Limitations on subcontracting, explained in plain English.
When a small business wins a set-aside contract, it cannot simply pass most of the work to a large company. The limitations on subcontracting rule sets how much it may subcontract — and to whom.
Where the rule comes from
The rule is in the SBA regulations at 13 CFR 125.6 and is implemented in contracts through the FAR clause 52.219-14, Limitations on Subcontracting. It applies to small-business set-asides and to set-asides and sole-source awards for socio-economic programs such as 8(a), HUBZone, SDVOSB and WOSB.
The 50% rule for services
For a services contract, the small-business prime may not pay more than 50% of the amount paid to it under the contract to subcontractors that are not similarly situated entities. The other thresholds are 50% for supplies (excluding the cost of materials), 85% for general construction and 75% for specialty trade construction.
What “similarly situated” means
A similarly situated entity is a subcontractor that has the same small-business program status as the prime — for example, a small business for a small-business set-aside — and is small under the NAICS code the prime assigned to the subcontract. Amounts paid to similarly situated entities count as if the prime performed the work itself.
How to structure a compliant team
- Price the work packages early and check the share before you submit.
- Keep management, client-facing and core work packages with the prime.
- Use similarly situated subcontractors for additional capacity where possible.
- Monitor the share during performance, not only at proposal time.
How Vella applies it
When Vella is the prime on a set-aside, we structure the team so the rule is met — with program management and defined work packages performed by Vella, and partner scope limited accordingly. When we are the subcontractor, we help the prime model the work share before the proposal. See compliance and delivery models.
General information, not legal advice. Always check the clauses of the specific solicitation.
Quick answers.
Question not listed? Ask us directly — a person answers, not a chatbot.
The limitations on subcontracting clause applies to set-asides and certain sole-source awards to small businesses, not to full and open competitions. Check the clauses in the specific solicitation.
The regulation measures compliance by performance period — the base term and then each option period. For orders set aside under multiple-award contracts, the contracting officer may require compliance order by order. Read the solicitation and ask the contracting officer if unclear.
