A federal contractor’s entire eligibility for small business set-asides currently hinges on a formula built around seven separate factors, applied across roughly 1,000 different industry-specific thresholds. The SBA just proposed tearing that apart and replacing it with something far simpler, and in some industries, far more generous.
The agency published two companion proposed rules in the Federal Register on August 20. The first overhauls the underlying methodology SBA uses to set size standards in the first place, consolidating the current system of nearly 1,000 six-digit NAICS-based standards into just 338, split between 276 four-digit and 62 five-digit industry groupings. It also replaces SBA’s old seven-factor formula with a simplified three-factor model: national industry size, the number of geographic markets a business competes in, and a net imports adjustment, combined into a single “average market size” metric. The second rule applies that new methodology directly, proposing the specific updated thresholds industry by industry.
One structural shift stands out beyond the raw numbers: the new methodology defaults to employee-based size standards for most industries, rather than revenue-based ones, except where Congress has specifically mandated revenue-based standards for services. That’s a meaningful departure from a system many industries have operated under for years, where a business’s eligibility depended on its average revenue rather than its headcount.
For industries that remain revenue-based, some of the proposed changes are substantial by any measure. Engineering Services (NAICS 541330) would jump from $25.5 million to $252 million. Other Computer Related Services (NAICS 541519) would climb from $34 million to $531 million. Other Management Consulting Services (NAICS 541618) would rise from $19 million to $295 million, and Facilities Support Services (NAICS 561210) would move from $47 million to $156 million. Employee-based standards are shifting too, though less dramatically in percentage terms: Guided Missile and Space Vehicle Manufacturing (NAICS 336412) would rise from 1,250 to 2,800 employees, and Ship Building and Repairing (NAICS 336611) would climb from 1,300 to 2,300 employees. Changes at that scale would instantly convert companies currently locked out of small business set-asides into eligible bidders, while also intensifying competition within those set-asides as far larger firms qualify to compete for the same contracts.
The methodology changes go beyond a one-time adjustment to specific thresholds. SBA is also proposing to eliminate the caps that have historically limited how high size standards could climb, adjust standards not just for inflation but for broader productivity growth across the U.S. economy, and shift toward employee-based standards wherever the agency has discretion to do so. Taken together, government contracts attorneys expect two distinct ripple effects. On one hand, current small business contractors would face substantially more competition within set-asides, now open to companies many times their size. On the other, businesses that have historically “graduated” out of small business eligibility only to fall into what’s often called the industry’s “valley of death,” too big for set-asides but not yet established enough to compete on full-and-open contracts against major primes, could suddenly find themselves back in eligible territory. Attorneys are also flagging a less obvious consequence: the changes could trigger a wave of mergers and acquisitions in the government contracting space, as small and current mid-size businesses combine while still retaining eligibility for set-aside work under the higher thresholds.
The aggregate effect, according to SBA’s own analysis, is a modest but real expansion of eligibility: the proposal would grow the number of eligible small businesses nationally from 6,344,967 to 6,459,508, an increase of about 1.8%. That total masks significant unevenness underneath it. Of the 338 size standards the new methodology produces, only 24 industry groups would actually see a reduction in the number of eligible small businesses, meaning the overwhelming majority of industries would see standards hold steady or expand, while a small handful would tighten.
SBA’s cost-benefit analysis flags one practical consequence worth noting: in the rare industries where standards tighten, some existing small businesses could lose eligibility for SBA loan guarantees under programs like 7(a), 504, or EIDL. The agency’s review of loan data between 2020 and 2026 found that in at least one affected industry, direct property and casualty insurance carriers, every business currently holding an approved 7(a) loan sits well below even the revised, tighter threshold, meaning it would remain eligible despite the change.
This overhaul is part of SBA’s third statutorily required five-year review of size standards under the 2010 Small Business Jobs Act, following prior reviews completed in 2016 and 2023. Public comments on both proposed rules are due within 30 days of publication, through the Federal eRulemaking Portal at regulations.gov under RIN 3245-AI67 or Docket No. SBA-2026-0199. Until a final rule is published, none of these changes are in effect, businesses should continue certifying under the current size standards for now. Given the scale of the proposed NAICS consolidation and the specific threshold jumps involved, government contracts attorneys are already advising businesses across affected industries to model out what their eligibility, and their competitive exposure, would look like under both the current and proposed standards before the comment period closes.