Proposed Federal Rule Could Change Small Business Eligibility for Construction Firms, by Elizabeth Marchionni, Esq., 10-28-2026

A significant federal regulatory proposal could fundamentally change how small business status is determined for federal contracting and U.S. Small Business Administration (SBA) programs, as well as certain state and local programs that incorporate SBA size standards.

The SBA recently proposed a sweeping revision to its size standards that would move many industries, including construction trades, away from revenue-based thresholds and toward employee headcount limits. If adopted, the proposal would largely replace the current North American Industry Classification System (NAICS) code-specific receipts standards for construction firms with employee-based size standards and substantially restructure how businesses are classified as “small.” 

The proposal represents one of the most consequential changes to federal small business policy in decades and could affect eligibility for federal set-asides, SBA programs and other government contracting opportunities that rely on SBA size standards.

Moving From Revenue to Employee-Based Standards
Construction firms currently qualify as small based on their average annual receipts, with the applicable receipts threshold varying by six-digit NAICS code.

Under the proposed rule, construction firms generally would be classified based on their number of employees. The proposed standards would vary by construction category, ranging from 550 employees for several specialty trades and residential building construction to 2,000 employees for oil and gas pipeline and related structures construction.

For many contractors, this change could have major implications. Companies that have exceeded current receipts-based thresholds due to inflation, rising material costs or larger project values may regain or retain small business eligibility if they remain below the applicable proposed employee-based size standard. At the same time, smaller firms could face increased competition from larger employers that would newly qualify as small businesses under the proposed standards.

Potential Effect on Government Contracting
Small business status can affect eligibility for federal set-aside contracts, SBA loan programs and other federal programs or contracting opportunities that rely on SBA size standards.

The SBA estimates that the proposal would result in a net increase of 114,541 businesses classified as small across all affected industries. That expansion could create new opportunities for some contractors while increasing competition for firms already participating in small business contracting programs.

Preparing for a Possible Change
Construction firms should review their current NAICS classifications, employee counts and long-term growth plans to assess how the proposed framework may affect their eligibility and competitive position. Businesses should also consider how planned hiring, acquisitions, affiliations or other changes could affect their status under an employee-based system.

The proposal has not been finalized, and businesses should not revise size representations or certifications based solely on the proposal. Existing standards remain in effect unless and until the SBA issues a final rule that becomes effective. The SBA has extended the public comment period on the proposal through November 20, 2026.

KD’s Construction Law Practice Group continues to monitor developments and provide compliance advice to clients that may be affected by the proposed changes.

Author:
Elizabeth Marchionni
Partner