On August 22, the U.S. Small Business Administration (SBA) proposed an important change that could affect thousands of companies competing for federal contracts. In the proposed rule, the SBA suggested raising certain size standards used to determine when a company is considered “small.” If finalized in its current form, the proposal will increase thresholds across 263 industries, from telecommunications and natural gas pipelines to commercial banking, and could add more than 11,000 firms to the small business category.
Why It Matters
Being classified as a small business determines whether a company qualifies for SBA loan programs and whether it is eligible to compete for contracts set aside exclusively for small businesses. Some of these size standards, which vary depending on industry and task, are based on average revenue over the previous five years, while others are based on the number of employees. The proposed rule introduced in August focuses only on the former, while the forthcoming proposal will adjust some of the employee-based size standards.
For firms on the edge of outgrowing their “small” designation, these changes mean they can hold onto those advantages longer. For federal agencies, the changes mean a larger pool of small businesses to choose from, which could increase competition and even lower procurement costs.
How SBA Decided Where to Raise the Bar
The SBA’s proposal is rooted in a revised methodology adopted in late 2024, which introduced the “disparity ratio” test. The test looks at whether small businesses are winning a fair share of federal work compared to their presence in the overall market. One ratio compares the share of contract dollars small businesses receive with their share of total industry revenue. The other ratio compares how many contracts small businesses win with their share of all firms that are ready and able to compete for federal contracts.
If an industry’s ratio is below 0.8, SBA considers small firms to be underrepresented in federal contracting and raises the size threshold to bring more companies into the small business pool. If the ratio is above 0.8, small businesses are viewed as overrepresented.
Several industries are scheduled for adjustments under this approach.
- In satellite telecommunications, the size standard would rise from $44 million to $45 million in annual receipts.
- For pipeline transportation of natural gas, it would increase from $41.5 million to $46 million.
- Testing laboratories would see an increase from $19 million to $23.5 million.,
- Architectural services would move from $12.5 million to $16 million.
- In the banking sector, the threshold for commercial banks would increase from $850 million to $925 million.
Each change reflects SBA’s analysis that firms in these industries were not winning as much federal business as their share of the market might suggest.
Notably, SBA’s analysis also indicated that size standards could be lowered in more than 200 industries. However, the agency chose not to reduce any thresholds, citing concerns that doing so could disqualify currently eligible firms from SBA programs at a sensitive point in the economy. Industries such as military and aerospace equipment manufacturing, environmental consulting services, and radio broadcasting will keep their current standards, even though the data suggested decreases might be warranted.
SBA explained that “decreasing size standards under the current economic environment could stifle the ongoing economic growth following the COVID-19 pandemic by causing many currently qualified and capable small firms to become ineligible for SBA’s financial assistance and Federal contracting programs.”
Looking Ahead
If adopted, the changes will mean more firms can compete for small business set-asides. While that will increase competition, SBA noted that past threshold hikes actually led to fewer size protests, not more. Still, very small businesses may face tougher competition against larger firms that remain “small” under the new limits.
This rulemaking is only part of SBA’s third five-year review of small business size standards, required by the 2010 Small Business Jobs Act. As noted above, a second proposal focused on employee-based size standards is expected soon. In the meantime, SBA is accepting public comments on the monetary-based rule until October 21, 2025.
For small businesses and industry stakeholders, now is the time to weigh in, with public comments due by October 21, 2025. The decisions SBA makes in this review will help shape not only the competitive landscape of federal contracting but also the financial opportunities available to small businesses in the coming years.
Entities can review the SBA’s current monetary thresholds, listed in its March 2023 size standards table, and compare them with the proposed increases outlined in the chart at the end of the rulemaking.
