SBA Proposes Sweeping Expansion of Small Business Size Standards

The US Small Business Administration (SBA) has issued two related proposals to expand “small business” eligibility size requirements under 13 C.F.R. Part 121, potentially making this one of the most consequential SBA size standard changes in decades for defense contractors, manufacturers, technology companies, professional services firms, and government suppliers (see 91 Fed. Reg. 54096 and 91 Fed. Reg. 53741). According to SBA, if approved, the change in size standards would net an additional 114,451 small businesses—dramatically expanding access to contract vehicles, teaming opportunities, and supplier-development programs unavailable to other-than-small businesses.

Key Takeaways

Higher Employee Thresholds for Many Manufacturers

Many manufacturing-related industries would see substantial increases in employee-based size standards, particularly relevant for defense industrial base suppliers, vehicle manufacturers, aerospace suppliers, systems integrators, and Tier 1 and Tier 2 defense subcontractors.

• Industrial Machinery Manufacturing: up to 1,500 employees
• Engine, Turbine and Power Transmission Equipment Manufacturing: up to 1,500 employees
• Railroad Rolling Stock Manufacturing: up to 1,500 employees
• Other Transportation Equipment Manufacturing: up to 1,500 employees
• Fabricated Metal Products Manufacturing: up to 1,500 employees
• Chemical Manufacturing sectors: many increased to 1,250-1,500 employees

Shift Toward Employee-Based Standards and Productivity Adjustment

The proposal moves many industries away from revenue-based standards and toward employee-based standards to better accommodate for inflation.

Under the new proposals, SBA would also adjust for productivity growth, reflecting technological advances and economic efficiency gains. This change alone significantly increases many receipt-based size standards.

Expanded Access to Set-Asides and Small Business Programs

Many mid-sized defense manufacturers, engineering firms, systems integrators, and technology companies that previously exceeded SBA size standards may become eligible “small businesses.”

This could significantly expand the pool of qualified suppliers available to major defense primes, particularly where primes must satisfy small business subcontracting goals, diversify critical supplier bases, or identify domestic sources for specialized manufacturing, software, engineering, and component-level work.

Potential Impact on Defense Industrial Base

The proposal is intended, in part, to strengthen domestic manufacturing capacity, supply chain resilience, and national security readiness. For defense companies nearing current SBA thresholds, the proposal could remove a major disincentive to growth. Companies may be able to:

• Make strategic acquisitions without immediately losing small business status.
• Expand workforce and revenues while maintaining eligibility.
• Continue competing for small business opportunities longer in their growth cycle.

Recommended Actions for Defense Contractors, Manufacturers, and Government Suppliers

• Review current and projected SBA size status under both existing and proposed standards
• Evaluate federal contracting strategy, including set-aside eligibility, subcontracting opportunities, teaming arrangements, and mentor-protégé options
• Model growth and merger and acquisition (M&A) scenarios to determine whether proposed thresholds could permit acquisitions, workforce expansion, or revenue growth without immediate loss of small business status
• Assess supplier-base and subcontracting-plan impacts, including how newly eligible companies may affect compliance, sourcing, and competitive positioning
• Consider submitting comments before the September 21, 2026 deadline if the proposal materially affects eligibility, competitive dynamics, or transaction planning

Bottom Line

The SBA’s proposal could materially expand federal contracting opportunities for defense contractors and industrial manufacturers while changing competitive dynamics for primes, subcontractors, and acquisition-minded companies. While the existing standards remain in effect until the rulemaking process is complete, companies that have recently “graduated” from small business status, or are approaching current size limits, should model the proposed rules now to determine how they may affect eligibility, bid strategy, teaming, subcontracting compliance, and M&A planning before the comment deadline and any final rulemaking.

Comment Deadline: September 21, 2026 (see: Federal Register: Small Business Size Standards)

For more information, please contact the authors of this Client Alert or your Butzel attorney.

Beth Gotthelf
248.258.1303
gotthelf@butzel.com

Derek Mullins
313.983.6944
mullins@butzel.com

Anthony Scalise
248.258.2612
scalise@butzel.com

Gregg Ozga
313.225.5352
ozga@butzel.com