The 50% Rule: How to Calculate and Document Limitations on Subcontracting

Win a small business set-aside contract and the work isn’t done — you now have to prove, over the life of the contract, that you’re not just a pass-through for a larger subcontractor doing the actual work. That’s what the limitations on subcontracting rule polices, and getting the math wrong doesn’t just risk a compliance letter — it risks termination and False Claims Act exposure. Here’s how the calculation actually works.

What the Rule Is Actually Trying to Prevent

Limitations on subcontracting exists to stop small businesses from winning a set-aside contract and then handing most of the actual work to a large subcontractor while collecting a management fee. The rule requires the small business prime to perform a minimum share of the contract itself — or through other qualifying small businesses — rather than becoming a pass-through.

The Governing Citations

Two sources work together here: FAR 52.219-14 is the clause that actually gets inserted into your contract, and FAR 19.505 covers the underlying policy at the acquisition-regulation level. SBA’s own implementing regulation, 13 CFR 125.6, is where the detailed calculation methodology and enforcement mechanics actually live. If you only read the FAR clause, you’re missing half the rule — 13 CFR 125.6 is where SBA spells out how “similarly situated entity” works and how compliance actually gets measured.

The Percentages, By Contract Type

This is the part people get wrong most often, because the percentage isn’t the same across contract types, and two of the four categories are phrased as a cap on subcontracting rather than a floor on self-performance:

• Services contracts: the prime cannot pay more than 50% of what the government pays to subcontractors that are not similarly situated entities. Read differently: at least 50% of what the government pays has to stay with the prime or with similarly situated subs.
• Supply/product contracts: same 50% cap on non-similarly-situated subcontractors, but the calculation excludes the cost of materials — a distinction that changes the math significantly on any contract with meaningful materials cost.
• General construction: the prime may pay up to 85% to non-similarly-situated subs, excluding materials — meaning the actual self-performance floor is only 15%, much lower than the services number.
• Special trade construction: the cap is 75% to non-similarly-situated subs, excluding materials — a 25% self-performance floor.

Confusing the services 50% floor with the construction 15%/25% floors is one of the most common compliance mistakes on mixed-scope contracts.

The “Similarly Situated Entity” Exception

This exception, created by the 2013 NDAA, is what makes legitimate small-business teaming possible without blowing your compliance math. A subcontractor counts as “similarly situated” — and payments to it don’t count against your cap — when it holds the same small business program status as the prime (both SDVOSB, both 8(a), etc.) and is small under the NAICS code assigned to the subcontract. Team with a similarly situated small business and you can subcontract a large share of the work while staying fully compliant, because none of that spend counts against your 50/85/75 cap. Team with a large business, or a small business under a different program status than yours, and every dollar counts against the cap. See our subcontracting and teaming overview for how this plays into broader teaming strategy, and our teaming agreement guide for documenting these arrangements correctly from the start.

How Compliance Is Actually Measured

Compliance is assessed over the period of performance, not invoice by invoice — so one heavy subcontracting month doesn’t automatically put you out of compliance if your running total stays within the cap. On multiple-award contracts, compliance is generally assessed at the order level unless the solicitation specifies otherwise, which means a single MAC award can carry different compliance obligations across different task orders depending on how each one is structured.

Documentation That Actually Protects You

Track subcontractor payments against government payments continuously, not at contract closeout. Keep a running ledger that separates similarly situated subcontractor payments from everyone else, and confirm each “similarly situated” subcontractor’s size and program status at the time each subcontract is executed — status can change mid-performance, and a subcontractor that was small when you signed the teaming agreement isn’t automatically still small two years later. For nonmanufacturer situations on supply contracts, keep manufacturer sourcing documentation separately, since that’s governed by a related but distinct nonmanufacturer rule inside the same FAR 19.505 section.

What Happens If You Get It Wrong

The consequences scale with how the violation is discovered. A compliance review that catches a miscalculation mid-performance can result in a corrective action plan. A violation discovered through a size protest, an IG referral, or a whistleblower can escalate to contract termination, False Claims Act liability with potential treble damages, and suspension or debarment — on top of the past-performance damage that follows a firm into every future proposal evaluation. This is not a rule where “close enough” holds up under scrutiny.

Correcting a Common Misconception About the FAR Overhaul

You may have seen this rule flagged as something the ongoing FAR Part 19 rewrite is about to change. As of today, that isn’t accurate. GSA’s model text for the new Part 19 — covering socioeconomic sequencing, the Rule of Two, order-level set-aside discretion, and 8(a) follow-on releases — does not touch FAR 19.505 or the 52.219-14 clause in any of the published model text or rulemaking so far. See our FAR Part 19 overhaul breakdown for the full rundown of what actually changed. The 50/85/75 percentages above are current and unaffected — but because the broader FAR rewrite is genuinely active, it’s worth rechecking FAR 19.505 directly before you rely on it in a proposal response, rather than assuming today’s numbers hold indefinitely.

Key Takeaways

• Governing citations: FAR 52.219-14 (contract clause), FAR 19.505 (policy), and 13 CFR 125.6 (SBA’s detailed methodology) — all three matter, not just the FAR clause.
• Self-performance floors by contract type: 50% services, 50% supplies (excluding materials), 15% general construction (85% cap on non-similarly-situated subs, excluding materials), 25% special trade construction (75% cap, excluding materials).
• The similarly situated entity exception (same program status + small under the assigned NAICS code) lets payments to qualifying subs bypass the cap entirely.
• Compliance is measured over the period of performance, generally at the order level for MACs — not per invoice.
• Violations can trigger termination, False Claims Act exposure, and suspension/debarment — and as of today, FAR 19.505 has not been altered by the ongoing FAR Part 19 rewrite despite claims to the contrary.

FAQ

Does teaming with a similarly situated small business let me subcontract unlimited work?
Payments to a qualifying similarly situated entity don’t count against your cap, but you still need to be performing a meaningful role as the prime — and the similarly situated subcontractor has its own compliance obligations if it’s holding a significant share of the work.

Is limitations on subcontracting the same rule as the nonmanufacturer rule?
No, though they live in the same FAR section (19.505). The nonmanufacturer rule governs sourcing requirements for supply contracts where you’re not the manufacturer; limitations on subcontracting governs how much of the contract value can go to non-qualifying subcontractors.

Has the FAR overhaul changed the 50% rule?
Not as of today. The published FAR Part 19 model text and the four proposed rules issued so far don’t touch FAR 19.505 or 52.219-14. Verify directly before relying on any claim that these percentages have changed.