With size standards, SBA saved 7,900 small businesses and wants to create 11,200 more
The agency asks for comments on its largest proposal ever, and it reads every single one of them
If you’re looking for a searchable list of SBA’s proposed size standards, check out my Google Sheet that includes a few enhancements.
SBA's massive size-standards proposed rule, published Friday, is the largest size-standards proposal the agency has ever published. It might actually be SBA’s longest proposed rule of any type ever, spanning over 100 Federal Register pages (unlike YouTube, federalregister.gov doesn’t let you filter by length, so I don’t know for sure). But before anyone screams about excessive regulations, look at what SBA did. SBA just saved 7,900 businesses from losing their small-business status.
The proposed rule reviews half of SBA’s size standards, the numeric values that determine whether a business qualifies as small. To be considered small by SBA, the business must be below the size standard that SBA has assigned to the business’s NAICS code. Each NAICS code is assigned at least one size standard, and a few of them have multiple size standards. The size standards are, with some rare exceptions, expressed as a dollar amount—corresponding to the business’s revenues—or a number of employees. The dollar-based size standards were what SBA reviewed in Friday’s proposed rule. The rule includes detailed analyses of 513 size standards. That’s why it extended past 100 pages.
SBA employs a team of economists that reviews Census data and Federal procurement data to calculate the size standards. For the proposed rule, the economists applied a rigorous methodology to calculate what the dollar amount should be for the size standard. The economists consider factors such as average firm size, average firm assets, industry concentration, and Federal contracting activity.
In the proposed rule, SBA reports that adopting the economic analysis alone would have increased 259 size standards but lowered 213. From the 213 size standards that would be lowered, 7,882 current small businesses would lose their status. Those firms are below the current size standard but would be above the lower size standard that SBA calculated. Altogether, those firms generate over $2 billion in government contracts annually.
The SBA proposed rule goes through a whole host of issues that SBA grappled with in deciding whether to lower size standards. These include fewer set-asides, Federal small-business goals, supply chains, competition, employment, and consolidation. Ultimately, SBA decided not to lower those 213 size standards. Instead, SBA kept the 213 size standards at their current level. This policy decision would save nearly 7,900 small businesses from losing their access to benefits that include small business set-asides, SBA loans, and disaster assistance. But that result is not assured; SBA asks in the proposed rule for comments on the policy. What do you think?
With the 259 increased size standards, SBA would add 11,200 new small businesses. Those new small businesses would have access to $650 million in government contracts, which is fairly modest. I’ll explain why below.
Why SBA sets size standards
When SBA started setting size standards in 1956, there was just one size standard for all of government contracting: 500 employees. And firms exceeding 500 employees could apply to their local SBA office to be considered small, a process that doesn’t exist today. (Though SBA could actually bring that back; the authority to issue small-business certificates still exists in the SBA’s statute, the Small Business Act.)
Matters have gotten considerably more complicated since the 1950s. Changes in law—particularly those brought about in 2010 and in 2013—now require SBA to not only assign a size standard to each of the 1,000 NAICS codes, but also to review those size standards at least every five years. Conveniently, the Census Bureau publishes new detailed business data every five years as well. But the agencies have not been able to sync up their calendars—the latest SBA proposed rule relies on Census data from 2017.
Congress gave SBA a lot of leeway for setting size standards. The only legal requirement is that the standards be set so that a small business is one that is “independently owned and operated and which is not dominant in its field of operation.” Other than that, SBA can develop its own approach, identify the source of data, and set appropriate factors, so long as that’s all included in the proposed rule. A few years ago, the law started requiring that SBA use the employee-based size standards for manufacturing companies and the revenue-based standards for services.
The size standards are most relevant for government contracting, where each solicitation is required to include the applicable SBA size standard. Only businesses at or below the solicitation’s size standard receive small-business preference for the contract. The industry-based size standards also are relevant for SBA loans, but, in reality, the alternative size standard that Congress passed during the financial crisis covers most loan applicants. Some states also use SBA size standards for their small-business contracting programs.
The proposed rule leaves most major industries untouched
SBA states that the proposed increases to 259 size standards would add 11,200 small businesses. But it’s hard to tell where the increases are from the Federal Register publication, which isn’t searchable. So I created my own spreadsheet to allow searching and sorting by several useful metrics: small-business dollars, set-aside dollars, and number of small-business vendors. I made the spreadsheet available as a Google Sheet.
When you sort the size standards by their importance to small-business contracting, most of the important standards are unchanged. In the top 20 NAICS for dollars to small businesses, there are only three proposed size-standard changes. They are to:
Engineering Services, NAICS code 541330, from $25.5 million to $29 million;
Administrative Management and General Management Consulting Services, NAICS code 541611, from $24.5 million to $27 million; and
Security Guards and Patrol Services, NAICS code 561612, from $29 million to $34 million.
Among those that SBA didn’t touch are 541519 for computer-related services (the general industry, not the IT value-added reseller exception), 236220 for commercial and institutional building construction, and 541512 for computer-systems design services. All of those three codes are in the top five for small businesses. In fact, had SBA not made the policy decision to not lower size standards, those three would have received lower size standards.
Many of the size standards that SBA increased are for industries with little government-contracting activity. The five largest increases are to industries that have fewer than 100 small-business vendors combined. They are All Other Miscellaneous Retailers, Amusement Arcades, Other Marine Fishing, Taxi and Ridesharing Services, and Hunting and Trapping. So while your local arcade might welcome the size-standard increase—my favorite is Zelky’s in Rehoboth Beach—that doesn’t make much of a difference for contracting.1 That's why the benefits of the increases that SBA calculated, $650 million in contracts, are low in comparison to the $180 billion awarded to small businesses in 2024.
The proposed rule ends with an invitation for the public to comment, especially on 12 specific issues. These include SBA’s policy of not lowering size standards, changes to how SBA weighs various data points, and specific questions about several industries: fire suppression, dredging, and specialized subindustries within engineering. I know from personal experience that SBA reads each individual comment and considers their points carefully.
What size standards miss in the current environment
After years of reading those comments on SBA size standards, I noticed a common theme. Most of the commenters want higher standards, and their most common reason for wanting them is that they think the current standards inhibit their growth. There are a lot of benefits to being and staying small. But, when your small-business status relies on your revenue staying the same, there’s not much incentive to grow.
The data confirms this point. Both GAO and the Center for Strategic and International Studies found that only about 6% of small businesses grow beyond small-business status after 10 years in the market. CSIS concluded that SBA’s size standards create “perverse incentives” to grow only enough to reach the SBA size standard.
Congress tried to address this problem with the Small Business Runway Extension Act of 2018, which extended the averaging period for revenues from three years to five years. But that solution has the strange result of penalizing businesses when they have declining revenues—something that could become a big problem as small-business contracts have started to decline.
My suggestion would be to take an example from the SBA loan programs. For loans, most borrowers can use an alternative size standard. The alternative size standard applies to all industries and—especially after SBA raised the thresholds last year—covers most businesses that would be interested in SBA loans. An alternative size standard in contracting could apply only to large contracts, those that exceed the current size standard. This would acknowledge that, as agencies consolidate contracts, a small business contractor might lose its small-business status after one large contract award. Under this alternative size-standard proposal, the threshold levels could either be a multiple of the current size standard or a fixed amount, such as $100 million. This would keep smaller contracts available for current small businesses without dissuading growth by those close to the size standard.
Allowing more growth among small businesses also would allow them to better compete with consolidated, multinational firms—especially if the FAR Overhaul removes Rule of Two over $250,000 and set-aside opportunities wane as a result. Granted, creating an alternative size standard for contracting would be a big change. But these size standards have gone through big changes before. Otherwise, we’d still be using a single 500-employee size standard.
Sam Le is a Virginia- and D.C.-licensed attorney. His website is www.samlelaw.com.
Funland, also in Rehoboth Beach, might be more appropriately classified in the Amusement and Theme Parks industry, NAICS code 713110, with a size standard of $47 million.