Limitations on Subcontracting (LOS)

Limitations on Subcontracting are SBA rules that restrict how much work a prime contractor on certain small business set-aside contracts can subcontract to other companies that are not similarly situated. The rule is designed to make sure small businesses perform a meaningful share of the contract work themselves.

What Are Limitations on Subcontracting?

In government contracting, Limitations on Subcontracting apply mainly to small business set-aside and certain socioeconomic set-aside contracts. The rule limits the percentage of contract performance that can be subcontracted to firms that are not similarly situated entities.

This helps prevent pass-through contracting, where a small business wins the contract but sends too much of the actual work to other firms.

Key Characteristics

Applies to many small business set-aside contracts

Limits subcontracting to non-similarly situated entities

Rules vary by contract type

Similar entities may be treated differently under the calculation

Important for compliance, proposal strategy, and performance planning

How It Works in Government Contracting

The rule is used during proposal planning, pricing, teaming, and contract performance. Contractors need to structure their workshare so they do not exceed the allowed subcontracting amount for the contract type.

The main limits are: Services: the prime cannot pay more than 50% of the amount paid by the government for contract performance to non-similarly situated subcontractors. Supplies: the prime cannot pay more than 50% of the amount paid by the government, excluding the cost of materials, to non-similarly situated entities. General construction: the prime cannot pay more than 85% of the amount paid by the government, excluding the cost of materials, to non-similarly situated entities. Special trade construction: the prime cannot pay more than 75% of the amount paid by the government, excluding the cost of materials, to non-similarly situated entities.

If a subcontractor is a similarly situated entity, that work generally does not count against the subcontracting limit to the extent that entity performs the work with its own employees.

Regulatory Framework

These rules are mainly tied to 13 C.F.R. § 125.6 and FAR 52.219-14. The FAR clause aligns with the SBA rule's current methodology.

Why It Matters for Contractors

Limitations on Subcontracting matter because they affect teaming structure, proposal strategy, staffing plans, and ongoing contract compliance. A contractor that miscalculates workshare can face performance problems or compliance risk.

They also matter strategically because small business primes need to plan early which work they will keep in-house and which work can go to subcontractors.

Common Misconceptions

The prime must always personally perform 51% of the work.

The rule is generally framed as a limit on what may be subcontracted to non-similarly situated entities, not simply a flat 51% self-performance rule.

All subcontracted work counts the same way.

Work performed by similarly situated entities is treated differently under the rule.

The same percentage applies to every contract.

The percentage changes depending on whether the contract is for services, supplies, general construction, or special trade construction.

Frequently Asked Questions

What does "similarly situated entity" mean?

It generally refers to a subcontractor that has the same relevant small business program status as the prime for that procurement and is small under the assigned NAICS code.

Do Limitations on Subcontracting apply to all federal contracts?

No. They are most relevant to certain small business set-aside and socioeconomic set-aside contracts.

Why are these rules important?

Because they help ensure that small business awards actually benefit eligible small businesses and are not mostly passed through to others.

Can teaming still work under these rules?

Yes, but the workshare must be structured carefully to stay compliant.