The Fifty Percent Rule

RER Solutions, the Herndon, Virginia prime contractor that sat at the top of the government's COVID-19 disaster-loan recommendation system, missed that number by $12,914,700.55 on its pandemic task order, and by $13,046,124.50 across the three orders SBA's Office of Inspector General audited.² Those are not fraud figures. They are the output of a compliance calculation.

What the clause requires

The limitation lives in the Small Business Act. Section 1651 of the 2013 National Defense Authorization Act rewrote it, codified it at 15 U.S.C. § 657s, and changed how compliance is measured. The old test looked at the cost of contract performance a prime incurred for its own personnel. The new one looks at money: on a services set-aside, the prime may not pay more than 50 percent of the amount the government pays it to subcontractors that are not "similarly situated."¹ SBA wrote that standard into its regulation, 13 C.F.R. § 125.6, in a rule published May 31, 2016.³

The limit binds a set-aside service contract once it clears a dollar floor: $250,000, or $800,000 where an agency head invokes it for emergency or major-disaster work under the Stafford Act.² RER's COVID order cleared either threshold by three orders of magnitude.

Which version governed

SBA's regulation moved to the amount-paid test in 2016; the Federal Acquisition Regulation's own clause, FAR 52.219-14, was rewritten later. The clause in force today dates from a FAR Council rule published August 11, 2021.⁴ RER was awarded its indefinite-delivery contract in 2018 and issued the COVID task order in March 2020, both before that rule.

So the Inspector General measured against SBA's regulation, the amount-paid test, and it counted dollars rather than labor hours: what the government paid RER, set against what RER paid its subcontractors.² The report grounds every subcontracting finding in 13 C.F.R. § 125.6, not in FAR 52.219-14.

The arithmetic

OIG built the numbers from RER's own invoices in SBA's accounting system and cross-checked them against the subcontractor revenue Rocket Loans reported to the SEC on its Form 10-K.² On the COVID order, contract 73351020F0071, they produce this:

RER retained 48.3 percent and came in $12.915 million under the floor; its subcontractors took 51.7 percent and ran $12.915 million over the ceiling. Prime plus subcontractors equals the audited total, so the amount one side falls short is the amount the other side runs long. The hurricane task order that preceded the pandemic stayed under the line. The small non-COVID order that followed went over by $131,423.95. Add the three and the excess is $13,046,124.50, which OIG carried in its schedule of questioned costs as an unallowable expense — the amount paid above the subcontracting limit under 13 C.F.R. § 125.6(g).²

The 50 percent rule uses audited payments, not the contract ceiling.²

The cure the clause builds in

The rule does not count every subcontracted dollar against the prime. Work sent to a "similarly situated entity" — a subcontractor holding the same small-business status that qualified the prime — does not count as subcontracted at all. Had RER's operators been small firms of the same status, their dollars would have sat on RER's side of the ledger and there would have been no overage.

They were not. RER's first-tier subcontractor was Rocket Loans, and the recommendation platform ran through Rocket's affiliate, Rapid Financial Services. Both are affiliates of Quicken Loans, one of the country's largest mortgage lenders, and the report says they "were not small businesses."² For this award the size standard was $15 million in annual revenue. Every dollar that flowed to Rocket and Rapid counted against RER's half, because none of it went to a firm the rule treats as similarly situated.

The other route to compliance is measurement over time. The limit is assessed across a defined performance period, and a contracting officer has options under the FAR for when to measure it, so an interim overage can in principle be cured by end-of-period self-performance.² On RER's COVID order the period closed with the prime below the line.

What the overage is, and is not

OIG opened a second question that the arithmetic does not answer: affiliation. Under the ostensible-subcontractor doctrine, a prime that is unusually reliant on a subcontractor to perform the primary and vital parts of the work can be treated as affiliated with that subcontractor for size purposes.⁵ The report found the RER-Rocket teaming agreement and award record pointed to that reliance: the platform, the systems, and the experience that mattered were Rocket's. House investigators who obtained the invoices counted six workers at RER against twenty at Rocket and 163 at Rapid, sitting atop the core software and third-party data services.⁶ If RER and Rocket were affiliated, their combined receipts would have exceeded the $15 million size standard, and RER would not have qualified for the set-aside it held. OIG recommended SBA request a formal size determination under FAR 19.302 and remedy any violation under 15 U.S.C. § 645(d). SBA had not done so, and that recommendation was still unresolved when the report published in April 2022. Management said RER self-certified as small at award and that recertification is required only on novation, merger, or contracts running past five years; OIG disagreed and left the item open.²

The $13,046,124.50 is a documented workshare overage, measured against a regulation and quantified from invoices. Whether RER should have held the set-aside at all is an unresolved affiliation question that SBA never adjudicated. Neither is a False Claims Act case, and neither is a finding of certification fraud. A limitation-on-subcontracting overage is a compliance breach; it is not by itself a false statement, and OIG did not identify one. The report did not conclude RER lied about its size. It concluded that SBA never checked, that the limit was exceeded, and that the size question remained open. The report's line that RER and Rocket Loans "circumvented" a rule "established to prevent a larger business from using a small business as a pass-through" describes the economics of the payment split; it is not an adjudication of anyone's intent.²

The report does record one consequence attached to the breach itself: a contractor's failure to comply with the spirit and intent of the subcontracting limitation is treated as a violation of the terms of the contract, and can be grounds to exclude the contractor from future federal work.² SBA agreed to the compliance-monitoring recommendations, added a requirement that contractors report annually on their subcontracting compliance, and closed those items. The size determination it did not perform.

The set-aside certification told the government who was allowed to bid. It did not tell the government who did the work. On this contract the invoices answered that second question, and the answer was $12.915 million past the line the certification was supposed to protect.

Notes

1. 15 U.S.C. § 657s (2024 ed.), subsections (a)(1) and (b). Enacted by Section 1651 of the National Defense Authorization Act for Fiscal Year 2013, which standardized the limitation on subcontracting and shifted the measure from the cost of contract performance incurred for personnel to a percentage of the amount paid by the government, exempting amounts paid to "similarly situated entities." ↩₁ ↩₂
2. SBA Office of Inspector General, Evaluation of SBA's Contract for Disaster Assistance Loan Recommendation Services, Report 22-10, April 14, 2022, Source document, https://www.sba.gov/document/report-22-10-evaluation-sbas-disaster-assistance-loan-recommendation-services. Table 3 (p. 12) reports, for Task Order 2 (contract 73351020F0071), total contract payments of $740,506,022.40, payments to the prime of $357,338,310.65, payments to subcontractors of $383,167,711.75, and an excess over the 50 percent threshold of $12,914,700.55; the three-order total excess is $13,046,124.50, carried in Appendix II as an unallowable expense under 13 C.F.R. § 125.6(g). The report describes the $100M/$600M/$850M ceiling increases, the $15 million size standard, the Stafford Act emergency threshold, the ostensible-subcontractor analysis, the statement that Rocket Loans and Rapid Financial Services "were not small businesses" (pp. 8, 14), the "pass-through" sentence (p. 8), and the unresolved status of the size-determination recommendation (Recommendation 3). Data reliability was tested against Rocket Loans' Form 10-K (Appendix I). Archived copy: https://pandemicdarlings.com/source-documents/2022-04-14-report-number-22-10-april-14-2022/. ↩₁ ↩₂ ↩₃ ↩₄ ↩₅ ↩₆ ↩₇ ↩₈ ↩₉ ↩₁₀ ↩₁₁
3. 13 C.F.R. § 125.6 (1–1–25 ed.), pp. 580–85. Adopted in SBA's final rule "Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments," 81 Fed. Reg. 34,243 (May 31, 2016); the section's source credit reads "81 FR 34262, May 31, 2016," with amendments in 2016, 2018, 2019, 2020, 2022 and 2023. The penalties paragraph that Report 22-10 cites as § 125.6(g) is paragraph (h) in the 2025 edition. ↩
4. FAR 52.219-14, Limitations on Subcontracting. The FAR Council conformed the clause to 13 C.F.R. § 125.6 in the final rule "Federal Acquisition Regulation: Revision of Limitations on Subcontracting," 86 Fed. Reg. 44,233 (Aug. 11, 2021) — after RER's 2018 award and its March 2020 COVID task order. The clause as it stood at that award and that order predates the 2021 rule. The text cited here is the later one: 48 C.F.R. 52.219-14 (10–1–25 ed.), pp. 177–78, clause dated OCT 2022, source credit "86 FR 44245, Aug. 11, 2021, as amended at 87 FR 58226, Sept. 23, 2022." ↩
5. 13 C.F.R. § 121.103(h) (affiliation, joint venture, and ostensible subcontractor rule) (1–1–25 ed.), where the ostensible-subcontractor rule now sits at paragraph (h)(3), p. 386; FAR 19.302 (size protests and determinations), 48 C.F.R. 19.302 (10–1–25 ed.), pp. 457–60; 15 U.S.C. § 645(d) (penalties for misrepresentation of small-business status). Report 22-10 cites 13 C.F.R. § 121.103(h)(4) and (h)(2) and recommends a size determination under FAR 19.302 with any remedy under 15 U.S.C. § 645(d). ↩
6. House Select Subcommittee on the Coronavirus Crisis, Idle on EIDL Fraud staff report, June 14, 2022, Source document, PDF pp. 21–22, https://pandemicdarlings.com/court-filings/select-subcommittee-coronavirus/2022-06-14-idle-on-eidl-fraud-staff-report/ (RER six workers, Rocket Loans twenty, Rapid Finance 163, atop the core platform and third-party data services). RER's Herndon, Virginia address: Select Subcommittee letter to RER Solutions, July 30, 2020, p. 1, Source document. ↩

Primary sources used in this article

• SBA Office of Inspector General, Evaluation of SBA's Contract for Disaster Assistance Loan Recommendation Services, Report 22-10, April 14, 2022 (Findings 1 and 2; Table 3, Subcontract Costs by Task Order; Appendix II, Questioned Costs).
• 15 U.S.C. § 657s, Limitations on Subcontracting (as enacted by Section 1651 of the National Defense Authorization Act for Fiscal Year 2013).
• 13 C.F.R. § 125.6, Prime contractor performance requirements (limitations on subcontracting).
• FAR 52.219-14, Limitations on Subcontracting.
• 13 C.F.R. § 121.103(h), affiliation and the ostensible subcontractor rule; FAR 19.302; 15 U.S.C. § 645(d).
• House Select Subcommittee on the Coronavirus Crisis, Idle on EIDL Fraud staff report, June 14, 2022 (contractor workforce counts).