As we discussed last week, on August 19, 2026, SBA proposed what can only be described as a complete shift in the paradigm of the small business size standards. In the first part of our review of these changes, we looked at the actual planned size standards themselves and how massive of a jump they represent from the norm. In that post, we also mentioned that SBA is proposing to simplify and combine several NAICS codes, as well as move several NAICS codes from receipts-based to employee-based size standards. Today, we’re going to explore this latter observation.
If you need a brief reminder, SBA’s size standards are categorized by the North American Industry Classification System, or NAICS, codes. Each industry has its own NAICS code. As of the time of this post, there are 978 separate NAICS codes (with 18 of these codes having their own subindustry exceptions). These codes are generally six digits long, with the first four digits representing an industry group. Each industry has its own NAICS code, but it will share the first four digits with similar industries.
In its accompanying proposed “methodology” rule, SBA proposes to simplify this system by, in most cases, essentially assigning a size standard to the industry group and placing all industries in that group under that size standard (as well as eliminating those exception subgroups). For example, 541512 presently represents “Computer Systems Design Services” and has a size standard of $34 million. 541513 represents “Computer Facilities Management Services,” and has a size standard of $37 million. SBA would instead lump these two industries together under Code 5415, “Computer Systems Design and Related Services,” with a size standard of $531 million (as we noted in our earlier post, in many cases, the proposed size standard increases are immense). The proposed changes would leave just 338 separate size standards.
Not every industry group would be combined. For example, architectural services, which currently has a NAICS code of 541310 and size standard of $12.5 million, and engineering services, which has a code of 541330 and size standard of $25.5 million, will not be combined. They would however, have new codes of 54131 and 54133 respectively. They would also have size standards of $135 million and $252 million respectively.
We imagine that this proposed change to the coding system will get much less attention than the massive jumps in size standards, but, it would represent an enormous change from the established rules. In any other year, such a proposal would be highly significant: Entire industries would see their size standards meld with their sister industries, NAICS code selections (and appeals) for procurements would become significantly simpler. Even without the size standard increases, it would still mean giant changes in competitor numbers and sizes for contractors.
These changes to the size standards and their coding are not all that SBA has in mind. 15 U.S.C. § 632(a)(2)(C)(ii)(II) states that SBA must determine “the size of a business concern providing services on the basis of the annual average gross receipts of the business concern over a period of not less than 5 years.” SBA has concluded that several industries currently under receipts-based size standards are not truly “services” industries, and further that it would be beneficial to switch these industries to employee-based size standards. Per SBA it “proposes to do this by considering whether the industry group or industry is predominantly service-oriented by, in turn, considering whether the industry group or industry is focused on the transfer of ownership or practical control of a tangible item.”
With this in mind, SBA implemented a three-step test to determine whether an industry is truly “services-based.” First, it asked whether physical objects are transferred as part of the work performed in the industry. If yes, then the next question was whether these objects were the focus of the work. If yes, finally, SBA asked whether ownership or control of the objects occurs. If that also received a “yes,” SBA concluded the industry is not “services-based” and thus should have an employee-based size standard.
Several industries would make the switch to employee-based size standards under this. Essentially all farming and resource extraction (lumber, oil) except fishing, construction, most retailers, software publishers, lessors of real estate, and restaurants would change to employee-based size standards as a result. SBA asserts that such a change would, in fact, benefit these industries as employee numbers are less volatile, it would mean that federal contract revenues do not hurt small business status, and such standards are less susceptible to inflation and productivity growth than receipts.
Much like the changes to the coding system, we suspect this proposed change will receive less attention than the overall size standard increases, which is understandable given their scale. But, again, this switch alone would have significant impacts on the industries involved. Even without the major increases to employee size standards, several of these industries have had lower receipts-based size standards. Switching to employee-based would no doubt leave result in an influx of many competitors into the federal contracting markets for these industries.
SBA’s proposed changes, both those discussed above and the immense size standard increases, would have tremendous impacts on essentially all federal contractors. Obviously, there would be a massive influx of competition from larger businesses that smaller businesses would need to contend with. But it’s not just small businesses that would be impacted. As our blog’s founder, Steven Koprince, observed: The true behemoths of federal contracting would see many contracts set-aside for “small” businesses as the Rule of Two requires that, where two or more small businesses can perform a given contract, it must be set aside for small businesses. Thus, many contracts that would be competed for by the Microsofts and Googles of the world would suddenly be closed off to those companies. It is little surprise that there have already been a large number of comments on SBA’s proposed changes, and we only see more to come.
Again, SBA has established a period for commentary by the public until September 21, 2026. If you are interested in providing commentary on this proposed rule, you may do so here.
Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.
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