SBA Proposes Sweeping Overhaul of Small-Business Size Standards: Prepare for a Shifting Competitive Landscape

On August 20, 2026, the U.S. Small Business Administration (SBA) published a proposed rule that would substantially restructure the size standards used to determine whether a business qualifies as “small” for federal contracting and other federal programs. This proposal would replace nearly 1,000 size standards currently established at the six-digit North American Industry Classification System (NAICS) level with 338 standards established at broader four-digit and five-digit levels.

The SBA explains that this restructuring is driven by a new analytical methodology that abandons existing factors in favor of calculating “average market size” based on national industry size, geographic markets, and net imports. Additionally, for the first time, the SBA proposes adding an economy-wide productivity adjustment to account for technological improvements and increased worker skills.

What Does This Mean for Your Business?

This proposed rulemaking serves as a stark reminder that the regulatory foundation of federal contracting is subject to constant shifts. When finalized, these changes will significantly expand the pool of eligible competitors, with the SBA estimating a net increase of 114,541 qualifying small businesses.

• Broader Groupings and Eliminated Exceptions: Consolidating standards into 276 four-digit and 62 five-digit NAICS levels will inevitably combine businesses with materially different cost structures and competitive conditions. Critically, the SBA proposes eliminating all 18 current subindustry exceptions. Contractors relying on exceptions tied to specific procurements or products face immediate exposure and must re-evaluate their eligibility.
• A Major Shift to Employee-Based Standards: Where the SBA has discretion, the proposed methodology defaults to employee-based standards over receipts-based measures. The agency argues this reduces volatility, but it means contractors will now need to instead strictly comply with complex employee-counting, affiliation, and workforce rules under 13 C.F.R. Part 121.
• The “Do No Harm” Approach vs. Specific Risks: To preserve a vital competitive advantage for growing firms, the SBA proposes not to reduce standards for industries retaining the same size measure—even if its new analytics support a lower threshold. However, this protection does not apply universally; for example, Direct Property and Casualty Insurance Carriers (NAICS 524126) face a shift from a 1,500-employee standard to an $842 million receipts standard, which the SBA estimates will result in the loss of small-business status for a handful of firms.

Recommendations While this remains a proposed rule and existing standards control until a final rule is effective, proactive preparation is essential to future-proof your pipeline. We strongly recommend that contractors take the following steps:

• Audit Your NAICS Footprint: Documentation is key. Compare every material six-digit NAICS code in your SAM profile, active contracts, and teaming arrangements against the SBA’s proposed four- or five-digit grouping. Model your future size status using both receipts and employee counts, factoring in all relevant affiliates.
• Assess Competitive Threats and Opportunities: Diligently monitor your market sector. Current small businesses near existing thresholds must anticipate an influx of larger competitors entering the set-aside pool, potentially squeezing win rates and margins. Conversely, firms that previously outgrew their standards should aggressively position for opportunities they may soon regain access to.
• Submit Strategic Comments: The SBA is accepting public comments until September 21, 2026. If a proposed aggregation, new size measure, or the elimination of an exception misrepresents the capital needs or competitive reality of your specific industry, you must submit formal comments electronically through Regulations.gov (identifying RIN 3245-AI67 or Docket No. SBA-2026-0199).

If you have questions about specific jurisdictions or need further assistance, contact one of these Clark Hill Government Contracts and Regulations Team attorneys managing the tracker:

• Bret S. Wacker (bwacker@clarkhill.com; 202.772.0906)
• Chris White (jcwhite@clarkhill.com; 517.318.3011)
• Ronald D. Sullivan (rsullivan@clarkhill.com; 202.809.2235)
• Colleen Jarrott (cjarrott@clarkhill.com; 202.640.6668)
• Gabrielle Long (glong@clarkhill.com; 312.701.6852)

Click here to find these and other Government Contracts and Regulations attorneys.

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