A popular government-contracting sales pitch goes something like this:
“You do not need employees, equipment, or experience. Just find a contract, submit a bid, win the award, and subcontract all the work to someone else.”
That advice is misleading.
A prime contractor can use subcontractors, teaming partners, suppliers, and independent contractors. In fact, many government contracts could not be completed without them.
However, bidding on a contract with the intention of outsourcing every responsibility can create serious performance, compliance, and eligibility problems.
A prime contractor works directly for the government.
Even when subcontractors perform portions of the work, the prime remains responsible for ensuring that the contract is completed according to its requirements.
The government does not generally manage your subcontractors for you.
As the prime, your business may remain responsible for:
Telling the contracting officer that your subcontractor caused a problem does not eliminate the prime contractor’s responsibility.
Sometimes.
On an unrestricted or full-and-open contract, there is not necessarily a universal rule requiring the prime to self-perform a specific percentage of every contract.
However, the solicitation may contain:
The solicitation and resulting contract control.
A business should never assume it can subcontract the entire requirement simply because the opportunity is unrestricted.
Federal small-business set-asides and socioeconomic set-asides frequently include the Limitations on Subcontracting clause.
This prevents a company from winning an opportunity reserved for a particular category of small business and then passing most of the contract revenue to a business that does not share that status.
The rule is often called the “51% rule,” but that shorthand is not completely accurate.
Under FAR 52.219-14, the applicable limitation depends on the type of contract.
For service contracts other than construction, the prime generally cannot pay more than 50% of the amount paid by the government to subcontractors that are not similarly situated entities.
For supply contracts, the prime generally cannot pay more than 50% of the amount paid by the government—excluding material costs—to subcontractors that are not similarly situated entities.
Separate nonmanufacturer rules may also apply when the prime is supplying products it did not manufacture.
For general construction, the prime generally cannot pay more than 85% of the amount paid by the government—excluding material costs—to subcontractors that are not similarly situated.
This effectively requires at least 15% to remain with the prime and qualifying similarly situated subcontractors.
For specialty-trade construction, the prime generally cannot pay more than 75% of the amount paid by the government—excluding material costs—to subcontractors that are not similarly situated.
This effectively requires at least 25% to remain with the prime and qualifying similarly situated subcontractors.
A similarly situated entity is generally a first-tier subcontractor that:
For example, on an SDVOSB set-aside, a qualifying SDVOSB subcontractor may be similarly situated. On a WOSB set-aside, the subcontractor would generally need to qualify as a WOSB and be small under the applicable subcontract NAICS code.
Work performed by a qualifying similarly situated entity can receive different treatment under the limitations calculation than work subcontracted to a large or nonqualifying company.
This creates legitimate teaming opportunities between certified small businesses—but the structure must be planned correctly.
Selling products is different from subcontracting an entire service requirement, but it is not simply government “dropshipping.”
The SBA’s nonmanufacturer rule allows an eligible small business to supply products it did not manufacture. However, the business generally must provide products manufactured by another small business unless an applicable waiver or exception exists.
The reseller or nonmanufacturer is still responsible for matters such as:
A distributor cannot simply accept an order, forward it to an unknown online seller, and assume the transaction is compliant.
This approach commonly fails because the bidder:
A subcontractor may also decide to pursue the contract directly, increase its price after award, lose key personnel, or refuse contract terms it never reviewed.
The prime contractor is then left with an obligation it cannot perform.
Before bidding, the prime should:
The best prime contractors do not merely pass work through. They organize, manage, integrate, and remain accountable for performance.
Must a certified small business personally perform 51% of every set-aside contract?
No. The exact calculation depends on the type of contract and whether subcontractors are similarly situated. Service, supply, general-construction, and specialty-trade contracts have different limitations.
Can an SDVOSB subcontract work to another SDVOSB?
Yes, and the second SDVOSB may qualify as a similarly situated entity if it meets the applicable requirements. The arrangement must still comply with the solicitation and FAR clauses.
Can I subcontract an unrestricted contract completely?
Possibly in limited circumstances, but never assume that it is allowed. The solicitation may contain key-personnel, responsibility, subcontracting, or self-performance requirements, and the prime remains responsible for all performance.
Subcontractors can help your business expand capacity, enter new geographic markets, add specialized expertise, and pursue larger opportunities.
They should not be used to disguise a company that has no ability to manage or perform the contract.
Before submitting a bid, make sure your structure is compliant, your subcontractors are committed, and your business can accept full responsibility for the result.
You can subcontract the work. You cannot subcontract the accountability.
