FAR 19.505—Limitations on subcontracting and nonmanufacturer rule.
Plain-English Summary
FAR 19.505 addresses two closely related small business compliance concepts: the limitations on subcontracting and the nonmanufacturer rule. It explains when these requirements apply to small business set-asides, sole-source awards, HUBZone preference awards, and certain set-aside orders under the small business programs, including awards under FAR subparts 19.8, 19.13, 19.14, and 19.15. It then sets the performance limits for different types of contracts—services, supplies/products, general construction, and special trade construction—by limiting how much of the government-paid amount may be subcontracted to firms that are not similarly situated entities. The section also establishes when compliance must be measured, such as by the end of the base term, option periods, or order performance period, depending on how the award is structured. In addition, it explains the nonmanufacturer rule for supply acquisitions, including the requirements for nonmanufacturers and kit assemblers, the definition of the manufacturer, and the possibility of SBA waivers. In practice, this section is central to ensuring that small business awards actually benefit small businesses through meaningful performance, while still allowing appropriate subcontracting and supply-chain flexibility.
Key Rules
Applies to covered small business awards
The limitations on subcontracting apply to small business set-asides above the simplified acquisition threshold and to certain orders issued directly to small businesses. They also apply, regardless of dollar value, to set-aside and sole-source awards under the HUBZone, 8(a), SDVOSB, and WOSB programs, as well as certain set-aside orders and HUBZone preference awards unless the preference is waived.
Service contracts have a 50 percent limit
For service contracts, excluding construction, the small business prime may not pay more than 50 percent of the amount paid by the Government for contract performance to subcontractors that are not similarly situated entities. If a similarly situated entity subcontracts further, that lower-tier subcontracting counts against the prime's 50 percent limit.
Supply contracts have a 50 percent limit
For supply or product contracts, other than nonmanufacturer procurements, the small business prime may 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. For mixed contracts, the rule applies only to the supply portion.
Construction contracts have higher limits
For general construction, the small business prime may not pay more than 85 percent of the amount paid by the Government for contract performance, excluding materials, to subcontractors that are not similarly situated entities. For special trade construction, the limit is 75 percent. In both cases, lower-tier subcontracting by similarly situated entities counts toward the applicable limit.
Compliance is measured by performance period
For set-aside contracts, compliance is measured by the end of the base term and each option period, or by the end of each order performance period if the contracting officer chooses that approach. For set-aside orders and certain direct orders, compliance is measured by the end of the order performance period.
Nonmanufacturer rule governs supply awards
A nonmanufacturer awarded a supply contract or order subject to the rule must furnish an end item made by a small business in the United States or its outlying areas, stay within the employee-size cap, be primarily engaged in retail or wholesale trade and normally sell the item, and take ownership or possession in a manner consistent with industry practice.
Kit assemblers have separate requirements
When the end item is a kit of supplies, the offeror may not exceed the applicable employee cap and at least 50 percent of the total cost of the kit components must be manufactured, processed, or produced in the United States or its outlying areas by small business concerns under the relevant component NAICS size standards.
Manufacturer is the transforming concern
For nonmanufacturer rule purposes, the manufacturer is the concern that uses its own facilities to transform raw materials, parts, or components into the end item being acquired. This definition matters because it determines whether the end item satisfies the small business manufacturing requirement.
SBA may waive the rule
SBA may grant an individual or class waiver to the nonmanufacturer rule, allowing a nonmanufacturer to supply an end item from an other-than-small business without regard to place of manufacture, processing, or production. A waiver changes the normal sourcing restriction but does not eliminate other applicable contract requirements.
Responsibilities
Contracting Officer
Determine whether the acquisition falls within the section's scope, include the correct limitations on subcontracting and nonmanufacturer rule requirements in the solicitation and award, decide how compliance will be measured for set-aside contracts or orders, and monitor whether the award structure or waiver status changes the applicable obligations.
Small Business Prime Contractor
Comply with the applicable subcontracting percentage limit for the contract type, ensure that work performed by similarly situated entities is treated correctly, and meet the compliance test by the required performance milestone. For supply awards subject to the nonmanufacturer rule, furnish compliant end items or qualify for a waiver.
Similarly Situated Entity
Perform work in a way that preserves its status for counting purposes under the limitations on subcontracting rules. If it subcontracts further, that lower-tier subcontracting is counted against the prime contractor's limit.
Nonmanufacturer / Supplier
For covered supply acquisitions, provide an end item made by a small business in the United States or its outlying areas, satisfy the employee-size cap, be primarily engaged in retail or wholesale trade, and take ownership or possession consistent with industry practice.
Kit Assembler
When supplying a kit, ensure the employee-size cap is met and verify that at least 50 percent of the total component cost comes from components manufactured, processed, or produced in the United States or its outlying areas by small business concerns under the relevant size standards.
SBA
Administer the nonmanufacturer rule and determine whether to grant individual or class waivers that permit supply of an end item from an other-than-small business without regard to place of manufacture, processing, or production.
Practical Implications
This section is a core compliance checkpoint for small business awards: a contractor can be technically eligible for award but still lose compliance if it outsources too much of the work or supplies a noncompliant end item.
The phrase "similarly situated entity" is critical. Work subcontracted to a similarly situated entity generally does not count against the prime's subcontracting cap, but any further subcontracting by that entity does count.
Mixed contracts require careful segregation of the service or supply portion. Contractors and contracting officers should not apply the percentage limit to the entire contract if the rule only applies to one portion.
For supply contracts, the nonmanufacturer rule is often the biggest trap. A small business reseller must verify the manufacturer status, employee cap, trade status, and U.S./outlying areas sourcing, or obtain a waiver if available.
Compliance timing matters. A contractor may appear compliant early in performance but still fail if it exceeds the limit by the end of the base term, option period, or order performance period.
Contract files should clearly document whether the award is a set-aside, sole-source, or preference-based award, whether the nonmanufacturer rule applies, and whether any SBA waiver has been granted.
Official Regulatory Text
(a) Applicability. (1) This section applies to small business set-asides above the simplified acquisition threshold and orders issued directly to a small business in accordance with 19.504 (c)(1)(ii) above the simplified acquisition threshold. (2) This section applies, regardless of dollar value, to the following awards under subparts 19.8 , 19.13 , 19.14 , and 19.15 : (i) Contracts that are set aside. (ii) Contracts that are awarded on a sole-source basis. (iii) Orders that are set-aside as described in 8.405-5 and 16.505 (b)(2)(i)(F). (iv) Orders that are issued directly in accordance with 19.504 (c)(1)(ii). (v) Contracts that use the HUBZone price evaluation preference to award to a HUBZone small business concern unless the concern waived the evaluation preference. (b) (1) Limitations on subcontracting. A small business concern subject to the limitations on subcontracting is required to comply with the following: (i) For a contract or order assigned a North American Industry Classification System (NAICS) code for services (except construction), the concern 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. Any work that a similarly situated entity further subcontracts will count towards the concern's 50 percent subcontract amount that cannot be exceeded. When a contract includes both services and supplies, the 50 percent limitation shall apply only to the service portion of the contract. (ii) For a contract or order assigned a NAICS code for supplies or products (other than a procurement from a nonmanufacturer of such supplies or products), the concern 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. Any work that a similarly situated entity further subcontracts will count towards the concern's 50 percent subcontract amount that cannot be exceeded. When a contract includes both supplies and services, the 50 percent limitation shall apply only to the supply portion of the contract. (iii) For a contract or order assigned a NAICS code for general construction, the concern 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. Any work that a similarly situated entity further subcontracts will count towards the concern's 85 percent subcontract amount that cannot be exceeded. (iv) For a contract or order assigned a NAICS code for construction by special trade contractors, the concern 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. Any work that a similarly situated entity further subcontracts will count towards the concern’s 75 percent subcontract amount that cannot be exceeded. (2) Compliance period. A small business contractor subject to the limitations on subcontracting is required to comply with the limitations on subcontracting— (i) For a contract that has been set aside, either by the end of the base term and then by the end of each subsequent option period, or by the end of the performance period for each order issued under the contract, at the contracting officer's discretion; and (ii) For an order set aside under a contract as described in 19.504 (a), (b), or (c)(1)(i) or an order issued in accordance with 19.504 (c)(1)(ii), by the end of the performance period for the order. (c) Nonmanufacturer rule. The nonmanufacturer rule applies to nonmanufacturers in accordance with paragraph (c)(1) of this section and to kit assemblers who are nonmanufacturers in accordance with paragraph (c)(2) of this section. (1) Nonmanufacturers. Any concern, including a supplier, that is awarded a contract or order subject to the nonmanufacturer rule, other than a construction or service acquisition, but proposes to furnish an end item that it did not itself manufacture, process, or produce ( i.e. , a “nonmanufacturer”), is required to— (i) Provide an end item that a small business has manufactured, processed, or produced in the United States or its outlying areas (see paragraph (c)(3) of this section for determining the manufacturer of an end item); (ii) Not exceed 500 employees, or 150 employees for information technology value-added resellers under NAICS code 541519; (iii) Be primarily engaged in the retail or wholesale trade and normally sell the type of item being supplied; and (iv) Take ownership or possession of the item(s) with its personnel, equipment, or facilities in a manner consistent with industry practice; for example, providing storage, transportation, or delivery. (2) Kit assemblers. When the end item being acquired is a kit of supplies— (i) The offeror may not exceed 500 employees, or 150 employees for information technology value-added resellers under NAICS code 541519; and (ii) At least 50 percent of the total cost of the components of the kit shall be manufactured, processed, or produced in the United States or its outlying areas by business concerns that are small under the size standards for the NAICS codes of the components of the kit. (3) Identification of manufacturers . For the purposes of applying the nonmanufacturer rule, the manufacturer, processor, or producer is the concern that manufactures, processes, or produces an end item with its own facilities (i.e., transforms raw materials, miscellaneous parts, or components into the end item being acquired). See 13 CFR 121.406 (b)(2). (4) Waiver of nonmanufacturer rule. (i) The SBA may grant an individual or a class waiver to the nonmanufacturer rule to allow a nonmanufacturer to provide an end item of an other than small business without regard to the place of manufacture, processing, or production. (A) Class waiver. An agency may request that SBA waive the requirement at paragraph (c)(1)(i) or (c)(2)(ii) of this section for a specific product or class of products. See 13 CFR 121.1202 for an explanation of when SBA will issue a class waiver. (B) Individual waiver. The contracting officer may also request a waiver of the requirements at paragraph (c)(1)(i) or (c)(2)(ii) of this section for an individual acquisition once the contracting officer determines through market research that no known small business manufacturers, processors, or producers in the United States or its outlying areas can reasonably be expected to offer an end item meeting the requirements of the solicitation. This type of waiver is known as an individual waiver and would apply only to a specific acquisition. (ii) Waiver requests. Requests for waivers shall include the content specified at 13 CFR 121.1204 and shall be sent via email to nmrwaivers@sba.gov or by mail to the—Director, Office of Government Contracting, Small Business Administration, 409 Third Street SW, Washington, DC 20416. (iii) List of class waivers. For the most current listing of class waivers, contact the SBA Office of Government Contracting or go to https://www.sba.gov/document/support-non-manufacturer-rule-class-waiver-list . (iv) Notification of waiver. The contracting officer shall provide potential offerors with written notification of any class or individual waiver in the solicitation. If providing the notification after solicitation issuance, the contracting officer shall provide potential offerors a reasonable amount of additional time to respond to the solicitation. (5) Multiple-item acquisitions. (i) If at least 50 percent of the estimated contract value is composed of items that are manufactured, processed, or produced by small business concerns, then a waiver of the nonmanufacturer rule is not required. There is no requirement that each item acquired in a multiple-item acquisition be manufactured, processed, or produced by a small business in the United States or its outlying areas. (ii) If more than 50 percent of the estimated acquisition cost is composed of items manufactured, processed, or produced by other than small business concerns, then a waiver is required. SBA may grant an individual waiver for one or more items in an acquisition in order to ensure that at least 50 percent of the cost of the items to be supplied by the nonmanufacturer comes from small business manufacturers, processors, and producers in the United States or its outlying areas or are subject to a waiver. (iii) If a small business offeror is both a manufacturer of item(s) and a nonmanufacturer of other item(s) for an acquisition, the contracting officer shall apply the manufacturer size standard.