SBA Proposes Sweeping Overhaul of Small Business Size Standards for 338 Industry Groups

At a Glance

• On August 20, 2026, SBA published a proposed rule that would replace nearly 1,000 industry-specific size standards, representing a significant restructuring of small business size standards and eligibility going forward.
• The proposed rule converts many industries from receipts-based to employee-based size standards, dramatically increases thresholds across the board (with some professional services standards increasing by more than 1,000%), and eliminates all existing size standard “exceptions.”
• The proposed changes carry major implications for small business set-aside eligibility, competitive dynamics in government contracting, mergers and acquisitions strategy, and access to SBA loan programs. Public comments are due September 21, 2026.

On August 20, 2026, the US Small Business Administration (SBA) published a proposed rule that would fundamentally restructure small business size standards across 338 industry groups and industries. The proposed rule consolidates nearly 1,000 existing size standards, significantly raises eligibility thresholds, converts many industries from receipts-based to employee-based standards, and would newly classify approximately 114,541 businesses as small (including many firms currently holding federal contracts). Comments are due September 21, 2026.

This alert summarizes the proposed rule and discusses key implications for federal contractors, current and prospective small business entities, and the broader federal contracting community.

Background and Regulatory Context

The SBA establishes small business size definitions (commonly referred to as “size standards”) for private sector industries across the country, pursuant to the SBA’s authority under the Small Business Act, 15 U.S.C. 631 et seq. These standards determine whether a business qualifies as “small” for purposes of eligibility for SBA loan programs, federal small business set-aside contracts, and other federal assistance programs. The statutory framework requires that, in establishing any size standard, the SBA shall ensure that the size standard “varies from industry to industry to the extent necessary to reflect the differing characteristics of the various industries and consider other factors deemed to be relevant by the Administrator.” 15 U.S.C. 632(a)(3).

The Small Business Jobs Act of 2010 requires SBA to review all size standards every five years and make necessary adjustments to reflect current industry and market conditions. SBA completed its first five-year review in 2016 and its second in 2023. The proposed rule published on August 20, 2026, represents the agency’s third five-year review of size standards. Currently, there are 102 different size standard levels covering 978 North American Industry Classification System (NAICS) industries and 18 subindustries (known as “exceptions” in SBA’s table of size standards). Currently, 73 levels are based on average annual receipts (covering 496 industries), 27 are based on average number of employees (covering 477 industries), one is based on refining capacity (covering only one industry), and one is based on average assets (covering four industries).

The proposed rule follows a period of significant regulatory activity affecting small business programs. On August 11, 2026, SBA published a final rule that eliminates the rebuttable presumption of social disadvantage for individually owned 8(a) Business Development Program applicants and replaces it with a new evidentiary standard. We analyzed the final rule in greater detail in a previous client alert. Together, these rulemakings signal a fundamental reshaping of the SBA’s small business programs and eligibility frameworks.

Overview of the Proposed Rule

On August 20, 2026, the SBA published a proposed rule, “Small Business Size Standards,” to propose new size standards across industries and industry groups. SBA also published a “Revised Size Standards Methodology” on the same date — a white paper explaining how SBA establishes, reviews, and modifies its small business size standards.

Several Key Proposed Changes in the Proposed Rule

Consolidation of NAICS Levels

The proposed rule reduces approximately 1,000 industry-specific size standards to 338 (276 at the 4-digit NAICS industry group level and 62 at the 5-digit NAICS industry level). The consolidation eliminates all existing “exceptions” (i.e., subindustry-specific standards) and is intended to improve clarity regarding which standard applies to a given firm.

Shift to Employee-Based Standards

The revised methodology defaults to employment-based size standards for all industries where SBA has discretion, reserving receipts-based standards for industries where Congress has mandated them. SBA has stated that this shift is intended to reduce the number of firms fluctuating between small and other-than-small status due to revenue volatility, inflation, and productivity growth.

Elimination of Size Standard Caps and New Minimums

The proposed methodology eliminates all explicit maximum size standards. New minimums are established at 500 employees (for employee-based standards) or $30.6 million (for receipts-based standards).

Productivity Adjustment for Monetary-Based Standards

SBA proposes adjusting receipts-based standards for productivity growth in addition to inflation, attempting to account for technological improvements and faster increases to business costs and receipts than to inflation alone.

The proposed rule includes dramatic increases to size standards across many industries, including selected examples below:

Receipts-Based Professional Services Size Standards

NAICS 541511 (Custom Computer Programming Services):

• Current $34 million → proposed $531 million (approximately 1,462% increase)

NAICS 541611 (Administrative Management and General Management Consulting):

• Current $24.5 million → proposed $295 million (approximately 1,104% increase)

NAICS 541310 (Architectural Services):

• Current $12.5 million → proposed $135 million (approximately 980% increase)

NAICS 541330 (Engineering Services):

• Current $25.5 million → proposed $252 million (approximately 888% increase)

Employee-Based Size Standards

NAICS 5171 (Wired and Wireless Telecommunications):

• Current 750 employees → proposed 1,500 employees

NAICS 32742 (Gypsum Product Manufacturing):

• Current 700 employees → proposed 1,500 employees

NAICS 2212 (Natural Gas Distribution):

• Current 500 employees → proposed 1,150 employees

NAICS 3253 (Pesticide, Fertilizer, and Other Agricultural Chemical Manufacturing):

• Current 600 employees → proposed 1,350 employees

Implications for Federal Contractors

If finalized, SBA estimates approximately 114,541 businesses would be newly classified as small. Among them, approximately 37,002 firms holding FY 2025 federal contracts worth roughly $71 billion would become eligible for small business set-aside competitions. The top industry by newly eligible firms with existing federal contracts is Engineering Services (NAICS 541330), with 5,314 firms, followed by Other Computer Related Services (NAICS 541519, 2,247 firms) and Custom Computer Programming Services (NAICS 541511, 2,171 firms).

The influx of newly eligible (and often larger and more experienced) competitors may compress margins and reduce win rates for existing small business entities that have relied on limited competition in set-aside procurements and will likely be disadvantaged by the proposed changes. The proposed increases would also restore small business status to many mid-size contractors and firms that previously exceeded existing thresholds but lack the scale to compete effectively in full-and-open procurements against the largest prime contractors. That said, even mid-size companies will find it difficult to compete against larger, better-resourced entities that may now be classified as small. The shift to employee-based standards also decouples contract performance revenue from size determinations, meaning that strong contract performance alone would no longer jeopardize a firm’s small business classification.

Further, the proposed rule is likely to affect mergers and acquisitions activity among government contractors. Under the substantially elevated thresholds, acquirers that would have exceeded current limits may now complete transactions for federal contractors while preserving the acquired firm’s small business eligibility. The higher ceilings also create additional headroom for small-to-small combinations that would not breach the merged entity’s applicable size standard. The changes may increase the attractiveness of existing small business contractors as acquisition targets, as a broader universe of potential acquirers would be positioned to preserve the target’s set-aside eligibility posttransaction. However, SBA’s affiliation rules continue to apply, and buyers must still analyze whether ownership, management, and contractual relationships could trigger affiliation and affect eligibility and later recertifications.

Comment Deadline and Next Steps

Public comments on both the proposed rule and the new methodology are due September 21, 2026. Federal contractors should carefully evaluate how the proposed changes would affect their size status under relevant NAICS codes and consider submitting comments. In particular, firms that may gain small business status should begin assessing opportunities for participation in small business set-aside programs, while currently small firms should consider the competitive implications of a significantly expanded field.

For More Information

For further information, you may contact the authors. Faegre Drinker's government contracts team will continue to monitor additional regulatory developments and further agency guidance in the coming weeks.