When “Small” Gets Bigger: What SBA’s Proposed Size Standards Could Mean for Federal Contractors

Excerpt

SBA’s proposed size standards could give growing government contractors more room before they graduate into unrestricted competition. But expanding the definition of “small” could also change who emerging companies must compete against. Government contracting expert Joanne Frederick explains the tension, the role of past performance and how new federal contractors can build credibility.

For a successful small government contractor, growth can eventually create an uncomfortable problem: becoming too large to remain “small” before the company feels large enough to compete comfortably against major federal contractors.

The U.S. Small Business Administration wants to address that problem. In August 2026, SBA proposed a major restructuring of the size standards that determine which companies qualify as small businesses across hundreds of industries. The proposal would establish standards for 338 industry groups and industries, simplify the current structure and substantially expand eligibility in many categories. SBA estimates that approximately 114,541 additional businesses would qualify as small under the proposal, including about 37,002 firms that already held federal contracts in fiscal year 2025.

For growing federal contractors, that additional runway could be consequential. Companies approaching their existing size limit would have more room to add employees, pursue revenue and build the systems required to compete in the unrestricted market without immediately losing access to small-business opportunities. SBA describes the existing transition problem as a “benefit cliff,” where firms may have an incentive to constrain growth because graduating from small-business status suddenly puts them into competition with much larger companies possessing extensive past performance.

Yet changing where that cliff sits raises another question: What happens to companies standing much farther down the mountain?

>> READ: Joanne Frederick on Building Credibility, Trust and a Career in Government Contracting

Joanne Frederick, CEO of Government Market Strategies (GMS), sees value in giving successful contractors more room to grow. She also argues that dramatically expanding some thresholds could change the competitive character of small-business contracting, particularly for newer firms still trying to earn the past performance that federal buyers frequently use to assess risk.

“Giving growing contractors additional runway could be enormously valuable,” Frederick says. “The jump from small-business set-asides to unrestricted competition often comes just as a contractor has built the workforce, systems, and experience needed to pursue larger programs.”

The difficult part, in her view, is determining how much runway to add without making it substantially harder for businesses near the beginning of their contracting journey to get off the ground.

Key Takeaways

• SBA’s August 2026 proposal would significantly restructure and raise small-business size standards across many industries. It remains a proposal, not a final rule.
• SBA estimates approximately 114,541 additional firms would qualify as small, including about 37,002 companies that already held federal contracts in FY2025.
• Higher thresholds could help growing contractors avoid the “benefit cliff” that can occur when a company outgrows small-business eligibility before it is prepared for unrestricted competition.
• Joanne Frederick argues that dramatically higher thresholds could also put much smaller firms into the same competition pool as contractors with significantly greater revenue, staff, relationships and past performance.
• Past performance creates a particular challenge for new entrants because companies need contract experience to build it, while agencies may use previous performance to reduce procurement risk.
• Subcontracting, mentor-protégé arrangements, joint ventures and smaller initial projects can give emerging contractors ways to develop experience and customer knowledge.
• SBA extended the public-comment period on the proposal through November 20, 2026.

What SBA Is Trying to Change

SBA size standards determine whether a business is considered small for federal programs, including eligibility for many small-business contracting opportunities. Standards vary by industry and are typically based on average annual receipts or employee counts.

SBA periodically reviews those standards to account for changing market conditions. Its 2026 proposal goes well beyond a routine inflation adjustment. Among other changes, the agency proposes moving from nearly 1,000 six-digit NAICS-level standards to 338 standards based on a combination of four- and five-digit industry groupings, converting numerous industries to employee-based standards and adding productivity growth to its adjustment of monetary standards.

SBA says the methodology is intended to reflect the scale at which a company could become dominant in its market rather than keeping businesses under thresholds that no longer reflect the industries in which they operate. The agency also argues that standards that are too low can discourage firms from growing and can push capable small contractors into unrestricted competition before they have the scale to compete effectively.

That is the side of the problem Frederick believes deserves attention.

“There is a real problem here that deserves to be fixed,” she says. Growing contractors can reach the point where they have finally developed the people, systems, and knowledge necessary for larger programs, only to lose the set-aside environment that helped them get there.

PowerHomeBiz previously explored Frederick’s broader philosophy in Chase Problems, Not Contracts: A Smarter Way to Build a Consulting Business. Her view of the size-standard debate follows a similar theme: government contracting works best when procurement structures give capable companies room to grow while continuing to develop new suppliers behind them.

When the Definition of “Small” Covers Very Different Businesses

The controversy is not simply about whether thresholds should rise. It is about scale.

For Administrative Management and General Management Consulting Services under NAICS 541611, Frederick points to the proposal to move from a current receipts threshold of $24.5 million to a proposed $295 million standard. Independent analyses of the proposed rule have documented the same change.

Frederick argues that the resulting competitive pool could include companies that are all legally classified as small but bear little operational resemblance to one another.

“A $3 million business and a $295 million business may both be called small under the proposal, even though they are not entering that competition with anything close to the same resources,” she says.

>> READ: How to Get Your First Government Contract When You Have No Past Performance

The difference can show up everywhere from proposal capacity to cash reserves. A more established contractor may have dedicated capture and business-development teams, experienced proposal writers, mature accounting and compliance systems, extensive agency relationships and a portfolio of completed contracts it can cite as past performance. A much younger company may have capable people and a strong technical solution but still rely heavily on the founder to sell, write proposals, manage client relationships and deliver the actual work.

SBA’s own regulatory analysis recognizes that expanding eligibility will increase competition. The agency says the greatest competitive effects are likely to fall on existing small businesses most similar in size to the companies newly classified as small. SBA also argues that the higher standards will give growing companies more room before they lose small-business status.

That nuance matters. The proposal does not simply create “winners” and “losers.” It changes where different firms encounter competitive pressure.

37,000 Existing Federal Contractors Could Become Newly Eligible

The scale of the proposed change becomes clearer in SBA’s estimates.

The agency calculates that approximately 114,541 additional businesses would become eligible for small-business status. Of those, roughly 37,002 firms already held federal contracts in FY2025, representing approximately 105,655 contracts and more than $71 billion in federal contracting activity.

That means the newly eligible population would not consist only of companies entering government contracting for the first time. Many already know how the federal market works.

SBA’s analysis identifies thousands of existing contractors across industries that could become newly eligible, including 5,314 Engineering Services firms and 1,818 Administrative Management and General Management Consulting Services firms.

Frederick sees that experience as the heart of the competitive question.

“Many will have established customer relationships, dedicated proposal and administrative teams, and the ability to spread their costs across multiple contracts,” she says. “The proposal could solve the graduation problem for today’s successful businesses while creating an entry problem for tomorrow’s.”

That is her interpretation of the proposal’s risk, not a conclusion SBA itself has reached. SBA, for its part, argues that expanding the eligible pool can increase competition, improve offerings, potentially reduce prices and give businesses more room to grow. The agency also acknowledges that greater competition may lower profits and reduce some existing firms’ probability of winning particular contracts.

The Past-Performance Catch-22

For emerging government contractors, one of the hardest advantages to overcome is past performance.

Federal buyers have legitimate reasons to consider previous performance. Agencies are spending public money and need evidence that a contractor can manage the work, control risk and deliver what it promises.

For a new entrant, however, this can create a circular problem.

“A company cannot build federal past performance without winning federal work, but it increasingly cannot win federal work without already having past performance,” Frederick says. “Set-asides help break that cycle by giving small businesses a realistic path to their first prime contracts.”

The problem is not purely theoretical. A Government Accountability Office review of Department of Defense contracting found that the number of small businesses receiving DOD contract awards fell from 42,723 in fiscal year 2011 to 24,296 in fiscal year 2020, a decline of 43 percent. That study is specific to DOD and covers 2011–2020, so it should not be treated as a current measure of the entire federal contracting market, but it illustrates longstanding concerns about the supplier pipeline.

For Frederick, past performance is therefore more than an evaluation criterion. It is part of the market-entry problem.

Her own entrepreneurial history reinforces that view. When she was building her business, the company did not begin with decades of corporate performance history. The first opportunity came through trust, but she says subsequent work followed because the team delivered.

“When you are a young company, you do not have a long corporate résumé to lean on,” Frederick explains. “You have to build credibility through the quality of the work itself: understand the problem, be responsive, make good decisions, and leave the client better than you found them.”

Subcontracting Is Part of the On-Ramp Too

Prime contracts are not the only route through which businesses gain federal experience. Subcontracting can help younger companies learn agency environments, develop relationships, participate in larger programs and build a body of relevant work.

Federal acquisition rules require certain prime contractors to provide small businesses, women-owned small businesses and other designated categories the “maximum practicable opportunity” to participate in contract performance. Larger contracts can also require formal subcontracting plans with goals for participation by different categories of small businesses.

Frederick raises a less obvious implication of dramatically increasing size standards: a prime contractor trying to meet small-business subcontracting goals may have a wider pool of established companies from which to choose.

“If much larger firms qualify as small, prime contractors could meet those goals through established suppliers instead of bringing newer businesses into the market,” she says.

That does not mean primes necessarily would stop using emerging companies, nor does the proposed rule require them to do so. It does mean the definition of which subcontractors count as small could influence the composition of the supplier pool.

For a company trying to break into federal contracting, that makes differentiation especially important. PowerHomeBiz’s broader guide to building trust as a competitive advantage applies here as well: credentials may get a company considered, but reliability, responsiveness, expertise and proven execution are what turn initial work into a reputation.

What Could Protect Both Growth and Market Entry?

Frederick does not argue that growing contractors should simply be pushed out of the small-business market sooner. Her concern is how to create room for one generation of contractors to grow without weakening the path for the next.

She suggests several possibilities policymakers could consider.

One would be to gradually increase existing standards as inflation and market conditions change. Another would be creating a separate midsized category that gives growing companies additional runway without grouping substantially larger businesses and startups into the same competitive class.

Frederick also points to what she describes as “graduated acquisitions”: smaller projects, demonstrations or paid pilots that allow businesses to prove themselves before competing for larger work. Evaluation methods could put greater emphasis on demonstrated capability through technical demonstrations, scenarios, oral presentations or work samples rather than relying primarily on evidence that the company has previously performed a contract of comparable size.

Those are Frederick’s policy suggestions, not provisions currently contained in the SBA proposal. Policymakers and contracting professionals may disagree about their feasibility or the appropriate balance between reducing procurement risk and creating avenues for new entrants.

The larger issue is the one the size-standard debate brings into focus: federal small-business policy is trying to accomplish two objectives at once. It must help successful small businesses continue growing while also maintaining an environment in which new companies can become successful small businesses in the first place.

What New Federal Contractors Can Do Now

Small businesses do not need to wait for the rulemaking process to finish before strengthening their federal contracting strategy. Whether the standards ultimately change substantially, change modestly or remain closer to current levels, the fundamentals of becoming a credible contractor are largely the same.

Start by understanding the customer rather than simply scanning for open solicitations. Frederick advises entrepreneurs to study the program, policy, budget, technology, people and operating environment behind the work. That context helps a business understand what an agency is trying to accomplish, rather than responding mechanically to requirements.

Businesses that want to bid directly on federal awards generally need an active SAM.gov entity registration. Companies should also determine whether they qualify for SBA contracting certifications and set-aside programs, including the Women-Owned Small Business program and other SBA certifications.

For businesses that lack federal past performance, partnerships can offer another route. SBA’s Mentor-Protégé program and joint-venture rules allow qualifying small businesses to work with more experienced contractors while developing capacity. The SBA also identifies subcontracting as a way for smaller businesses to gain a foothold in federal contracting.

Most important, Frederick says entrepreneurs should not interpret a short corporate history as proof that they are not ready.

“Every established company started without decades of corporate history,” she says. “The question is whether you can turn the first opportunity into proof that you can deliver.”

The Size Standards Are Still a Proposal

Businesses should also be careful not to treat the proposed numbers as if they are already law.

SBA published the proposed rule on August 20, 2026. On September 24, the agency announced that it had extended the public-comment period by 60 days, making November 20, 2026 the new deadline for comments. SBA said it will consider the public record as it develops a final rule.

That means the eventual standards could differ from those currently proposed.

For federal contractors, however, the debate itself is worth following because it asks a fundamental question about small-business policy: When should a successful business stop being considered small?

A threshold that is too low can penalize growth. A threshold that expands dramatically can change the competitive field beneath it. The difficult policy task is finding enough room for businesses to mature without making the path into the market unnecessarily narrow for companies that are still trying to prove themselves.

Frederick summarizes the tension this way: “Valuable runway for the current generation cannot come at the cost of eliminating the on-ramp for the next generation.”

For entrepreneurs, that on-ramp still begins where Frederick’s own business began decades ago: with an opportunity, enough preparation to make the opportunity count, and the ability to turn one successful piece of work into evidence that the company deserves the next one.

FAQ