On August 20, the Small Business Administration (SBA) released a proposed rule intended to overhaul the size standards used to reserve federal contracting opportunities for small businesses. These standards are critical because they determine where the SBA draws the line between small and large businesses, and shape how billions of dollars in set-aside contracts are awarded across nearly every industry that sells to the government.
The SBA’s proposal would reduce 1,000 existing size standards into 338 and eliminate the special exceptions that apply to federal contracting with small businesses. Among the most controversial aspects of the proposed revisions are that they would define companies with revenues in the hundreds of millions of dollars as “small,” a classification that defies every common-sense understanding of what a small business is. Thousands of small and emerging companies, whose growth and development are currently and intentionally aided by a market in which they compete against like-sized companies, will now be forced to compete against exponentially larger companies.
The proposed rule would also shift many industries from an annual business revenue test to an employee count, set a new employee floor for every industry, and remove the upper revenue limits that have capped how large a small business can be. In many fields, the new thresholds are far higher than the old ones. The standard for computer systems design services, for example, would rise from $34 million in annual revenue to $531 million.
The criticism has been fierce enough that members of Congress have weighed in against the proposed rule. House Small Business Committee Ranking Member Nydia Velázquez circulated a letter urging the SBA to withdraw the rule. Along the same lines, House Small Business Committee staff raised similar concerns at the SBA’s public forum last month, criticizing the short comment period and warning that much larger firms could push small businesses out. Most notably, Sen. Edward Markey and 12 other senators sent a letter to SBA Administrator Kelly Loeffler urging her to rescind the proposal, warning that it “would decimate federal contracting opportunities for true small businesses.”
The lawmakers highlighted the following points in their letter:
Under the the SBA’s new size standards, the highest receipts-based standard would exceed $1 billion in annual revenue—more than 20 times the current $47 million maximum—and the highest employee-based standard would reach 3,600 employees—more than twice the current 1,500-employee maximum.
Of the 114,000 businesses that would be newly classified as small, more than 37,000 of these businesses have collectively won more than 100,000 federal contracts worth approximately $71 billion in Fiscal Year 2025 alone without a small business designation.
If SBA included the awards won by these 37,000 businesses in its Fiscal Year 2025 analysis, small business contracts would have accounted for 38% of all federal contracts, instead of the 27% that SBA announced this summer.
Understandably, small business owners and industry groups alike have voiced strong objections, with thousands submitting comments raising concerns about the SBA’s proposed rule. In fact, the response has been so negative that the SBA had to extend the public comment period by 60 days, to November 20, 2026, after groups including the American Subcontractors Association and the National Small Business Association asked for more time.
At CAMI, we agree the old standards needed work. They have not kept pace with changes in the federal market for contractors, and too often they punish companies for their success. But the SBA’s proposed rule leaves out a connected procurement law, and that gap could undercut the very goals the SBA set out to reach.
That piece is the Rule of Two. Under the Federal Acquisition Regulation (FAR), a contracting officer must set aside a contract for small businesses whenever two or more qualified small firms can do the work at a fair price. The rule has no dollar limit. It has worked well over the years in part because contracting officers on large, complex programs rarely found two small firms able to perform. Those programs went forward through full and open competition, allowing the government to choose from every capable provider.
The new thresholds would change that. Across the three largest IT subsectors alone, more than 6,000 companies that already hold federal contracts would newly qualify as small. With a pool that large, the Rule of Two would apply far more often, and contracts worth hundreds of billions of dollars would have to be reserved for “small” businesses.
The current successful small contractors would be shut out of the competitions they are best equipped to perform. So would many of the commercial and nontraditional companies the Administration has worked to bring into the federal market. Agencies would face recompetitions on programs where continuity matters, and large reserved contracts would invite complicated teaming and subcontractor arrangements that make it harder to see who is winning the competitions and doing the work. That's what happened when SBA raised size standards after 2010. An NBER working paper found the share of contract dollars going to the smallest firms fell 11.3 percentage points, while total contract dollars in those industries didn't change.
Reclassifying a company as small does nothing to expand what it can deliver. A program built to help new suppliers grow would end up steering its largest awards to large companies already earning hundreds of billions of dollars a year.
Businesses across the country have reached the same conclusion, with many companies highlighting the rule’s potentially disastrous consequences. IT contractor Enabled Advisors warned that the Rule of Two "would become a procedural formality rather than a safeguard for meaningful small-business participation," while tribally owned enterprise Delaware Nation Industries & Investments warned that the new standards, “when coupled with SBA’s Rule of Two,” would increase set-aside contracts and let larger firms edge out their smaller rivals.
Individual small business owners have also raised concerns with the proposed rule. Veteran small business owner Melissa Lee, for example, wrote that the Rule of Two "will greatly disadvantage very small businesses like mine and put us in competition with much larger organizations," while Matthew Corkery, owner of the small Florida-based firm Dustoff, pointed out that the proposal distorts the Rule of Two and could speed up consolidation of the defense industrial base.
It is difficult to interpret the reaction to the SBA’s proposed size standards as anything but a clear rebuke. An analysis by Sam Le, a former SBA procurement policy official, found that 87% of comments filed before the original deadline opposed the proposal. Opposition runs even higher in key sectors including architectural services, administrative and consulting services and veteran-owned firms, of which 99%, 96% and 94% opposed the proposed rule, respectively. The response makes clear that more analysis must be conducted.
We propose one targeted change to the rule. We recommend a $25 million cap on mandatory Rule of Two set-asides. Contracts above the micro-purchase threshold of $15,000 and up to $25 million would still be set aside for small businesses when two or more qualified small firms can perform the work at a fair price. Above that level, agencies would skip the test and have the flexibility to conduct full and open competition. The same $25 million line would apply to HUBZone, service-disabled veteran-owned, women-owned, and task-order set-asides. The figure is already used in the SBA’s Certificate of Competency process as the point for determinations to move from area offices to headquarters, making it a logical benchmark.
Modernizing size standards is a worthy goal, but it should not come at the expense of the small firms the program was built to foster. A cap on the Rule of Two would let the SBA implement its reforms without triggering a wave of mandatory set-asides on the government’s largest contracts. We urge the SBA and the FAR Council to adopt this one change before the rule is finalized.