Limitations on Subcontracting for Federal Construction: The Math, Worked Out

This clause decides whether you may bid a job the way you actually build. Get it wrong and you are non-compliant on a contract you already won, which is a far worse place to be than losing it.

It is also the single most frequently mis-stated rule in federal construction. The version you will hear on a jobsite, in a forum thread, and sometimes from a consultant is that you must self-perform 15 percent of the work. That is not what the regulation says, and acting on it will cost you jobs you could have taken.

What the rule actually says

FAR 52.219-14 sets four ceilings, depending on what kind of contract you hold. In the clause's own words, the contractor agrees that:

Contract type	The limit
Services, except construction	"it will not pay more than 50 percent of the amount paid by the Government for contract performance to subcontractors that are not similarly situated entities"
Supplies, other than from a nonmanufacturer	"it will not pay more than 50 percent of the amount paid by the Government for contract performance, excluding the cost of materials, to subcontractors that are not similarly situated entities"
General construction	"it will not pay more than 85 percent of the amount paid by the Government for contract performance, excluding the cost of materials, to subcontractors that are not similarly situated entities"
Construction by special trade contractors	"it will not pay more than 75 percent of the amount paid by the Government for contract performance, excluding the cost of materials, to subcontractors that are not similarly situated entities"

Source: FAR 52.219-14, read on 2026-09-17.

Read the construction rows closely. The rule is a ceiling on money you pay out, not a floor on work you perform. Nothing in it requires you to swing a hammer. It requires that a defined share of the contract dollars does not leave the small business community that the set-aside was created to serve.

That distinction is the whole post, and it is why the 15 percent self-performance story is wrong. Fifteen percent is simply what is left over from 85. It is not a self-performance requirement, and it does not have to be performed by you.

The two things that move the number

Materials come out first. For construction, the percentage applies to the amount paid by the government for contract performance excluding the cost of materials. 13 CFR 125.6 puts it plainly: cost of materials are excluded and not considered to be subcontracted. On a material-heavy job this changes the answer dramatically, and it is the second most common error after the self-performance myth.

Similarly situated subcontractors sit on your side of the line. FAR 19.001 defines the term as "a first-tier subcontractor, including an independent contractor" that meets two tests: it "[h]as the same small business program status as that which qualified the prime contractor for the award", and it "[i]s considered small for the size standard under the NAICS code the prime contractor assigned to the subcontract."

Under 13 CFR 125.6, amounts paid to such a subcontractor are not counted as subcontracted when that subcontractor performs the work with its own employees. So teaming with a firm that holds your status is not only a capability decision. It is a compliance lever, and often the only one available on a job you cannot self-perform.

The calculation, worked

Take a general construction award, NAICS 236, set aside for small business.

Step 1. Start with what the government pays you. Contract value: $1,000,000

Step 2. Take out the cost of materials. Materials: $300,000 Calculation base: $1,000,000 − $300,000 = $700,000

Step 3. Apply the ceiling. General construction, 85 percent of $700,000 = $595,000

That is the most you may pay to subcontractors that are not similarly situated. Everything else, at least $105,000 of the base, has to be covered by you or by similarly situated subcontractors.

Now the version that trips people up

Same job. You self-perform very little and subcontract $650,000 of the $700,000 base.

• If all $650,000 goes to firms that are not similarly situated: $650,000 is above the $595,000 ceiling. Non-compliant, by $55,000.
• If $100,000 of that goes to a similarly situated subcontractor performing with its own employees: the counted amount drops to $550,000, which is under $595,000. Compliant, with room to spare.

Nothing changed about how much work you personally performed. One subcontractor's status moved you from breach to compliance.

And the version nobody warns you about

Same job, same compliant structure. Your similarly situated subcontractor takes its $100,000 and passes $60,000 of it down to a firm that is not similarly situated.

13 CFR 125.6(a)(3) is explicit: "Any work that a similarly situated subcontractor further subcontracts will count towards the 85% subcontract amount that cannot be exceeded." Paragraph (a)(4) says the same thing for special trade contractors, against the 75% figure.

So that $60,000 comes back onto your ledger. Counted amount becomes $610,000, against a ceiling of $595,000. Non-compliant again, on a decision made one level below you, possibly without a phone call.

The defence is contractual, not arithmetic. If you are relying on a similarly situated subcontractor to stay inside the limit, your subcontract with that firm has to say what it may and may not pass down, and you have to be able to see it.

What to do before you bid

1. Read the NAICS code on the solicitation and confirm whether you are under the general construction ceiling of 85 percent or the special trade ceiling of 75 percent. Ten points is a large difference on a tight job.
2. Separate your materials number from your subcontract number in the estimate. If they are mixed, you cannot calculate this rule at all.
3. Compute the base, meaning contract value less materials, then apply the percentage. Write the resulting dollar ceiling down next to your subcontract plan.
4. Check the status of every first-tier subcontractor you are counting as similarly situated, against the status that won you the award, and against the size standard for the NAICS you will assign to that subcontract. Both tests, not one.
5. Decide the flow-down language before award, not after. Any further subcontracting by a similarly situated firm counts against you.

What this guide does not cover

This covers the arithmetic of the clause for construction. It does not cover which contracts carry the clause in the first place, the treatment of joint ventures and mentor protege arrangements, when compliance is measured across a base period and option periods, the separate performance-of-work rules that apply to 8(a) and HUBZone awards, or what happens when the government alleges a violation. Those are real questions and each deserves its own answer.

Nothing here is legal advice. Where the money is large or the structure is unusual, have a government contracts attorney read your teaming arrangement before you sign it, not after the contracting officer asks.

The next step in the job

Open the estimate for the job you are pricing right now. Find your materials figure and your total subcontract figure as two separate numbers. Subtract materials from the contract value, take 85 percent of what remains, or 75 percent if the solicitation says special trade, and compare it to what you plan to pay firms that do not share your set-aside status. If the second number is larger, you do not have a pricing problem. You have a teaming problem, and it is still early enough to solve it.