The U.S. Small Business Administration (SBA) has proposed sweeping changes to how it defines small businesses, including higher size thresholds that would allow roughly 114,000 additional businesses to qualify as small.

Under its proposed rule, published Aug. 20 in the Federal Register, the SBA would reduce the number of industry classifications used for size standards from nearly 1,000 to 338, change several size standards from receipts-based to employee-based, and increase both the receipts-based and employee-based standards.

“Given the difficult conditions small businesses faced during 2021-2024, including high inflation and increased regulatory burdens, the SBA believes reductions would stifle the economic growth now underway,” the agency said.

The SBA would substantially raise some thresholds. For example, the employee-based standard for aircraft manufacturers would increase from 1,500 to 2,800 employees, and shipbuilding would increase from 1,300 to 2,300 employees. The receipts-based standard for natural gas pipeline transportation would jump from $41.5 million to $477 million, and the asset limit for commercial banks would increase from $850 million to $5 billion.

The changes would increase the number of businesses classified as small from about 6.34 million to 6.45 million, potentially expanding the pool of companies eligible for federal small-business contracting programs.

The proposed rule could have mixed effects for federal contractors. Supporters say the higher thresholds will expand access to capital, counseling, and contracting opportunities, while critics warn that the smallest businesses could find it harder to compete for set-aside contracts.

Midsize businesses could be among the biggest beneficiaries, as companies that had outgrown small-business programs but struggled to compete with large contractors could regain access to set-aside opportunities under the increased size thresholds.

The SBA is also proposing to reduce the number of size standards by relying on broader North American Industry Classification System (NAICS) categories and eliminating certain size-standard exceptions.

The agency would also reduce the number of receipts-based standards and make employment-based standards the default across industries. The SBA reasons that employment measures are less susceptible to inflation and business volatility, thereby reducing the likelihood that companies repeatedly move in and out of small-business status.

Overall, the proposed rule would broaden eligibility for SBA programs and federal contracting opportunities, benefiting some midsize companies while potentially increasing competition for the smaller government contractors.

The SBA is accepting public comments on the proposed rule through Sept. 21. For questions about this proposed rule, contact a member of Taft’s Government Contracts group.