Limitations on Subcontracting: How Much of a Set-Aside Contract You Have to Do Yourself
Certains liens sont des liens affiliés ; nous pouvons percevoir une commission, sans frais supplémentaires pour vous. As an Amazon Associate I earn from qualifying purchases.
The 50, 85 and 75 percent caps on set-aside work, who counts as similarly situated, and how to plan a compliant bid before you sign a teaming deal.
Plenty of small businesses find a set-aside they can win on price and then plan to hand most of the work to a bigger partner. That plan can sink the bid before award or haunt you after it. Set-aside and sole-source contracts carry a rule called the limitations on subcontracting, which caps how much of the government's money you can pay to firms that do not share your small business status. This article explains the caps, who counts as a "similarly situated" subcontractor, when compliance is measured, and how to build the numbers into a bid before you sign a teaming agreement.
It is a companion to our posts on vetting a teaming partner in SAM.gov and pricing a federal bid, and to our guide on joint ventures and mentor-protege JVs. Everything quoted here was read today on acquisition.gov, which showed the Federal Acquisition Regulation at FAC 2026-01, effective March 13, 2026, and on the eCFR and sba.gov. This is a plain-language overview, not legal advice. Your local APEX Accelerator can review a specific deal for free.
Where the rule lives and when it applies
There are two layers. SBA's rule is 13 CFR 125.6, titled "What are the prime contractor's limitations on subcontracting?" SBA's own prime and subcontracting page says that under certain kinds of set-aside contracts, small business prime contractors are required to perform minimum levels of work, and it points to 13 CFR 125.6 for the full definition. The FAR side is FAR 19.505, and the clause that lands in your contract is FAR 52.219-14, Limitations on Subcontracting, currently dated October 2022.
FAR 19.505(a) says the section applies to small business set-asides above the simplified acquisition threshold, and to orders issued directly to a small business above that threshold. It also applies, regardless of dollar value, to set-aside contracts, sole-source contracts and certain orders under the 8(a), HUBZone, SDVOSB and WOSB programs, and to contracts that use the HUBZone price evaluation preference unless the concern waived it. On the SBA side, 13 CFR 125.6(f)(1) says the limitations do not apply to small business set-aside contracts valued above the micro-purchase threshold but at or below the simplified acquisition threshold. The FAR clause adds that it does not apply to the unrestricted portion of a partial set-aside.
The short version: a small, plain total small business set-aside under the simplified acquisition threshold usually will not carry the rule, but a 8(a), HUBZone, SDVOSB or WOSB award can carry it at any size. Do not guess. Search the solicitation for 52.219-14, or for the program clauses that reference it, before you plan your work split. Our walkthrough on reading a SAM.gov contract notice shows where the clause list usually sits.
The four caps, by NAICS code
The rule is not one number. The NAICS code the contracting officer assigned decides which cap you live under. Paragraph (e) of FAR 52.219-14 says that by submitting an offer and signing the contract, you agree to these limits on what you pay subcontractors that are not similarly situated entities.
For services other than construction, you will not pay more than 50 percent of the amount paid by the government for contract performance to those subcontractors. For supplies, other than buying from a nonmanufacturer, the cap is also 50 percent, but the cost of materials is excluded. For general construction, the cap is 85 percent, excluding the cost of materials. For construction by special trade contractors, it is 75 percent, excluding the cost of materials. Each version adds the same warning: any work that a similarly situated entity further subcontracts counts toward your cap.
Notice how the rule is framed. Older versions of the rule were built around the percentage of cost of contract performance incurred for personnel, and you will still hear people describe it that way. The current text is about what you pay out. The question is not whether your staff touched more than half the hours. It is how much of the government's money went to subcontractors that are not similarly situated. If you are not sure which NAICS code applies, our explainer on NAICS codes and SBA size standards covers how those codes get assigned.
Mixed contracts and the excluded costs
Many contracts mix services, supplies and construction. 13 CFR 125.6(b) says the contracting officer's choice of NAICS code is determinative as to which limitation applies, that the matching cap applies only to that portion of the award, and that in no case shall more than one limitation apply to the same contract. SBA's own example 2 describes a $3,000,000 set-aside with a $2,500,000 services portion and a $500,000 supply portion under a services NAICS code. The supply portion drops out, so the base is $2,500,000. The prime and any similarly situated entities must perform at least $1,250,000, and the prime may not subcontract more than $1,250,000 to firms that are not similarly situated.
SBA also lets some costs fall outside the services calculation. 13 CFR 125.6(a)(1) says other direct costs may be excluded to the extent they are not the principal purpose of the acquisition and small businesses do not provide the service, and it names examples such as airline travel, cloud computing services and mass media purchases. That is a narrow carve-out, not a license to relabel subcontracted labor as an "other direct cost." If you plan to rely on it, be ready to show why the cost fits.
Who counts as "similarly situated"
This is where most teaming plans go wrong. FAR 52.219-14(b) defines a similarly situated entity as a first-tier subcontractor, including an independent contractor, that has the same small business program status as the one that qualified the prime for the award, and that is small under the size standard for the NAICS code the prime assigned to the subcontract. On a plain small business set-aside, any small business counts, without regard to socioeconomic status. On a WOSB set-aside, it has to be a WOSB. On a HUBZone award, it has to be a HUBZone firm.
SBA's example 3 in 13 CFR 125.6(c) makes the trap concrete. A WOSB set-aside for $1,000,000 in landscaping services subcontracts $500,001 to an SDVOSB that is not also a WOSB. That prime is in violation, because the SDVOSB is not similarly situated to a WOSB prime. Both firms are small and both are certified, and it still does not count.
Two more details matter. Under 13 CFR 125.6(c), money paid to a similarly situated subcontractor is excluded only to the extent that firm does the work with its own employees; anything it passes down is treated as subcontracted. And a prime may no longer count a similarly situated entity once that subcontractor stops qualifying as small or loses the relevant status. That is why checking a partner's SAM.gov record before you sign, and again before option years, is not paperwork for its own sake.
Independent contractors count as subcontractors under FAR 52.219-14(d). 13 CFR 125.6(d)(3) adds that, except for staffing contracts, workers obtained from a temporary employee agency, professional employer organization or leasing concern are treated as your own self-performance.
When compliance is measured
FAR 52.219-14(f) gives the contracting officer two choices for a contract, marked by a checkbox in the clause: compliance by the end of the base term and then by the end of each option period, or by the end of the performance period for each order. For set-aside orders under multiple-award contracts, compliance is measured by the end of each order's performance period. Read which box is checked. A plan that averages out over a five-year contract may fail if the agency measures order by order.
Compliance also shows up before award. FAR 9.104-3(d)(2) says a small business that is unable to comply may be considered nonresponsible, and one that has not agreed to comply may be considered nonresponsive. 13 CFR 125.6(d)(2) says compliance is an element of responsibility, not size eligibility, so a nonresponsibility call can go to SBA under the Certificate of Competency process we cover in our COC explainer. Contracting officers can also ask for proof during or after performance. 13 CFR 125.6(f)(4) lists invoices, copies of subcontracts or a list of the value of tasks performed as examples.
What happens if you miss
The consequences are real. Under 13 CFR 125.6(e), if an agency decides at the end of performance that you did not meet the limit, it must let you explain extenuating or mitigating circumstances. If you offer none, or the failure was within your control, the agency may not give a satisfactory or higher past performance rating on that factor. The rule lists examples of circumstances that can help, such as unforeseen labor shortages, government-directed scope changes, force majeure events and good-faith reliance on a subcontractor's size or status representation.
Penalties go further. 13 CFR 125.6(h) points to 15 U.S.C. 645(d) and treats the fine as the greater of $500,000 or the dollar amount spent over the permitted level. It also says failing to honor the spirit and intent of a subcontract with a similarly situated entity may be grounds for debarment. A poor rating on one contract follows you into the next bid, which is why this belongs in your past performance planning, not just your legal file.
Building the numbers into a bid
Here is a hypothetical. A small facilities firm wants to bid a $900,000 base-year WOSB set-aside for janitorial and minor maintenance services under a services NAICS code. The owner plans to use a large regional company for floor care and window work. Before signing anything, she lists every task, prices it, and marks who will perform it: her own crews, a similarly situated WOSB subcontractor working with its own employees, or the large company. If the large company's share plus any work her WOSB partner would pass down tops $450,000 of what the government pays, she is over the cap. Her choices are to self-perform more, find a WOSB that can take a share with its own staff, or skip the bid.
Do this in a simple spreadsheet before pricing, then keep it current during performance. Put the clause's compliance period at the top. Track payments by subcontractor each month, not just at year end, because you cannot fix a base-year overage in the last week. When your teaming agreement is drafted, write the work split, the partner's duty to keep its size and status current in SAM.gov, and its duty to tell you if either changes. Our guide to subcontracting under large primes covers the flip side, when you are the sub.
When you are ready to test the math on a real notice, browse our set-aside listings, pick one under the program you qualify for, and find the clause list. Make sure your own record is current with our SAM.gov registration guide. Then run the split before you commit. The agency picked a set-aside so a small business would do the work, and the rule is how it checks.
Helpful reading. For more on this topic, see government subcontracting guides (Affiliate link) and government contracting for small business books (Affiliate link). As an Amazon Associate I earn from qualifying purchases.
The Set-Aside Desk is published by SetAside Signal, an independent publication, not a government agency. This article isn't legal advice; rules change, so confirm details with the official sources: SBA (sba.gov), SAM.gov and the FAR at acquisition.gov. Published Nov 12, 2026.