The Limitation on Subcontracting clause is discussed all the time and has been confusing for 30+ years. To make it worse, there was a change implemented by the National Defense Authorization Act (NDAA) of 2013 which appears to have been implemented and is being upheld by the GAO, but which has not yet appeared in the FAR.
Currently, FAR 52.219-14, Limitations on Subcontracting (November 2011), applies to contracts that are set aside for small businesses (SB) or 8(a) companies. The intent of the clause is to ensure the majority of work under a small business set aside (SBSA) is actually done by the SB, not a large business. The clause states that by submitting an offer or executing a contract, you agree that in the performance of the contract for:
a. Services (other than construction), that at least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.
b. Supplies (other than procurement from a non-manufacturer of such supplies), that the concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.
c. General construction, that the concern will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees.
d. Construction by special trade contractors, that the concern will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees.
However, in 2013, the NDAA signed by the President in January 2013, made important changes to the limitation on subcontracting rules applicable to small business set-aside contracts.
The “Limitation on Subcontracting” rule has often been referred to as the “50 percent rule.” It precludes small businesses who are the prime contractor from passing on more than 50% of the “cost of performance incurred by personnel” to their subcontractors. The 2013 NDAA changes the way the limitations on subcontracting are calculated on service contracts. It now is calculated on the “amount paid” to the prime contractor, regardless of personnel performance. So, under the revised language, small business primes on service contracts may subcontract out up to 50% of the “amount paid under the contract” to the prime. Since this now includes things like government payment for software licenses, which can cost thousands of dollars but require no “labor”, this dramatically changes the amount that can be subcontracted to other businesses, including large business.
Perhaps the biggest change the NDAA makes is for small business service contractors that are unable to perform 50% or more of the work with their own employees. These businesses may now meet their set-aside performance obligations by subcontracting to a “similarly situated entity…”
The SBA’s proposed rewrite of the rules implementing these changes also expands it to cover ALL of the small business programs, such as Service Disabled Veteran Owned Small Businesses (SDVOSB), Historically Underutilized Business Zone (HUBZone), and Women Owned Small Businesses (WOSB), not just SB and 8(a) program small businesses. This applies the 50% rule, as written in the 2013 NDAA, to all special SB programs in the same manner. This means that, for example, an 8(a) firm and a subcontractor 8(a) firm may share the 50% responsibility on an 8(a) set-aside. And a small business firm subcontracting with one or more small businesses under the specified NAICS may share the 50% work responsibility under a small business set-aside effort.
It should be noted that none of these changes have been incorporated into the FAR as the date of January 2016. But, it’s “safer” right now (since it hasn’t been updated in the FAR yet) to have the prime perform 50% of the work with its own employees so there is absolutely no discussion about this. The fact is that the GAO has upheld this new rule and it has already been implemented, whether or not it has been incorporated into the FAR.