Limitations on Subcontracting: The 50% Rule and the Middleman Myth

The limitations on subcontracting rule caps how much of a set-aside contract a small business can pay other companies to perform. On a services set-aside, you can't pay more than 50% of what the government pays you to subcontractors that aren't "similarly situated" (the limit is 50% for supplies not counting materials, 85% for general construction and 75% for specialty trade work). So yes, you can subcontract part of a government contract, but on most set-asides you can't pass the work to a company that couldn't have won the contract.

What is the limitations on subcontracting rule?

Set-asides exist so that small businesses, or firms in one of SBA's programs, get the work. This rule makes sure they actually do a real share of it.

The rule comes from the Small Business Act (15 U.S.C. 657s) and lives in two places that say the same thing:

• SBA's regulation, 13 CFR 125.6. It's titled "What are the prime contractor's limitations on subcontracting?" and sets the percentages, the exceptions and the penalties.
• The contract clause, FAR 52.219-14, "Limitations on Subcontracting." Contracting officers put it in the solicitation and the contract. By signing the contract, you agree to it.

As of October 2026, agencies use two versions of the FAR. In the codified FAR, the rule that tells contracting officers when to include the clause is at 19.507(e). In the FAR overhaul text agencies have adopted, it moved to 19.104-3(c), and the clause keeps its number, 52.219-14. The overhaul's small business part hasn't been formally proposed as a rule yet, so its wording could still change. The percentages are the same in both versions.

How much of a government contract can you subcontract?

The limit depends on the NAICS code the contracting officer assigns to the contract. Here's how much you may pay to subcontractors that aren't similarly situated:

The test is about money, not hours. You compare what you pay subcontractors that aren't similarly situated with what the government pays you. For services, SBA lets you leave out some other direct costs that aren't the main purpose of the contract and that small businesses don't provide, such as airline travel and cloud computing services.

A worked example

Here's how the limit plays out on four set-aside contracts, all above $350,000:

In the services example, the other $250,000 or more has to be performed by your own company, by similarly situated subcontractors, or both.

If a contract mixes services, supplies and construction, only one limit applies. The NAICS code the contracting officer picks decides which one, and it applies only to that portion of the contract.

Who counts as a subcontractor?

• Independent contractors (1099 workers) count as subcontractors. Their work counts toward your share only if they qualify as similarly situated.
• Leased or temporary employees from a staffing agency or professional employer organization generally count as your own people, except on staffing contracts.
• Work your similarly situated subcontractor passes on to someone else counts against your limit.

When does the 50% rule apply?

The clause goes into these contracts:

• Small business set-asides above $350,000, the simplified acquisition threshold. This includes the set-aside part of a partial set-aside, but not the part open to everyone.
• 8(a), HUBZone, WOSB, EDWOSB and SDVOSB contracts of any value, whether competed as a set-aside or awarded sole source. SBA's rule also covers the VA's veteran-owned (VOSB) contracts.
• Set-aside orders under multiple-award contracts. For plain small business set-aside orders, that's orders expected to exceed $350,000. For orders set aside for the SBA programs, it's any value.
• Awards won with the HUBZone price evaluation preference in full and open competition, unless the firm waived the preference.

The rule doesn't apply to small business set-asides above the micro-purchase threshold ($15,000) up to $350,000. It also doesn't apply to full and open contracts, and it doesn't apply to subcontracts themselves. If you're a small sub under a large prime, the limit is the prime's problem, not yours. The exception is when a set-aside prime counts you as similarly situated: then you need to do that work with your own employees. Our guide on how to become a government subcontractor covers that side.

Over what period is compliance measured?

For a set-aside contract, it's generally the base term and then each option period. The contracting officer can instead require you to comply on each order and marks that choice in the clause. For orders set aside under a multiple-award contract, you're measured over each order's period of performance. The contracting officer can ask for proof at any time, such as invoices, copies of subcontracts or a list of the value of tasks performed. So keep those records from day one.

Similarly situated entities: subs that count as you

A subcontractor is "similarly situated" when it has the same small business program status that qualified you for the award. Under the clause, it must be a first-tier subcontractor, and it must be small under the NAICS code you assign to the subcontract.

Money you pay a similarly situated sub doesn't count against your limit, but only for work it performs with its own employees. Anything it passes along counts against you. Status has to match exactly: SBA's own example says a WOSB prime that pays a service-disabled veteran-owned sub more than 50% on a WOSB contract is in violation, because an SDVOSB isn't similarly situated to a WOSB.

If your sub stops being small or loses its certification, you can't keep counting it. SBA does treat good-faith reliance on a sub's own representation as a possible mitigating factor, but checking first is cheaper. You can look up a proposed sub in FedReady's free CAGE code and UEI lookup to see its SAM.gov registration status, SBA certifications and any active exclusion. You still need to confirm it's small under the NAICS code on your subcontract, using SBA's size standards tool.

Supplies, drop-shipping and the nonmanufacturer rule

Product resellers ask the most questions here, because drop-shipping can look like 100% subcontracting. It isn't treated that way when you qualify under the nonmanufacturer rule (13 CFR 121.406).

On a set-aside for manufactured products, you either make the item yourself in the United States or qualify as a nonmanufacturer. To qualify, a reseller must:

• Have no more than 500 employees (150 for IT value-added resellers).
• Be primarily in the retail or wholesale trade and normally sell that type of item.
• Take ownership or possession of the item "in a manner consistent with industry practice."
• Supply a U.S.-made item from a small business manufacturer, unless SBA has waived that requirement.

When you meet the nonmanufacturer rule, the usual 50% supply limit doesn't apply in the same way. Instead, you must deliver small business products. On a multiple-item buy, at least 50% of the value must come from small business manufacturers or from items SBA has waived.

Because the rule says ownership or possession, a reseller that takes title and has the manufacturer ship straight to the agency isn't automatically out of bounds. Your setup still has to fit industry practice, and that depends on the facts, so check before you rely on it.

SBA can grant a waiver for one contract or a whole class of products when no small business maker is available. A waiver lets you supply any size firm's product, but it doesn't excuse the Buy American Act or the Trade Agreements Act. The nonmanufacturer rule doesn't apply to contracts with service or construction NAICS codes.

Ostensible subcontractors and what happens if you break the rule

The limitations on subcontracting rule has a cousin in SBA's size rules: the ostensible subcontractor rule at 13 CFR 121.103(h). An ostensible subcontractor is a sub that isn't similarly situated and either performs the "primary and vital requirements" of the contract or is one you're "unusually reliant" on. If SBA finds one, you're ineligible for that award as a small business or program firm, usually after a competitor files a size protest.

You can still feature a big partner's experience in your proposal. SBA's rule says a prime "may use the experience and past performance of a subcontractor" to strengthen its offer. On services, supplies and specialty trade set-asides, SBA won't find an ostensible subcontractor if you show that you and your small subs will meet the limitations on subcontracting.

If you go over the limit during performance, the consequences stack up:

• Past performance: the agency must let you explain. If it finds the failure was within your control, it may not give you a satisfactory or higher past performance rating for that factor.
• Fines and debarment: the Small Business Act applies its misrepresentation penalties. For overspending on subcontractors, the fine is treated as the greater of $500,000 or the amount you paid over the limit. Penalties can also include suspension or debarment and up to 3 years of ineligibility for SBA programs.

These are maximums. What actually happens depends on the facts and on who brings the case.

The middleman strategy: what's legal and what isn't

The "government contracting middleman" pitch says you can win contracts and sub out all the work. Parts of it are true. The trouble starts on most set-asides.

What's legal:

• Full and open contracts. The clause isn't in them, so a prime can subcontract heavily. The solicitation may still require named key personnel, licenses or other proof you can do the work.
• Small business set-asides above $15,000 up to $350,000. The limitations on subcontracting, the ostensible subcontractor rule and the nonmanufacturer rule don't apply there.
• Managing subs within the limit. You do your share, and subs handle the rest.
• Using similarly situated subs that perform with their own employees.
• Reselling as a qualified nonmanufacturer on supply contracts.
• Joint ventures. In SBA's Mentor-Protégé Program, a mentor and protégé can form a joint venture that bids as a small business. The protégé must perform at least 40% of the joint venture's work, and more than administrative tasks.

What isn't: a front or pass-through, where you win a set-aside and a firm that isn't similarly situated does most or all of the work.

The legitimate version of that partnership exists. You run the contract and do at least half the work, and the larger firm subcontracts within the limit or teams with you through a teaming agreement or an approved mentor-protégé joint venture. To see what SDVOSB work looks like, browse open SDVOSB set-asides in FedReady's free search.

A quick compliance checklist

1. Find the clause. Look for FAR 52.219-14 in section I or the clause list of the solicitation.
2. Note the NAICS code. It decides which limit applies.
3. Check whether compliance is measured per period or per order.
4. Budget your share before you bid, after leaving out materials or excluded costs.
5. Confirm every "similarly situated" sub's status and size for your subcontract's NAICS code.
6. Track payments to subs against what the government pays you, every invoice cycle.

This guide isn't legal advice. Teaming deals and nonmanufacturer questions get complicated fast. An APEX Accelerator can review your plan, usually at no cost, and an attorney who handles government contracts can answer edge cases.

Next steps

To see which set-asides you qualify for, read set-aside contracts explained. If you're a veteran weighing a partnership offer, read SDVOSB certification and set-asides. And before you sign a teaming deal, find your local APEX Accelerator.

This guide is general information, not legal or financial advice. Rules and thresholds change, so confirm details on SAM.gov and the official agency sites linked above before you act. FedReady is an independent company and is not affiliated with any government agency.