The Small Business Administration is trying to open the federal contracting door to more small businesses.

In a new proposed rule issued today, SBA is updating the small business size standards that would make more than 114,000 companies eligible for federal small business contracts.

Under this new regulation, small business employee-based and revenue-based thresholds would significantly increase as part of how the agency says it’s trying to address long-standing complaints about how the government determines size standards.

Additionally, SBA is proposing to reduce the number of and simplify the approach to the North American Industry Classification System (NAICS) codes as a way to define small business markets. The agency wants to revamp the existing NAICS structure of five or six digits to a four-digit classification system that reduces total size standard categories from nearly 1,000 down to 338 broad industry groupings. Of the 338 new groupings, the SBA says 45 would retain their current size standards, while 86 would change from revenue based to employed based and the remaining size standards would continue to be revenue based.

“This proposal ensures that these job creators have the regulatory certainty to scale, expanding small business eligibility by 0.3%, or over 110,000 firms. By streamlining definitions, the SBA will expand access capital, counseling and contracting opportunities, which in turn create jobs and drive growth,” said SBA Administrator Kelly Loeffler in a statement.

Along with the new size standards, SBA is proposing major changes to the methodology to determine these thresholds.

SBA wants comments on the new size standards, and particularly six specific questions about the proposed methodology changes, by Sept. 21.

The agency last updated size standards, mainly for inflation purposes, in 2022 and it last changed the methodology in 2024.

Experts say this may be the first time SBA released an updated size standard methodology at the same time it released the new size standards and that is worrisome.

During the administration of President Joe Biden, John Shoraka, chairman of GovConPros and a former SBA associate administrator of Government Contracting and Business Development, said the agency released the draft methodology, received comments and made changes. Only then, he said, did SBA issue new draft size standards. He said the government never finalized the update to the revenue-based size standards and the revamped employee-based size standards never got out of SBA even as a proposed rule.

“This is a critical step that we are missing here,” Shoraka said. “I am a little concerned this is a done deal, especially with only a 30-day comment period. When SBA updated the size standards before, they did them in chunks. The methodology was first. Then the revenue-based standards, where they incorporated feedback and published them. Then, SBA updated the employee-based standards. I’m hopeful since they haven’t had the opportunity to get comments on the methodology that they will take a breather and review the comments. I think the comments may show there are problems with the methodology.”

Eric Crusius, a procurement lawyer with Hunton Andrews Kurth, said SBA’s proposal, specifically around the revenue-based size standards, is a “shock to the system” and will impact every part of federal contracting.

“The practical impact of what they are proposing would mean more businesses would qualify as small and that would have a cascading effect across the entire market. It would mean small business subcontracting plans would be easier to meet. It would mean mergers and acquisitions would look a lot different as those companies which now qualify as small would be more valuable in some ways and less in other ways,” he said. “There are businesses out there in the $100 million to $200 million range that were large under the former NAICS code, but now would be considered small and may now enter government contracting space too. The entire competitive landscape could change.”

SBA estimated the number of companies which now would qualify as small if the changes went through. In some of the most popular federal contracting NAICS codes, such as 541511 for computer programming services, the new size standard would increase to $531 million from $34 million and would add 1,343 new companies.

“Small firms excluded from small business status would compete directly against large corporations with far greater resources. Many would be acquired or exit, consolidating key sectors such as manufacturing, construction and IT, reducing innovation and choice, and raising costs to the taxpayer. That outcome would conflict with Executive Order 14267 which directs agencies to reduce anticompetitive regulatory barriers,” SBA stated in its rule. “Small firms without small status would lose access to set-aside contracts, shrinking the pool of qualified suppliers in contract-dependent industries such as defense, construction and IT. Fewer contractors capable of high-value or technically demanding work means delays, lower quality and higher prices. Firms would also lose subcontracting opportunities, as primes favor subcontractors that still count toward their small business goals. Small businesses comprise 73% of companies in the U.S. defense industrial base, even while [DoD] small business vendor count decreased 49% between 2010 and 2024. Lowering standards or retaining one that is already too low would disqualify additional firms, narrow [DoD’s] options for specialized capabilities, and further erode the flexibility and resilience essential to the defense and broader industrial base.”

There are several NAICS codes that would see an increase in the standard of more than $450 million.

Source: GovConPros

Shoraka said such large increases in the standards could do the opposite of what SBA is trying to do by expanding the small business marketplace. He said SBA may be creating a sector with a few dominate players because there still is a huge difference between a $50 million company and a $450 million one.

“There always are competing interests to increase or decrease any one size standard. It’s a balancing act where you want the size standards to be small enough that nascent firms can be competitive and enter the market, while at the same time you want it large enough that the small companies doesn’t immediately drop off the edge and have to compete with large companies,” he said. “Where is that cut off to logically create that safe ecosystem for new entrants? That was the idea of the small business program to help create that ecosystem and increase industrial base.”

Imani Augustus, the director of the Center for Entrepreneurial Opportunity at Third Way, a Washington, D.C. based think tank, said SBA’s actions to update the size standards is a welcome change and long overdue, but she also is concerned about what they mean for the small business community.

“We have been doing a lot of research around something we call the ‘missing middle.’ These are businesses that have grown too large to benefit from SBA programs, but still are too small to receive capital from larger traditional financial institutions. There is a capital gap for these middle market firms. These size standards changes is the first time we are seeing SBA drill and narrow into that segment of the market,” Augustus said in an interview with Federal News Network. “There should be a system of support and resources for middle-sized businesses that run parallel to things at SBA. It could be a collaborative effort with the Commerce Department and other agencies to support businesses owners as they grow. The rulemaking tends to fix the growth penalty for those at top, but it also has to protect those at the bottom. We believe those are two separate problems and expanding the pool of small businesses doesn’t necessary address the challenges either.”

Crusius added that because more companies now will be eligible for set-aside contracts, will this lead to the government increasing governmentwide goals?

“How do those $10 million or $30 million or even $50 million companies compete with $300 million or $400 million companies? These changes make being small not as special as it used to be now that nearly everyone will be considered small,” he said. “That lack of specialness may make owning a small business not as valuable for those seeking to buy or invest in these firms. The differentiator for small businesses, or really any business in the federal market, is whether you offer a unique product or service or offer it in a way that is unique to the government. If you do that, the government will find a way to buy it. That will become even more important if these changes are finalized.”

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