What SBA’s New Size Standards Could Mean for Small Businesses

On August 20, 2026, the Small Business Administration (SBA) proposed a major revision of the standards used to determine which firms qualify as small businesses for federal programs. The proposal would simplify the methodology used to set thresholds by replacing nearly 1,000 categories with 338 broader ones while increasing employment and revenue thresholds. The proposed revisions will classify an estimated 114,000 existing midsize firms as “small businesses,” including over 37,000 firms already participating in federal contracting,

The changes could affect federal contracting, SBA lending, and competition among small businesses. Growing firms could retain small-business status longer, and some companies currently classified as large could become eligible for small-business programs. SBA argues that the changes will make the system easier to navigate and reduce the sharp loss of federal preferences that firms can experience when they exceed their applicable size threshold. Critics have raised concerns about the new standards’ impact on competition and innovation, specifically the negative impact on the competitive positions of “true smalls” (firms with under 50 employees).

As it currently stands, the new SBA standards are a proposal. The agency is seeking comments from businesses and the public through September 21, which will help determine the new standards’ final form.

Q1: What are SBA size standards?

A1: SBA size standards establish the maximum size a company can reach while qualifying as a small business for federal purposes. The thresholds primarily depend on three factors: (1) the firm’s North American Industry Classification System (NAICS) category, (2) average employment, and (3) average annual revenue.

Industry-specific standards aim to reflect differences in market structure. Capital-intensive sectors, such as energy, can require substantial employment, facilities, and revenue for firms to be able to offer a viable contracting alternative to large business.

The federal government therefore has no single threshold for defining a small business. Current employee-based standards reach up to 1,500 workers, while revenue-based standards max out at $47 million. The Small Business Act requires qualifying firms to be independently owned and operated and not dominant in their field, and authorizes SBA to establish industry-specific thresholds.

Small-business status affects access to federal contracts reserved or set aside for small businesses, SBA-backed financing, and other federal programs.

Q2: How have SBA size standards historically evolved?

A2: During World War II, the Small War Plants Corporation and the Reconstruction Finance Corporation used a 500-employee threshold in federal contracting. SBA retained the 500-employee manufacturing standard after its creation in 1953 and established a $1 million receipts standard for nonmanufacturing businesses in 1954.

SBA raised many manufacturing thresholds during the 1960s and 1970s, adjusted monetary standards for inflation, and established much of the modern industry-based framework in 1984. SBA considered a major simplification proposal in 2004 but ultimately concluded that simplification could produce distorted results in cases where firms with very high revenues maintained relatively small workforces.

The Small Business Jobs Act of 2010 requires SBA to review all size standards at least every five years. SBA completed comprehensive reviews in 2016 and 2023. Across those reviews, the agency only ever reduced three of their thousand-odd standards; the remainder were raised or maintained. The new proposal would replace the SBA’s 2024 methodology after an unusually brief period.

Q3: What would change under SBA’s new proposal?

A3: The most visible change is consolidation. The existing system contains 978 size standards generally aligned with six-digit NAICS industries and 18 special subindustry exceptions. SBA proposes 338 standards, including 276 at the four-digit NAICS level and 62 at the five-digit level. The proposal would eliminate the 18 exceptions.

The proposal would also expand the use of employment-based standards. The current system includes 496 revenue-based standards and 478 employment-based standards. The proposed system would include 129 receipts-based standards, 208 employment-based standards, and one asset-based standard for depository institutions. Sixty-four industries’ standards would shift from revenue to employment.

For revenue-based standards, SBA proposes incorporating productivity growth alongside inflation. SBA calculates that the $1 million receipts threshold established in 1954 would equal about $9.7 million today when adjusted for inflation and $30.6 million when adjusted for inflation and economy-wide productivity growth.

SBA would also remove the existing ceilings of $47 million in receipts and 1,500 employees. Some thresholds would remain below the old ceiling (for example, tortilla manufacturing would go to 1,350 workers up from 1,250), but some industry categories, such as orange growers, would expand past it (up to 3,500).

SBA estimates that the number of firms classified as small would rise from approximately 6.3 million to 6.41 million, an increase of 1.8 percent.

Q4: What are the potential risks and benefits?

A4: Concerns have largely focused on how the changes could reduce the incentive for and ability of small businesses, particularly startups, to compete for federal contracts. The addition of 37,000 established, larger contractors to the small-business competition pool could render it more challenging for true smalls with dozens of employees and millions of dollars in revenue for compete with businesses with thousands of employees and hundreds of millions of dollars in revenue. Such established players are also far more likely to have robust sales, business development, legal, and government-affairs operations to support their competition for contracts.

However, higher thresholds could reduce the growth penalty created when a successful federal contractor exceeds its size standard. Firms that graduate from small-business status can lose access to set-aside competitions while still lacking the scale, past performance, and capital of major incumbents.

This has created unnatural market dynamics, such as firms refraining from taking on more business and firms’ valuations decreasing as they grow. Advocates of the change have noted that while SBA programs were originally intended to incubate new businesses that could go on to grow independently, many contractors have been incentivized to remain under the SBA umbrella.

Consolidation could also lower administrative costs. Reducing 978 standards to 338 would simplify classification for businesses and contracting officers. Employment-based standards can also provide greater stability than receipts-based measures when revenues fluctuate because of inflation or large individual contracts.

SBA argues the proposal could strengthen the supplier base and increase the number of capable competitors for federal contracts. SBA expects increased competition could also reduce federal procurement costs and expand agency choices.

On the methodology side, embracing broader industry categories risks reducing precision in pursuit of simplicity. Combining categories could produce thresholds that fit some businesses within a category better than others. Eliminating all 18 contracting exceptions removes another mechanism for recognizing differences within individual markets. The shift toward employment-based standards creates a separate measurement issue. Automation, outsourcing, and capital intensity allow firms with similar employment levels to operate at very different economic scales. SBA identified this concern when it considered greater reliance on employee-based standards in 2004.

The policy test is whether the revised standards’ impact employment numbers, entries and exits of the federal contracting market, and procurement costs and competition.

Q5: Are these changes final?

A5: No. Small businesses and members of the public have been asked to provide feedback on the proposed standards and the methodology behind them by September 21, 2026.

Effective comments should be empirical and specific. General statements that a proposed standard feels too high or too low, for example, are of limited use to the SBA in its evaluation of an industry threshold. Commenters can provide firm-level, industry-level, or procurement data showing how the proposal would change market conditions.

Businesses should prioritize providing information about employment effects; for instance, whether a higher size threshold would change their hiring plans, subcontracting partners, or investment decisions about pursuing federal work. Contracting data can also strengthen comments.

The proposed rule would reshape the small business contracting ecosystem. Its effects will differ sharply across industries. The public-comment process gives firms and industry groups an opportunity to test SBA’s assumptions against actual data before the standards are finalized.

Jerry McGinn is the director of the Center for the Industrial Base and a senior fellow with the Defense and Security Department at the Center for Strategic and International Studies (CSIS). Oliver Buntin is a research assistant for the Center for the Industrial Base at CSIS.