SBA Proposes to Rewrite the Size Standards: Fewer Standards, Higher Thresholds, and a Shift Toward Headcount

On August 20, 2026, the U.S. Small Business Administration (SBA) published a notice of proposed rulemaking (NPRM) that would replace the entire table of small business size standards at 13 C.F.R. § 121.201 (91 Fed. Reg. 53741; RIN 3245–AI67). Issued as the third five-year review required by the Small Business Jobs Act of 2010, the proposal would consolidate roughly 1,000 size standards into 338, move most standards from the six-digit North American Industry Classification System (NAICS) level up to the four- and five-digit level, eliminate every existing exception, convert a large share of industries from receipts-based to employee-based standards, and raise thresholds across most of the economy, in some industries by an order of magnitude.

The SBA estimates the proposal would increase the number of firms qualifying as small from 6,344,967 to 6,459,508, a net gain of 114,541. More consequential for the federal market: The SBA projects that 37,002 firms already holding federal contracts would become small, accounting for roughly 105,655 contracts and more than $71 billion in FY 2025 obligations. The Engineering Services category (NAICS 541330) alone accounts for 5,314 of those firms.

The SBA simultaneously published a revised methodology white paper, which is incorporated into the NPRM and likewise open for comment. Comments on both are due on September 21, 2026, roughly 30 days after the NPRM was published — a compressed window for a rulemaking of this scope.

The Proposed Methodology

The NPRM identifies five significant departures from the 2024 methodology.

Aggregation to four- and five-digit NAICS. Standards would be set at 276 four-digit industry groups and 62 five-digit industries rather than at the current six-digit level. The SBA points to the current split between Ship Building and Repairing (1,300 employees) and Boat Building (1,000 employees) as an illustration of the line-drawing it means to eliminate. Relatedly, the SBA proposes to remove all 18 subindustry exceptions, which today carve out discrete markets (including information technology value-added resellers and dredging) with their own thresholds and, in some cases, associated performance requirements.

A default to employee-based standards. Today, 496 standards are receipts-based and 478 employee-based. The proposal inverts the presumption, using employment wherever the SBA has discretion and leaving 129 receipts-based standards (retained where required by statute) and 208 employee-based standards. The stated rationale is stability: Headcount is less sensitive to revenue volatility, inflation, and productivity growth.

New analytical factors. The seven factors of the 2024 methodology — including simple average firm size, weighted average firm size, average assets per firm, the four-firm concentration ratio, the national Gini coefficient, and two federal contracting disparity ratios — give way to three: national industry size, the number of distinct geographic markets, and an adjustment for net imports, which are combined into an “average market size” measure. The SBA grounds the change in the statutory requirement that a small business be “not dominant in its field of operations,” reading “field of operations” to encompass both product and geography, and analogous to market definition under the Department of Justice/Federal Trade Commission merger guidelines. The federal contracting disparity ratios drop out entirely.

A single conversion function, with no upper bound on the result. Average market size would be translated into a size standard through one function rather than by averaging factor-by-factor results. Under the current methodology, the calculated result for any industry is capped at $47 million in receipts or 1,500 employees, so industries whose analytics supported a higher threshold are held at the cap regardless. The proposal removes that cap and lets the results of the function stand, producing, for example, $1,011 million in receipts for Other Financial Investment Activities and 3,500 employees for Motor Vehicle Parts Manufacturing. The SBA would keep a minimum, which stops the same function from generating a near-zero threshold in industries with very small average market sizes. Eliminating the cap accounts for some of the largest increases in the table.

A productivity adjustment. Monetary standards would be adjusted for general productivity growth in addition to inflation, on the theory that employee-based standards already carry an implicit productivity adjustment.

The combined effect is substantial. For example, Engineering Services would move from $25.5 million in receipts to $252 million; Custom Computer Programming Services would move from $34 million to $531 million. Measure changes are equally dramatic: Software Publishers would move from $47 million in receipts to 3,600 employees, and most residential and specialty trade construction industries would move from receipts standards in the $15 million to $45 million range to headcount standards of 550 to 650 employees.

The Stated Policy Basis

The SBA’s own analysis indicates that 45 industry groups or industries should see reductions. The SBA proposes to adopt none of them, holding every standard that retains the same measure at its current level.

The stated justification is both economic and mission-based. The SBA points to the conditions small businesses faced during 2021–24, emphasizing the “benefit cliff” (i.e., firms approaching a threshold forgo growth to preserve eligibility) and citing bipartisan criticism of “antiquated” standards from the House Committee on Small Business. It invokes the defense industrial base, noting that small businesses comprise 73% of companies in that base even as the Department of Defense’s small business vendor count fell 49% from 2010 to 2024, and frames the rule as consistent with Executive Order 14267 and as a deregulatory action under Executive Order 14192. The SBA also notes that it declined to lower standards in both prior five-year reviews. Under the proposal, fewer than 200 firms nationwide would lose small business status.

Affiliation Rules Appear Unchanged

The NPRM proposes to amend only the size standards table at § 121.201. It does not propose changes to the affiliation rules at 13 C.F.R. § 121.103, the receipts calculation rules at § 121.104, or the employee counting rules at § 121.106. Firms should assume the familiar aggregation principles (i.e., common ownership and management, negative control, identity of interest, newly organized concern, ostensible subcontractor, and joint venture treatment) continue to apply unchanged, as do the five-year averaging period for receipts and the 24-month averaging period for employees. That continuity matters: Higher thresholds do not relax the obligation to count an affiliate’s receipts or employees, and for industries converting to headcount, the affiliation rules will operate on a metric many firms have never tracked at the enterprise level.

Commentary

There is a credible case that the current standards are too low and push contractors out of the set-aside market before they can compete effectively in full and open procurements. The benefit cliff is real, and firms manage it, for example, by declining work, splitting entities, or slowing hiring to preserve eligibility. Standards keyed to receipts and adjusted for inflation only intermittently drift downward in real terms between reviews.

The countervailing concern is equally real. Set-aside pools are zero-sum in the short run. If thresholds rise far enough, a genuinely small firm may find itself bidding against companies with hundreds of millions in revenue, mature performance records, and dedicated capture organizations. The SBA acknowledges the point as to firms nearest the current thresholds, but the same logic applies with greater force further down the size distribution, where the resource gap is widest. It is also worth noting the asymmetry the proposal builds in: A methodology where reductions are not adopted as a matter of policy can only ratchet upward over successive reviews.

There is presumably a workable midpoint between standards too low to permit growth and standards that dilute the preference they are meant to confer. Where that point lies is an empirical question on which the comment file should inform the agency’s decision making, so the compressed comment period makes early engagement important for firms with a view.

Practice Points

• Map your NAICS codes against both tables. Firms that would newly qualify as small should begin evaluating a set-aside pipeline they may not have tracked and confirm that System for Award Management registrations, NAICS selections, and self-certifications are current.
• Treat the receipts-to-employment conversion as a compliance project. Headcount under § 121.106 is a 24-month trailing average covering full-time, part-time, and temporary personnel across the concern and all affiliates, meaning it is not just employees at the concern that count but employees at all entities under the umbrella of the common upstairs ownership. It does not appear on any financial statement, and some labor-intensive firms comfortably small today may not be small under a headcount test.
• Expect effects on deal timing and capital structure. Later size transitions extend the runway before a portfolio company ages out of small status, which may push out the point at which an exit thesis depends on graduating to full and open work. Recertification on change of ownership is unchanged. Firms that retain or gain small status also retain access to 7(a) and 504 lending and may lean on it more where revenue no longer drives eligibility.
• Affiliation rules are unaffected. The existing affiliation rules are not affected by the NPRM. Firms should continue to consider these rules carefully when evaluating headcount and revenue for small business status purposes.
• Consider commenting by September 21. Industry-specific comments, particularly on geographic markets, the elimination of exceptions, and the conversion to headcount in specific NAICS codes are the most likely to shape the final table.