This week, the Small Business Administration (SBA) published a proposed rule announcing its intent to increase size standards for small businesses.

If adopted, the change will increase the small business size standards for 263 industries while retaining current standards for 237 industries and 12 subindustries (exceptions).

The SBA uses two primary criteria to determine firms’ eligibility: the average annual receipts and the average number of employees. The agency also includes financial assets for some financial industries and refining industries to determine their business size and three SBA programs, the Small Business Investment Company (SBIC), Certified Development Company (CDC/504) and the 7(a) Loan Program also consider the industry-based size standards or the “tangible net worth and net income based alternative size standards to determine eligibility.

The proposed revisions are part of the mandated five-year review cycle to provide consistent qualification criteria for small business participation in federal programs and contracting opportunities.  Reviews for potential inflationary adjustments are also every five years or sooner if necessary as directed by the Small Business Size Standards Inflation Adjustment to Monetary Based Standards Rules (67 FR 3041 and 13 CFR 121.102(c). However, this article only addresses the mandated rolling five-year reviews. The first review and adjustment cycle occurred in 2016 and the second in 2022.

Historical Review Cycles:

Before 2024, the agency used a comparison-based process using small business share of total contract values and the small business share of industry receipts. This was used during the first and second review cycles.

In 2016, the agency reviewed 1,009 standards and revised 618 with the majority resulting in increases to the monetary or employee-based size standards. The adjustment also decreased to standards for three mining industries to prevent impact on small businesses from potentially dominant or large firms being able to enter the market. The outcome added 72,275 new eligible small businesses with an estimated potential of up to $1.3B in contracts and up to 565 loans valued between $144M and $195M. At this time, the NAICS code structure was not part of the SBA determination process.

In 2022, the Office of Management and Budget’s (OMB) revised the NAICS Code size standard structure adding 111 new NAICS industries by splitting, merging or modifying the 6-digit codes or industry titles/definitions of 156 industries existing under the 2017 NAICS structure. The SBA subsequently adopted these and incorporated the NAICS tables in the second five-year rolling review.

During that review, the agency reviewed 1,037 standards and resulted in revisions to the size standards for 437 industries. This included increased size standards for 22 industries and 29 parts of two industries, decreased standards for seven industries and 53 parts of two others while the standards for 117 industries and 19 parts of seven remained unchanged. The outcome added 61,692 newly qualified small businesses and with an estimated additional $1.3B in small business contracts, and 120 loans totaling almost $60M.

2024 Methodology Update:

In 2024, the agency revised its size standards methodology, transitioning to using two disparity ratios. One is based on the small business share of the number of contracts versus the share of all firms registered in the System for Acquisition Management (SAM) that were “willing, ready and able to bid on and perform Federal contracts” or in other words, the competitive pool. The other is based on the share of contract obligations to the share of industry receipts. The adjustments are determined based on the ratio outcomes:

Source: SBA

The upcoming third review cycle will apply this new disparity ratio to 102 different size standards covering 978 NAICS industries and 18 subindustries. Of these, 73 are based on average annual receipts covering 496 industries and 13 subindustries while 27 are based on average number of employees covering 478 industries and five subindustries. If adopted, the proposed increases will:

• Add 110 financial firms as small businesses by increasing the assets standards from $850M to $925M for all four financial industry categories.
• Reclassify 324 active federal contracting firms as small business status qualifying them to compete for small business contracts awards totaling around $647M annually.
• Render newly qualified small businesses eligible for up to 84 micro loans under the SBA’s 7(a) and CDC/504 programs estimated at $49M under the new size standards and nine low-interest Economic Injury Disaster Loans (EIDL) estimated at $400K.
• Round the size standard to the nearest $500K, or the nearest $250K for agricultural industries.

Projected Impacts:

The proposed changes will have varied impacts on both government procurement and small business participation.

For the government, an increased number of small businesses enlarges the pool of federal contractors for its small business programs. This could reduce the prices the government pays for contracts set aside or reserved for small businesses under some socio-economic programs but could also increase procurement costs associated with setting those contracts aside for small. Furthermore, this could add to associated administrative costs and potentially increase the number of small business size-related protests.

For small businesses, those close to exceeding their size standards will be able retain their status longer. There will be no additional costs to firms related to the size standard outside those required to register in SAM or update their profiles. Firms still recovering from COVID-19 impacts will retain eligibility under the revised standards.

The increased size standards may also result in a redistribution of federal contracts, impacting both large and small firms. Contracts previously awarded to large businesses under Full and Open procurements may now be set aside for small businesses. This shift could result in lost opportunities for some larger firms. Conversely, the increased competition pool could reduce the number of contract opportunities and contract values available for small businesses. And, while the government may set aside more opportunities due to its increased pool, existing small businesses will face greater competition from the reclassified previous large businesses. Furthermore, small businesses seeking financial assistance through SBA’s loan programs may also incur additional verification-related costs.

Regulatory Alternatives:

OMB Circular A-4 requires the SBA to consider alternative regulatory solutions. Under this, the SBA offers the following:

• Alternative #1: Adopt size standards based solely on the analytical results. This would increase the size standard for 263 industries while decreasing the size standard for 212 industries and subindustries (exceptions) causing 7,882 current small businesses to lose their eligibility to compete under small business set-aside procurements and potentially lose their ability to obtain SBA financial assistance.
• Alternative #2: Make no changes and retain all size standards for all industries. While this may indicate no impact, not changing the standards will negate the benefits from the proposed increases to the 263 size standards.

Both alternatives are discussed in detail in the proposed rule.

Active federal contractors and those seeking entry into the federal marketplace must provide input on the proposed rule. Comments are due by October 21, 2025.