Limitations on Subcontracting: The 50% Rule Explained

On a small business set-aside you generally may not pay more than 50% of what the government pays you to subcontractors that are not "similarly situated" — 85% for general construction and 75% for special trades. Work performed by a similarly situated small business, one holding the same set-aside status you won under, does not count against the cap.

Check first: use our free 60-second eligibility checker to confirm which set-aside programs your business actually qualifies for before you plan how to split the work.

You just won your first small business set-aside, and somewhere in the award is a clause called FAR 52.219-14. It decides how much of the contract you are allowed to hand to other companies. Misread it and you can face a penalty measured in the hundreds of thousands of dollars, or worse, debarment. This guide explains exactly what the limitations on subcontracting rule requires, which dollars count against you, and how to structure your team so compliance is built in before you ever submit a bid.

What the limitations on subcontracting rule actually requires

Set-asides exist for a reason: the government reserves certain contracts for small businesses so that small businesses actually do the work, rather than acting as a pass-through to a large firm. The limitations on subcontracting rule is how that intent gets enforced.

The rule lives in two places that work together. The U.S. Small Business Administration writes the policy at 13 CFR 125.6, and the Federal Acquisition Regulation puts the requirement into your contract through the clause at FAR 52.219-14, titled "Limitations on Subcontracting."

Here is the mental shift that trips up most first-time winners. The rule is not written as "you must self-perform X percent." It is written as a ceiling on how much of the government's payment you may pass to the wrong kind of subcontractor. In the SBA's words for a services contract, the prime "will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated." Everything below turns on that phrase, not similarly situated, so it is worth getting precise about the numbers first and the definition second.

The four caps, by contract type

The percentage you have to watch depends on what you are selling. Under 13 CFR 125.6(a), the limits are:

• Services, except construction: no more than 50% of the amount the government pays you may go to firms that are not similarly situated.
• Supplies or products (where you are the manufacturer, not a nonmanufacturer reseller): the same 50% ceiling, and here the cost of materials is excluded from the calculation.
• General construction: no more than 85% may go to non-similarly-situated firms, again excluding the cost of materials.
• Special-trade construction (electrical, plumbing, and similar specialty work): no more than 75%, materials excluded.

Two details matter. First, construction gets much higher ceilings because construction primes legitimately rely on specialty trades, so the rule expects far more subcontracting there. Second, excluding materials on supply and construction contracts can meaningfully change your numbers, because the cap applies to labor and the value you add, not to the raw goods flowing through the job. If you resell another company's product as a "nonmanufacturer," a separate set of rules applies under 13 CFR 125.6(a)(2)(ii), and you should confirm whether the nonmanufacturer rule or a waiver is in play before you bid.

"Similarly situated" is the lever that changes everything

If the caps were the whole story, the rule would be a simple self-performance test. They are not, because subcontracting to a similarly situated entity does not count against your limit. This is the single most useful concept in the regulation, and it is where smart teaming pays off.

FAR 52.219-14 defines a similarly situated entity as a first-tier subcontractor, including an independent contractor, that "has the same small business program status as that which qualified the prime contractor for the award," and that is also small under the NAICS code the prime assigns to the subcontract. In plain terms: if you won a HUBZone set-aside, a HUBZone subcontractor that is small for the work is similarly situated. If you won a service-disabled veteran-owned set-aside, another SDVOSB small business is similarly situated. The statuses have to match the one that made you eligible to win.

There is a limit on how far that exclusion stretches. Under 13 CFR 125.6(c), a similarly situated subcontractor's work is excluded from your cap only to the extent that it performs the work with its own employees. Anything that subcontractor further subcontracts flows back and counts against your number. So the exclusion rewards genuine partners who do the work, not a second pass-through.

A quick example makes it concrete. Suppose you hold a $1,000,000 services set-aside. You may pay up to $500,000 to subcontractors that are not similarly situated. If you also bring on a similarly situated small business that performs $200,000 of the work with its own staff, that $200,000 sits outside the cap entirely, which leaves your team far more room to assemble the right mix of specialists while staying compliant.

When the clock runs, and when the rule does not apply

Timing is where compliant-looking contracts quietly go sideways. You are not judged month to month. Under 13 CFR 125.6(d), for a total or partial set-aside, compliance is generally measured over the base term, and then separately over each subsequent option period. A heavy-subcontracting stretch early in the base can be balanced out later, but every performance period has to land inside the line on its own.

The rule also has a floor. Per 13 CFR 125.6(f)(1), the limitations do not apply to contracts valued above the micro-purchase threshold but at or below the simplified acquisition threshold. Below that level the compliance obligation is relaxed, which is one reason small-dollar set-asides can be a practical on-ramp for a business still building its own capacity. For how those smaller opportunities are structured, our guide to small business set-aside types walks through the categories you are likely to see.

What happens if you blow past the cap

The consequences are serious enough that they belong in your pricing model, not a footnote. A violation is subject to the penalties in 15 U.S.C. 645(d), referenced at 13 CFR 125.6(h): a willful violation can draw a penalty of the greater of $500,000 or the dollar amount spent in excess of permitted levels on subcontractors. On top of that, failing to comply with the spirit and intent of a subcontract with a similarly situated entity can be a basis for debarment under FAR 9.406-2, which would shut you out of federal contracting altogether for a period.

It is also worth remembering that you certify compliance. When you accept the clause in your offer, you are representing that you will honor these limits, so a shortfall is not just a performance problem — it can be a representation problem. If you are unsure how the clause interacts with the rest of your solicitation, our breakdown of how to read a federal solicitation can help you find the clauses that bind you before you sign.

How to build a compliant team before you bid

The businesses that stay clean treat the 50% rule as a planning input, not a post-award surprise. A few habits make the difference.

Start by mapping self-performance honestly. Before you price the work, estimate what share your own employees can realistically deliver, and compare that to the cap for your contract type. If the gap is large, you have a structural problem to solve on paper, not on the job.

Close that gap with similarly situated partners where you can. Because their self-performed work sits outside your cap, a teaming arrangement or a joint venture with a partner that shares your set-aside status is often the cleanest way to take on larger scope. Our guides to teaming agreements versus joint ventures and the SBA Mentor-Protégé program and joint ventures explain the trade-offs between each structure.

Then track the dollars as you go. Keep subcontractor invoices tagged by whether the firm is similarly situated, and total them against the government's payments at the close of the base term and at each option boundary — the exact points where compliance is measured. Waiting until an audit to reconstruct those numbers is how good-faith contractors end up out of compliance.

Finally, confirm your own standing first. Every one of these exclusions depends on your business genuinely holding the status you won under, so it pays to verify your eligibility before you rely on it. You can start with our free eligibility checker, and if you want a human to pressure-test your setup, a WedgeBid audit reviews your certifications, your capability narrative, and your compliance posture end to end.

Plan the rule in, not around

The limitations on subcontracting rule is not a trap so much as a design constraint. Winners who understand it early price their work, choose their partners, and schedule their performance around it, which is exactly the kind of discipline that makes a small business a reliable federal supplier over time. Learn the cap for your contract type, lean on similarly situated partners to expand your reach, and measure your numbers at every performance period rather than at the end.

Not legal advice — see our disclosures for full disclaimers.