FAR 52.226-5—Restrictions on Subcontracting Outside Disaster or Emergency Area.
Plain-English Summary
FAR 52.226-5 imposes subcontracting and performance-location limits for contracts awarded in a disaster or emergency area set-aside. It explains the applicable SBA definitions, then sets minimum self-performance or local-performance percentages for four contract types: services (other than construction), supplies, general construction, and construction by special trade contractors. The clause is designed to ensure that the economic benefits of disaster or emergency area set-asides flow to the affected area and to businesses and workers located there, rather than being largely performed elsewhere through subcontracting. In practice, it requires contractors to track where work is performed, who performs it, and how much of the relevant contract cost is attributable to qualifying labor or manufacturing effort. It also ties compliance to SBA regulatory definitions in 13 CFR 125.6(e) and to the disaster/emergency area notice clause at FAR 52.226-4, so contractors must read the clauses together. For contracting officers, the clause provides a measurable performance standard that can be monitored during contract administration and used to assess compliance.
Key Rules
SBA definitions control
The clause incorporates SBA definitions from 13 CFR 125.6(e) for key terms such as cost of the contract, cost of contract performance incurred for personnel, cost of manufacturing, cost of materials, personnel, and subcontracting. Those definitions determine how the percentage requirements are calculated.
Services require 50 percent personnel cost
For service contracts other than construction, at least 50 percent of the cost of contract performance incurred for personnel must be expended for employees of the contractor or employees of other businesses residing or primarily doing business in the designated disaster or emergency area.
Supply contracts require 50 percent manufacturing cost
For supply contracts, except where the contractor is procuring from a nonmanufacturer, the contractor or employees of other businesses in the set-aside area must perform at least 50 percent of the cost of manufacturing the supplies, excluding the cost of materials.
General construction requires 15 percent self-performance
For general construction, the contractor must perform at least 15 percent of the cost of the contract, excluding materials, with its own employees or employees of other businesses residing or primarily doing business in the set-aside area.
Special trade construction requires 25 percent self-performance
For construction by special trade contractors, the contractor must perform at least 25 percent of the cost of the contract, excluding materials, with its own employees or employees of other businesses residing or primarily doing business in the set-aside area.
Local-area performance counts
The clause allows performance by the contractor’s own employees or by employees of other businesses that reside or primarily do business in the designated area. This means the rule is not limited to direct employees, but it does require work to be tied to the disaster or emergency area.
Responsibilities
Contractor
Meet the applicable percentage requirement for the contract type, track qualifying labor and manufacturing costs, ensure subcontracting does not reduce performance below the required threshold, and use only employees or businesses that qualify under the disaster or emergency area standard when counting toward compliance.
Contracting Officer
Include the clause when prescribed, identify the applicable disaster or emergency area set-aside, and monitor contract performance for compliance with the required percentage and the SBA-based definitions used to calculate it.
Subcontractors / Other Businesses
If their employees are counted toward the requirement, they must reside or primarily do business in the designated area and perform qualifying work that can be credited toward the contractor’s required percentage.
Agency
Administer the set-aside program consistently with the disaster or emergency area designation and ensure the clause is used only when the procurement is subject to the applicable set-aside rules.
Practical Implications
Contractors must maintain detailed cost and labor records; without good records, it is hard to prove compliance with the percentage thresholds.
The biggest pitfall is misclassifying costs, especially confusing materials with manufacturing or personnel costs, or counting nonqualifying subcontract work toward the required percentage.
For supply contracts, contractors should verify whether they are a manufacturer or a nonmanufacturer, because the clause expressly treats nonmanufacturer procurement differently.
For construction, the required percentage is based on contract cost excluding materials, so contractors need a clear method for separating material costs from labor and other performance costs.
Because the clause depends on the disaster or emergency area designation, contractors should confirm the geographic scope and whether each participating business truly resides or primarily does business in that area.
Official Regulatory Text
As prescribed in 26.206 (c) , insert the following clause: Restrictions on Subcontracting Outside Disaster or Emergency Area (Nov 2007) (a) Definitions. The definitions of the following terms used in this clause are found in the Small Business Administration regulations at 13 CFR 125.6(e) : cost of the contract, cost of contract performance incurred for personnel, cost of manufacturing, cost of materials, personnel, and subcontracting. (b) The Contractor agrees that in performance of the contract in the case of a contract for- (1) Services (except construction) . At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the Contractor or employees of other businesses residing or primarily doing business in the area designated in the clause at FAR 52.226-4 , Notice of Disaster or Emergency Area Set-Aside; (2) Supplies (other than procurement from a nonmanufacturer of such supplies) . The Contractor or employees of other businesses residing or primarily doing business in the set-aside area shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials; (3) General construction . The Contractor will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees or employees of other businesses residing or primarily doing business in the set-aside area; or (4) Construction by special trade Contractors . The Contractor will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees or employees of other businesses residing or primarily doing business in the set-aside area. (End of clause)