What are the prime contractor’s limitations on subcontracting?

Summary

Section 125.6, "What are the prime contractor's limitations on subcontracting?", from 13 CFR Ch. I (1–1–25 Edition). Paragraph (a) states that to be awarded a full or partial small business set-aside contract with a value greater than the simplified acquisition threshold, an 8(a) contract, an SDVOSB contract, a VOSB contract, a HUBZone contract, or a WOSB or EDWOSB contract, a small business concern must agree to the limits that follow. For a contract for services (except construction), the concern will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. The page opens with paragraphs (k) through (o) of the preceding section on denial and reconsideration of a COC, and later text addresses joint ventures and a FAR Council adjustment of dollar thresholds.

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Full text

§ 125.6 13 CFR Ch. I (1–1–25 Edition)

(l) of this section, there can be no fur- tracting officer is not required to issue
ther appeal or reconsideration of the an award to that offeror if the con-
decision of the AA/GC. tracting officer denies the contract for
(k) Notification of denial of COC. The reasons unrelated to responsibility.
notification to an unsuccessful appli- (n) Effect of Denial of COC. Denial of
cant following either an Area Director a COC by SBA does not preclude a con-
or a Headquarters denial of a COC will tracting officer from awarding a con-
briefly state all reasons for denial and tract to the referred firm, nor does it
inform the applicant that a meeting prevent the concern from making an
may be requested with appropriate offer on any other procurement.
SBA personnel to discuss the denial. (o) Monitoring performance. Once a
Upon receipt of a request for such a COC has been issued and a contract
meeting, the appropriate SBA per- awarded on that basis, SBA will mon-
sonnel will confer with the applicant itor contractor performance.
and explain the reasons for SBA’s ac- [61 FR 3312, Jan. 31, 1996; 61 FR 7987, Mar. 1,
tion. The meeting does not constitute 1996, as amended at 72 FR 50041, Aug. 30, 2007;
an opportunity to rebut the merits of 78 FR 61142, Oct. 2, 2013; 81 FR 34262, May 31,
the SBA’s decision to deny the COC, 2016; 81 FR 48585, July 25, 2016; 85 FR 66192,
and is for the sole purpose of giving the Oct. 16, 2020]
applicant the opportunity to correct
deficiencies so as to improve its ability § 125.6 What are the prime contrac-
to obtain future contracts either di- tor’s limitations on subcontracting?
rectly or, if necessary, through the (a) General. In order to be awarded a
issuance of a COC. full or partial small business set-aside
(l) Reconsideration of COC after contract with a value greater than the
issuance. (1) An approved COC may be simplified acquisition threshold (as de-
reconsidered and possibly rescinded, at fined in the FAR at 48 CFR 2.101), an
the sole discretion of SBA, where an 8(a) contract, an SDVOSB contract, a
award of the contract has not occurred, VOSB contract, a HUBZone contract,
and one of the following circumstances or a WOSB or EDWOSB contract pursu-
exists: ant to part 127 of this chapter, a small
(i) The COC applicant submitted false business concern must agree that:
or omitted materially adverse informa- (1) In the case of a contract for serv-
tion; ices (except construction), it will not
(ii) New materially adverse informa- pay more than 50% of the amount paid
tion has been received relating to the by the government to it to firms that
current responsibility of the applicant are not similarly situated. Any work
concern; or that a similarly situated subcontractor
(iii) The COC has been issued for further subcontracts will count to-
more than 60 days (in which case SBA wards the 50% subcontract amount
may investigate the business concern’s that cannot be exceeded. Other direct
current circumstances and the reason costs may be excluded to the extent
why the contract has not been issued). they are not the principal purpose of
(2) Where SBA reconsiders and reaf- the acquisition and small business con-
firms the COC the procedures under cerns do not provide the service, such
paragraph (h) of this section do not as airline travel, work performed by a
apply. transportation or disposal entity under
(m) Effect of a COC. By the terms of a contract assigned the environmental
the Act, a COC is conclusive as to re- remediation NAICS code (562910), cloud
sponsibility. Where SBA issues a COC computing services, or mass media pur-
on behalf of a small business with re- chases. In addition, work performed
spect to a particular contract, con- overseas on awards made pursuant to
tracting officers are required to award the Foreign Assistance Act of 1961 or
the contract without requiring the work required to be performed by a
firm to meet any other requirement local contractor, is excluded.
with respect to responsibility. Where (2)(i) In the case of a contract for
SBA issues a COC with respect to a re- supplies or products (other than from a
ferral in paragraph (a)(2)(ii) or nonmanufacturer of such supplies), it
(a)(2)(iii) of this section, the con- will not pay more than 50% of the

580
Small Business Administration § 125.6

amount paid by the government to it is subject to an SBA class waiver. Since 100%
to firms that are not similarly situ- of the value of the contract can be procured
ated. Any work that a similarly situ- through domestic small business manufac-
turers or processors plus manufacturers or
ated subcontractor further sub- processors of the item for which a waiver has
contracts will count towards the 50% been granted, the procurement should be set
subcontract amount that cannot be ex- aside for small business. At least 50% of the
ceeded. Cost of materials are excluded value of the contract, or 50% of $1,000,000,
and not considered to be subcon- must be supplied by one or more domestic
tracted. small business manufacturers or manufac-
(ii) In the case of a contract for sup- turers or processors of the one item for
which class waiver has been granted. In addi-
plies from a nonmanufacturer, it will tion, the prime small business nonmanufac-
supply the product of a domestic small turer may act as a manufacturer for one or
business manufacturer or processor, more items.
unless a waiver as described in Example 3 to paragraph (a)(2). A contract is
§ 121.406(b)(5) of this chapter is granted. for $1,000,000 and calls for the acquisition of
(A) For a multiple item procurement 10 items. Market research shows that only
where a waiver as described in four of these items are manufactured by
small businesses. The value of the items
§ 121.406(b)(5) of this chapter has not manufactured by small business is estimated
been granted for one or more items, to be $400,000. The contracting officer seeks
more than 50% of the value of the prod- and is granted contract specific waivers on
ucts to be supplied by the nonmanufac- the other six items. Since 100% of the value
turer must be the products of one or of the contract can be procured through do-
more domestic small business manu- mestic small business manufacturers or
facturers or processors. processors plus manufacturers or processors
of the items for which a waiver has been
(B) For a multiple item procurement
granted, the procurement should be set aside
where a waiver as described in for small business. At least 50% of the value
§ 121.406(b)(5) of this chapter is granted of the contract, or 50% of $1,000,000, must be
for one or more items, compliance with supplied by one or more domestic small busi-
the limitation on subcontracting re- ness manufacturers or manufacturers or
quirement will be determined by com- processors of the six items for which a con-
bining the value of the items supplied tract specific waiver has been granted. In ad-
dition, the prime small business nonmanu-
by domestic small business manufac-
facturer may act as a manufacturer for one
turers or processors with the value of or more items.
the items subject to a waiver. As such, Example 4 to paragraph (a)(2). A contract is
as long as the value of the items to be for $1,000,000 and calls for the acquisition of
supplied by domestic small business 10 items. Market research shows that three
manufacturers or processors plus the of the items can be sourced from small busi-
value of the items to be supplied that ness manufacturers at this particular time,
are subject to a waiver account for at and the estimated value of these items is
$300,000. There are no class waivers subject
least 50% of the value of the contract, to the remaining seven items. In order for
the limitations on subcontracting re- this procurement to be set aside for small
quirement is met. business, a contracting officer must seek and
(C) For a multiple item procurement, be granted a contract specific waiver for one
the same small business concern may or more items totaling $200,000 (so that
act as both a manufacturer and a non- $300,000 plus $200,000 equals 50% of the value
manufacturer. of the entire procurement). Once a contract
specific waiver is received for one or more
Example 1 to paragraph (a)(2). A contract items, at least 50% of the value of the con-
calls for the supply of one item valued at tract, or 50% of $1,000,000, must be supplied
$1,000,000. The market research shows that by one or more domestic small business man-
there are no small business manufacturers ufacturers or processors or by manufacturers
that produce this item, and the contracting or processors of the items for which a con-
officer seeks and is granted a contract spe- tract specific waiver has been granted. In ad-
cific waiver for this item. In this case, a dition, the prime small business nonmanu-
small business nonmanufacturer may supply facturer may act as a manufacturer for one
an item manufactured by a large business. or more items.
Example 2 to paragraph (a)(2). A procure-
ment is for $1,000,000 and calls for the acqui- (3) In the case of a contract for gen-
sition of 10 items. Market research shows eral construction, it will not pay more
that nine of the items can be sourced from than 85% of the amount paid by the
small business manufacturers and one item government to it to firms that are not

581
§ 125.6 13 CFR Ch. I (1–1–25 Edition)

similarly situated. Any work that a $2,500,000, and the supply portion comprising
similarly situated subcontractor fur- $500,000. The contracting officer appro-
ther subcontracts will count towards priately assigns a services NAICS code to the
requirement. Thus, because the supply por-
the 85% subcontract amount that can- tion of the contract is excluded from consid-
not be exceeded. Cost of materials are eration, the relevant amount for purposes of
excluded and not considered to be sub- calculating the performance of work require-
contracted. ment is $2,500,000 and the prime and/or simi-
(4) In the case of a contract for spe- larly situated entities must perform at least
cial trade contractors, no more than $1,250,000 and the prime contractor may not
75% of the amount paid by the govern- subcontract more than $1,250,000 to non-simi-
larly situated entities.
ment to the prime may be paid to firms
Example 3 to paragraph (b). A procuring ac-
that are not similarly situated. Any tivity is acquiring both services and general
work that a similarly situated subcon- construction through a small business set-
tractor further subcontracts will count aside. The total value of the requirement is
towards the 75% subcontract amount $10,000,000, with the construction portion
that cannot be exceeded. Cost of mate- comprising $8,000,000, and the services por-
rials are excluded and not considered tion comprising $2,000,000. The contracting
to be subcontracted. officer appropriately assigns a construction
NAICS code to the requirement. The 85%
(b) Mixed contracts. Where a contract limitation on subcontracting identified in
integrates any combination of services, paragraph (a)(3) would apply to this procure-
supplies, or construction, the con- ment. Because the services portion of the
tracting officer shall select the appro- contract is excluded from consideration, the
priate NAICS code as prescribed in relevant amount for purposes of calculating
§ 121.402(b) of this chapter. The con- the limitation on subcontracting require-
tracting officer’s selection of the appli- ment is $8,000,000. As such, the prime con-
cable NAICS code is determinative as tractor cannot subcontract more than
$6,800,000 to non-similarly situated entities,
to which limitation on subcontracting and the prime and/or similarly situated enti-
and performance requirement applies. ties must perform at least $1,200,000.
Based on the NAICS code selected, the
relevant limitation on subcontracting (c) Subcontracts to similarly situated
requirement identified in paragraphs entities. A small business concern prime
(a)(1) through (4) of this section will contractor that receives a contract
apply only to that portion of the con- listed in paragraph (a) of this section
tract award amount. In no case shall and spends contract amounts on a sub-
more than one limitation on subcon- contractor that is a similarly situated
tracting requirement apply to the same entity shall not consider those subcon-
contract. tracted amounts as subcontracted for
purposes of determining whether the
Example 1 to paragraph (b). A procuring small business concern prime con-
agency is acquiring both services and sup- tractor has violated paragraph (a) of
plies through a small business set-aside. The
total value of the requirement is $3,000,000,
this section, to the extent the subcon-
with the supply portion comprising tractor performs the work with its own
$2,500,000, and the services portion com- employees. Any work that the simi-
prising $500,000. The contracting officer ap- larly situated subcontractor does not
propriately assigns a manufacturing NAICS perform with its own employees shall
code to the requirement. The cost of mate- be considered subcontracted. SBA will
rial is $500,000. Thus, because the services also exclude a subcontract to a simi-
portion of the contract and the cost of mate- larly situated entity from consider-
rials are excluded from consideration, the
relevant amount for purposes of calculating
ation under the ostensible subcon-
the performance of work requirement is tractor rule (§ 121.103(h)(3)). A prime
$2,000,000 and the prime and/or similarly situ- contractor may no longer count a simi-
ated entities must perform at least $1,000,000 larly situated entity towards compli-
and the prime contractor may not sub- ance with the limitations on subcon-
contract more than $1,000,000 to non-simi- tracting where the subcontractor
larly situated entities. ceases to qualify as small or under the
Example 2 to paragraph (b). A procuring relevant socioeconomic status.
agency is acquiring both services and sup-
plies through a small business set-aside. The Example 1 to paragraph (c): An SDVO SBC
total value of the requirement is $3,000,000, sole source contract is awarded in the total
with the services portion comprising amount of $500,000 for hammers. The prime

582
Small Business Administration § 125.6
contractor is a manufacturer and sub- (2) Compliance will be considered an
contracts 51% of the total amount received, element of responsibility and not a
less the cost of materials ($100,000) or component of size eligibility.
$204,000, to an SDVO SBC subcontractor that
manufactures the hammers in the U.S. The
(3) Work performed by an inde-
prime contractor does not violate the limita- pendent contractor shall be considered
tion on subcontracting requirement because a subcontract, and may count toward
the amount subcontracted to a similarly sit- meeting the applicable limitation on
uated entity (less the cost of materials) is subcontracting where the independent
excluded from the limitation on subcon- contractor qualifies as a similarly situ-
tracting calculation. ated entity.
Example 2 to paragraph (c): A competitive (e) Past Performance Evaluation.
8(a) BD contract is awarded in the total
Where an agency determines that a
amount of $10,000,000 for janitorial services.
The prime contractor subcontracts $8,000,000
contractor has not met the applicable
of the janitorial services to another 8(a) BD limitation on subcontracting require-
certified firm. The prime contractor does not ment at the conclusion of contract per-
violate the limitation on subcontracting for formance, the agency must notify the
services because the amount subcontracted business concern and give it the oppor-
to a similarly situated entity is excluded tunity to explain any extenuating or
from the limitation on subcontracting. mitigating circumstances that nega-
Example 3 to paragraph (c): A WOSB set- tively impacted its ability to do so.
aside contract is awarded in the total
(1) Where a small business does not
amount of $1,000,000 for landscaping services.
The prime contractor subcontracts $500,001
provide any extenuating or mitigating
to an SDVO SBC subcontractor that is not circumstances or the agency deter-
also a WOSB under the WOSB program. The mines that the concern’s failure to
prime contractor is in violation of the limi- meet the applicable limitation on sub-
tation on subcontracting requirement be- contracting requirement was not be-
cause it has subcontracted more than 50% of yond the concern’s control, the agency
the contract amount to an SDVO SBC sub- may not give a satisfactory or higher
contractor, which is not considered similarly past performance rating for the appro-
situated to a WOSB prime contractor.
priate factor or subfactor in accord-
(d) Determining compliance with appli- ance with FAR 42.1503.
cable limitation on subcontracting. The (2) Where a contracting officer deter-
period of time used to determine com- mines that extenuating circumstances
pliance for a total or partial set-aside warrant a satisfactory/positive past
contract will generally be the base performance evaluation for the appro-
term and then each subsequent option priate evaluation factor or subfactor
period. However, for a multi-agency set and the individual at least one level
aside contract where more than one above the contracting officer concurs
agency can issue orders under the con- with that determination, a satisfactory
tract, the ordering agency must use or higher past performance rating may
the period of performance for each be given.
order to determine compliance. For an (i) Extenuating or mitigating cir-
order set aside under a full and open cumstances that could lead to a satis-
contract or a full and open contract factory/positive rating include, but are
with reserve, the agency will use the not limited to, unforeseen labor short-
period of performance for each order to ages, modifications to the contract’s
determine compliance unless the order scope of work which were requested or
is competed among small and other- directed by the Government, emer-
than-small businesses (in which case gency or rapid response requirements
the subcontracting limitations will not that demand immediate subcon-
apply). tracting actions by the prime small
(1) The contracting officer, in his or business concern, unexpected changes
her discretion, may require the concern to a subcontractor’s designation as a
to comply with the applicable limita- similarly situated entity (as defined in
tions on subcontracting and the non- § 125.1), differing site or environmental
manufacturer rule for each order conditions which arose during the
awarded under a total or partial set- course of performance, force majeure
aside contract. events, and the contractor’s good faith

583
§ 125.6 13 CFR Ch. I (1–1–25 Edition)

reliance upon a similarly situated sub- digit industry codes in the North
contractor’s representation of size or American Industry Classification Sys-
relevant socioeconomic status. tem (NAICS) pursuant to the following
(ii) An agency cannot rely on any cir- procedures:
cumstances that were within the con- (1) Format of request. Requests from
tractor’s control, or those which could representatives of a trade or industry
have been mitigated without imposing group and interested SBCs should be in
an undue cost or burden on the con- writing and sent or delivered to the Di-
tractor. rector, Office of Government Con-
(f) Inapplicability of limitations on sub- tracting, U.S. Small Business Adminis-
contracting. The limitations on subcon- tration, 409 3rd Street SW., Wash-
tracting do not apply to: ington, DC 20416. The requester must
(1) Small business set-aside contracts demonstrate to SBA that a change in
with a value that is greater than the percentage is necessary to reflect con-
micro-purchase threshold but less than ventional industry practices among
or equal to the simplified acquisition small business concerns that are below
threshold (as both terms are defined in the numerical size standard for busi-
the FAR at 48 CFR 2.101); or nesses in that industry category, and
(2) Subcontracts (except where a must support its request with informa-
prime is relying on a similarly situated tion including, but not limited to:
entity to meet the applicable limita- (i) Information relative to the eco-
tions on subcontracting). nomic conditions and structure of the
(3) For contracts where an inde- entire national industry;
pendent contractor is not otherwise (ii) Market data, technical changes
treated as an employee of the concern in the industry and industry trends;
for which he/she is performing work for (iii) Specific reasons and justifica-
size purposes under § 121.106(a) of this tions for the change in the subcon-
chapter, work performed by the inde- tracting percentage;
pendent contractor shall be considered (iv) The effect such a change would
a subcontract. Such work will count have on the Federal procurement proc-
toward meeting the applicable limita- ess; and
tion on subcontracting where the inde- (v) Information demonstrating how
pendent contractor qualifies as a simi- the proposed change would promote the
larly situated entity. purposes of the small business, 8(a),
(4) Contracting officers may, at their SDVOSB, VOSB, HUBZone, WOSB, or
discretion, require the contractor to EDWOSB programs.
demonstrate its compliance with the (2) Notice to public. Upon an adequate
limitations on subcontracting at any preliminary showing to SBA, SBA will
time during performance and upon publish in the FEDERAL REGISTER a no-
completion of a contract if the infor- tice of its receipt of a request that it
mation regarding such compliance is considers a change in the subcon-
not already available to the con- tracting percentage requirements for a
tracting officer. Evidence of compli- particular industry. The notice will
ance includes, but is not limited to, in- identify the group making the request,
voices, copies of subcontracts, or a list and give the public an opportunity to
of the value of tasks performed. submit information and arguments in
(g) Request to change applicable limita- both support and opposition.
tion on subcontracting. SBA may use dif- (3) Comments. SBA will provide a pe-
ferent percentages if the Administrator riod of not less than 30 days for public
determines that such action is nec- comment in response to the FEDERAL
essary to reflect conventional industry REGISTER notice.
practices among small business con- (4) Decision. SBA will render its deci-
cerns that are below the numerical size sion after the close of the comment pe-
standard for businesses in that indus- riod. If SBA decides against a change,
try group. Representatives of a na- SBA will publish notice of its decision
tional trade or industry group or any in the FEDERAL REGISTER. Concurrent
interested SBC may request a change with the notice, SBA will advise the re-
in subcontracting percentage require- quester of its decision in writing. If
ments for the categories defined by six SBA decides in favor of a change, SBA

584
Small Business Administration § 125.8

will propose an appropriate change to § 125.8 What requirements must a joint
this part. venture satisfy to submit an offer
(h) Penalties. Whoever violates the re- for a procurement or sale set aside
quirements set forth in paragraph (a) or reserved for small business?
of this section shall be subject to the (a) General. A joint venture of two or
penalties prescribed in 15 U.S.C. 645(d), more business concerns may submit an
except that the fine shall be treated as offer as a small business for a Federal
the greater of $500,000 or the dollar procurement, subcontract or sale so
amount spent, in excess of permitted long as each concern is small under the
levels, by the entity on subcontractors. size standard corresponding to the
A party’s failure to comply with the NAICS code assigned to the contract,
spirit and intent of a subcontract with or qualify as small under one of the ex-
a similarly situated entity may be con- ceptions to affiliation set forth in
sidered a basis for debarment on the § 121.103(h)(4) of this chapter.
grounds, including but not limited to, (b) Contents of joint venture agreement.
that the parties have violated the (1) A joint venture agreement between
terms of a Government contract or two or more entities that individually
subcontract pursuant to FAR 9.406– qualify as small need not be in any spe-
2(b)(1)(i) (48 CFR 9.406–2(b)(1)(i)). cific form or contain any specific con-
ditions in order for the joint venture to
[81 FR 34262, May 31, 2016, as amended at 81 qualify as a small business.
FR 67093, Sept. 30, 2016; 83 FR 12852, Mar. 26, (2) Every joint venture agreement to
2018; 84 FR 65239, Nov. 26, 2019; 84 FR 65664, perform a contract set aside or re-
Nov. 29, 2019; 85 FR 66192, Oct. 16, 2020; 87 FR
served for small business between a
73412, Nov. 29, 2022; 88 FR 26210, Apr. 27, 2023]
protégé small business and its SBA-ap-
EFFECTIVE DATE NOTE: Amendments to proved mentor authorized by § 125.9
§ 125.6 were published at 89 FR 102491, Dec. 17, must contain a provision:
2024, effective Jan. 16, 2025. (i) Setting forth the purpose of the
joint venture;
§ 125.7 Acquisition-related dollar
thresholds. (ii) Designating a small business as
the managing venturer of the joint
The Federal Acquisition Regulatory venture, and designating a named em-
Council (FAR Council) has the respon- ployee of the small business managing
sibility of adjusting each acquisition- venturer as the manager with ultimate
related dollar threshold on October 1, responsibility for performance of the
of each year that is evenly divisible by contract (the ‘‘Responsible Manager’’).
five. Acquisition-related dollar thresh- (A) The managing venturer is respon-
olds are defined as dollar thresholds sible for controlling the day-to-day
that are specified in law as a factor in management and administration of the
defining the scope of the applicability contractual performance of the joint
of a policy, procedure, requirement, or venture, but other partners to the joint
restriction provided in that law to the venture may participate in all cor-
procurement of property or services by porate governance activities and deci-
an executive agency as determined by sions of the joint venture as is com-
the FAR Council. 41 U.S.C. 431a(c). mercially customary. The joint ven-
Part 125, Government Contracting Pro- ture agreement may not give to a non-
grams, contains acquisition-related managing venturer negative control
dollar thresholds subject to infla- over activities of the joint venture, un-
tionary adjustments. The FAR Council less those provisions would otherwise
shall publish a notice of the adjusted be commercially customary for a joint
venture agreement for a government
dollar thresholds in the FEDERAL REG-
contract outside of SBA’s programs. A
ISTER. The adjusted dollar thresholds
non-managing venturer’s approval may
shall take effect on the date of publica-
be required in, among other things, de-
tion. termining what contract opportunities
[74 FR 46887, Sept. 14, 2009] the joint venture should seek and initi-
ating litigation on behalf of the joint
venture.

585

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