SBA just signaled it plans to tighten how much work small business construction contractors can hand off to firms that are not themselves small.
Here is the current rule. Under 13 CFR 125.6, the limitations on subcontracting cap how much of a set-aside contract can go to subcontractors that are not similarly situated, meaning subs that would not have qualified for the prime contract themselves. The caps are 50% for services, 50% for manufacturing, 75% for specialty trade construction, and 85% for general construction. That last number means a small business can win a general construction set-aside and self-perform as little as 15% of it.
In September, SBA’s Office of Inspector General published a report on how the rule is applied and enforced across government. It found inconsistent interpretation by contracting personnel, incomplete or missing sub-award reports and performance assessments, ambiguous non-mandatory language in the regulation, and unclear lines of responsibility between SBA and procuring agencies. It also flagged that the other direct cost deduction lets contractors justify costs after the fact to appear compliant.
SBA’s management response went further than the OIG asked. Rather than just fixing oversight, SBA said the construction thresholds themselves are too permissive, describing a regime that effectively legalizes using small businesses as a pass-through to large corporations in exchange for what amounts to a fee.
SBA cited two 2024 examples. An 8(a) construction award of $95.3 million where $73.6 million went to a large corporation with nearly $20 billion in revenue, about 77% passed through. And an 8(a) consulting contract of roughly $8.8 million where $8.5 million went to a large consulting firm, over 96% passed through.
SBA says it will propose revisions to 13 CFR 125.6 by April 1, 2027, setting new thresholds, clarifying oversight and reporting, and building collection mechanisms for compliance data. Legally it can do this: the statute at 15 U.S.C. 657s fixes the 50% figure for services and manufacturing, but it lets SBA set the percentage for other categories by rule.
Source: The FedLift Launchpad, Steven Koprince - SBA Plans Stricter Subcontracting Limits for Construction
SBA OIG Report 26-19 - https://legacy.sba.gov/sites/default/files/2026-09/SBA%20OIG%20Report%2026-19%20-%20Consolidated%20OIG%20Findings%20on%20Subcontracting%20Limitation%20Concerns%20for%20Set-Aside%20Awards.pdf
Why GovCons Should Care
If you prime small business construction work, your self-performance floor is probably going up. SBA gave no number, but the realistic range runs from 75% subcontracting, matching specialty trade, down to 50%, matching services and manufacturing. Model both against your project mix, your bonding capacity, and your crew size before the proposed rule lands.
Your best lever is the similarly situated entity rule. Subcontracts to small and certified firms do not count against the limit. Building a deeper bench of qualified small subs in your trades and regions is useful now regardless of where the threshold ends up.
Services firms are not off the hook. The 50% cap is statutory and cannot move, but the other direct cost deduction is squarely in SBA’s sights, and the enforcement and reporting changes apply across all categories. Expect more sub-award reporting and more scrutiny in performance assessments.
One practical warning. Changing SBA’s regulation does not automatically change the matching FAR clause at 52.219-14, and the two are already not fully aligned. The Department of War has issued a deviation to pick up SBA’s earlier tweaks. Many other agencies have not. The last time SBA overhauled this rule, the FAR Council took more than five years to catch up. You could be working under two different formulas depending on the agency.
Two Sides of the Debate
One side says this is exactly what the program needs. The point of a set-aside is to build a small firm’s past performance, capacity, and balance sheet. A deal where the small business keeps 15% and routes 85% to a company with $20 billion in revenue is not a small business contract, it is a brokerage fee that taxpayers pay for. SBA’s own examples show how far it goes. Honest small primes have been losing to fronting arrangements for years, and the thresholds are what make those arrangements legal.
The other side says construction is not services and the numbers exist for a reason. A general contractor’s core competency is coordinating trades, not performing all of them, and no single small firm holds every trade on a complex project. Push self-performance too high and small firms either cannot bid or take on risk they cannot bond. The similarly situated carve-out only helps where enough certified small subs actually exist in your trade and your region, which is not true everywhere. And layering a new threshold on top of a FAR clause that may take years to conform creates a compliance trap rather than a fix.
Your Turn
If you prime small business construction work, what would a 75% or 50% cap do to your bids? And have you lost a set-aside to a firm that was clearly fronting for a large subcontractor?
Tell us what you think in the comments below.SBA just signaled it plans to tighten how much work small business construction contractors can hand off to firms that are not themselves small.
Here is the current rule. Under 13 CFR 125.6, the limitations on subcontracting cap how much of a set-aside contract can go to subcontractors that are not similarly situated, meaning subs that would not have qualified for the prime contract themselves. The caps are 50% for services, 50% for manufacturing, 75% for specialty trade construction, and 85% for general construction. That last number means a small business can win a general construction set-aside and self-perform as little as 15% of it.
In September, SBA’s Office of Inspector General published a report on how the rule is applied and enforced across government. It found inconsistent interpretation by contracting personnel, incomplete or missing sub-award reports and performance assessments, ambiguous non-mandatory language in the regulation, and unclear lines of responsibility between SBA and procuring agencies. It also flagged that the other direct cost deduction lets contractors justify costs after the fact to appear compliant.
SBA’s management response went further than the OIG asked. Rather than just fixing oversight, SBA said the construction thresholds themselves are too permissive, describing a regime that effectively legalizes using small businesses as a pass-through to large corporations in exchange for what amounts to a fee.
SBA cited two 2024 examples. An 8(a) construction award of $95.3 million where $73.6 million went to a large corporation with nearly $20 billion in revenue, about 77% passed through. And an 8(a) consulting contract of roughly $8.8 million where $8.5 million went to a large consulting firm, over 96% passed through.
SBA says it will propose revisions to 13 CFR 125.6 by April 1, 2027, setting new thresholds, clarifying oversight and reporting, and building collection mechanisms for compliance data. Legally it can do this: the statute at 15 U.S.C. 657s fixes the 50% figure for services and manufacturing, but it lets SBA set the percentage for other categories by rule.
Sources:
The FedLift Launchpad, Steven Koprince
SBA OIG Report 26-19
Why GovCons Should Care
If you prime small business construction work, your self-performance floor is probably going up. SBA gave no number, but the realistic range runs from 75% subcontracting, matching specialty trade, down to 50%, matching services and manufacturing. Model both against your project mix, your bonding capacity, and your crew size before the proposed rule lands.
Your best lever is the similarly situated entity rule. Subcontracts to small and certified firms do not count against the limit. Building a deeper bench of qualified small subs in your trades and regions is useful now regardless of where the threshold ends up.
Services firms are not off the hook. The 50% cap is statutory and cannot move, but the other direct cost deduction is squarely in SBA’s sights, and the enforcement and reporting changes apply across all categories. Expect more sub-award reporting and more scrutiny in performance assessments.
One practical warning. Changing SBA’s regulation does not automatically change the matching FAR clause at 52.219-14, and the two are already not fully aligned. The Department of War has issued a deviation to pick up SBA’s earlier tweaks. Many other agencies have not. The last time SBA overhauled this rule, the FAR Council took more than five years to catch up. You could be working under two different formulas depending on the agency.
Two Sides of the Debate
One side says this is exactly what the program needs. The point of a set-aside is to build a small firm’s past performance, capacity, and balance sheet. A deal where the small business keeps 15% and routes 85% to a company with $20 billion in revenue is not a small business contract, it is a brokerage fee that taxpayers pay for. SBA’s own examples show how far it goes. Honest small primes have been losing to fronting arrangements for years, and the thresholds are what make those arrangements legal.
The other side says construction is not services and the numbers exist for a reason. A general contractor’s core competency is coordinating trades, not performing all of them, and no single small firm holds every trade on a complex project. Push self-performance too high and small firms either cannot bid or take on risk they cannot bond. The similarly situated carve-out only helps where enough certified small subs actually exist in your trade and your region, which is not true everywhere. And layering a new threshold on top of a FAR clause that may take years to conform creates a compliance trap rather than a fix.
Your Turn
If you prime small business construction work, what would a 75% or 50% cap do to your bids? And have you lost a set-aside to a firm that was clearly fronting for a large subcontractor?
Tell us what you think in the comments below.