Updated 12/1/2024
Limitations on subcontracting typically apply to all contracts awarded to small businesses under set asides valued over the Simplified Acquisition Threshold (SAT), as defined in the Federal Acquisition Regulation (FAR) subpart 2.101.
What does the clause mean to me as a small business prime?
The clause provides notification to a small business prime contractor of limits on subcontracting to first-tier subcontractors who are not similarly situated entities. Of the amount paid by the Government, the prime may not subcontract more than the following percentages:
Services (except construction) - 50% of the amount to be paid by the Government under the contract, excluding the cost of materials.
Supplies (other than procurement from a nonmanufacturer of the supplies) -- 50%, of the amount to be paid by the Government under the contract, excluding the cost of materials.
General construction -- 85% of the amount to be paid by the Government, excluding the cost of materials
Construction by special trade contractors -- 75% of the amound to be paid by the Government, excluding the cost of materials.
Work performed by a first-tier subcontractor who is a "similarly situated entity" does not count toward these limitations and can be used by the prime toward the percentage that must be self-performed. However, credit cannot be taken for work that a first-tier subcontractor further subcontracts to a similarly situated entity.
What is a "similarly situated entity"?
An entity that has the same small business program status as that which qualified the prime for award AND is considered small for the size standard under the NAICS assigned by the prime contractor to the subcontract. Example: Prime contractor received a contract award under a small business set-aside. Any first-tier subcontractor who is also a small business AND is a small business under the NAICS assigned by the prime to the subcontract is a "similarly situated entity". Independent contractors are considered a subcontractor for the purposes of determining if their work qualifies them as a similarly situated entity.
By when must I comply?
For contracts, the Contracting Officer will indicate compliance by either (1) the end of the base term of the contract, and end of each subsequent option period; or (2) by the end of the performance period for each order. For orders, it is by the end of the performance period of the order.
What if I'm part of a joint venture (JV)?
The JV must perform the applicable percentage by the aggregate of the JV participants. Include a term similar to the contract term in the JV agreement. There are exceptions for certain JVs.
JV Small Business Protégé and Mentor (SBA approved): Protégé must perform at least 40% of the work performed by the JV.
8(a) JV: The 8(a) participants must perform at least 40% of the work performed by the JV.
In both exceptions, the work must be more than administrative functions.
FAR 52.219-14 also applies to these other types of contract actions, regardless of the dollar value of the contract action:
Part(s) of a multiple-award contract set-aside for small businesses,
Contracts awarded on a sole-source basis under one of the SBA Federal Contracting Programs,
Orders set-aside under either GSA schedules or multiple award contracts, or issued directly to small businesses under the same, and
Contracts using the HUBZone price evaluation preference to award to a HUBZone, unless the preference was waived.
Tracking the amount of subcontracting and who the work is subcontracted to in terms of business size and socioeconomic category by NAICS is important when it comes time to discuss compliance with the Contracting Officer. A best practice is to have this tracking / documentation prepared and up-to-date with monthly payments to first-tier subcontractors and have first-tier subcontractors report any further subcontracting they do to you as the prime to have an accurate count in case of an audit.
References:
FAR 2.101
FAR 19.505
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