SBA to Propose Massive Changes to Its Small Business Size Standards

On August 20th, SBA will publish stunning proposed changes to its size standards, replacing the August 2025 proposed rule, which we discussed here, as well as revised size standards methodology. From time to time, SBA reviews and proposes changes to its size standards and those changes are typically incremental and to adjust for inflation. Tomorrow’s proposed changes are massive and will dramatically reshape how small businesses are determined for federal contracting if finalized. 

One of the major proposed changes is to shift from revenue to employee-based size standards in many industries. For example, all the construction-related NAICS codes in NAICS Sectors 236 and 237 currently have revenue-based size standards ranging between $19 and $45 million. SBA is now proposing to change all of the construction industries to employee-based size standards, with the new size standards ranging between 550 and 2,000 employees depending on the industry. For example, a firm currently operating in the other heavy and civil engineering construction industry, NAICS code 237990, qualifies as small if its average annual revenue over the past five completed fiscal years is less than $45 million. But under SBA’s new proposal, firms would qualify under the broader Construction NAICS Sector 23713 if their average employees per pay period over the last 24 months is less than 1,500 employees. This means significantly larger and more firms would now qualify as small for construction.

In addition, SBA is proposing to change the NAICS level at which size standards are calculated, which will reduce the number of individual size standards. Along these lines, this will also result in SBA removing all size standard exceptions. Currently, many NAICS codes have certain exceptions to size standards for various subindustries. One of these is the exception for NAICS code 541519, Information Technology Value Added Resellers (ITVAR), which currently has a size standard of 150 employees. ITVAR is not addressed directly in the proposed rule, but with the proposed shift to 4- or 5-digit NAICS levels to determine size standards, it appears that the size standard could be changing to $531 million. It is unclear how this will comport with the performance of work requirements for ITVARs performing on set-aside contracts.   

Another major proposed change is the dramatic increase in most (but not all) of the current revenue-based size standards. To provide a few examples, the table below compares the current and proposed new size standards for several professional services industries. The magnitude of the proposed changes is readily apparent from the percentage increase, the lowest of which reflects an increase of more than 200%.

SBA explains that its proposals will increase industrial base resilience, participation in SBA loan programs, and satisfaction of small business goals by dramatically increasing the number of small businesses in federal contracting. While true, it is not clear if SBA considered the other side of that equation – namely, firms that currently qualify as small businesses would now have to compete for small business set-aside contracts against much larger and more sophisticated firms. 

For example, a consulting firm averaging approximately $20M per year in revenue currently competes for small business set-asides against other similarly-sized firms with revenue below $24.5M. But if the proposed increases are finalized, the $20M business would have to start competing for small business set-asides against businesses with average annual revenue of nearly $300M. The resources, number of personnel, and sophistication of a $300M company will unquestionably surpass a $20M business. This may end up having the opposite effect that SBA intended by driving many smaller firms out of federal contracting because they cannot hope to compete against firms that are 15 times (or more) their size.

Indeed, it seems unavoidable that the massive size standard increases will significantly harm the competitive viability of many businesses that qualify as small under the current size standards. Also, the significant proposed increases may decrease the attractiveness of SBA’s mentor-protégé program and mentor-protégé joint ventures, as more mentors may now qualify as small and, as a result, would not need to enter into a mentor-protégé agreement to form a joint venture to qualify as small. While larger small businesses could still utilize the mentor-protégé program now as protégés, the mentor-protégé program has been an important tool for newer and smaller firms that may now find it harder to attract willing mentors. 

On the other hand, the proposed changes address the so-called “mid-tier cliff” experienced by firms that are no longer small but are not large enough to compete against the biggest contractors in full and open procurements. Over the years there has been talk of creating a separate set-aside program for mid-tier firms. Instead of a separate set-aside program, the proposed size standard increases would turn many mid-tier firms back into small businesses. 

Additionally, the changes could improve the exit strategy options for small business owners and turbo charge M&A activity amongst small business contractors. With much more room to grow under the new size standards, small businesses could use mergers and acquisitions to scale up and compete in the new landscape. And many small businesses would likely have a more robust market of potential buyers that would be able to maintain their existing set-aside contracts, deemphasizing the significance of SBA’s oft-criticized recertification rules. In these ways, the new rules could make existing small business sellers more valuable targets.

Public comments will be due 30 days after the date of publication. Assuming the proposed rule is published tomorrow, comments will be due on or around September 19. We recommend all potentially affected firms submit comments, whether you are in favor of or against SBA’s proposals. 

If you would like to discuss SBA’s proposed changes and how they may impact your company and your business strategy, please contact the authors of this alert, Jon Williams and Meghan Leemon, members of PilieroMazza’s Government Contracts Practice Group.