Can You Subcontract 100% Of The Work?

In the world of federal contracting, there's a practice known as the "middle man method" that’s often met with skepticism. Contractors who use this approach are sometimes referred to as "10 percenters" by the federal government. But why? These contractors purchase commodities from manufacturers, mark up the price by 10%, and then resell the same items to the government, pocketing the profit.

Subcontracting ALL of the work

While it’s true that this method can make you money—many have indeed made quick bucks this way—it's not without its downsides. Essentially, you're operating as a dropshipper, buying low and selling high. The difference here is that instead of selling to consumers, you're selling to the government. However, being a dropshipper in the federal space comes with its own set of challenges, particularly when it comes to scaling your business.

If you're making money by selling to the government, what’s to stop others from bypassing you and selling directly to the government themselves? It’s a tough model to scale, and the U.S. government is well aware of this practice and has put in place several limitations to curb it.

Subcontracting Limitations: The Fine Print

One of the most significant limitations you'll face as a federal contractor is the restriction on how much of the work you can subcontract. This is where the Federal Acquisition Regulation (FAR) 19.505 comes into play. The regulation explicitly states that you cannot subcontract every part of a project. So if you’re thinking you can just sit back, collect the profits, and let another entity do all the work, think again. The government isn’t paying you to be a "couch contractor."

Here’s a breakdown of the subcontracting limitations according to FAR 19.505:

• Services (except construction): You cannot pay more than 50% of the contract amount to subcontractors.

• Supplies or products: Again, no more than 50% of the contract amount can go to subcontractors.

• General construction: You can’t pay more than 85% of the contract amount to subcontractors.

• Special Trade Construction Contracts: No more than 75% of the work can be subcontracted.

  
  

So, can you subcontract all of your work? Unfortunately, no. The federal government wants to ensure that prime contractors are directly involved in the work, maintaining some control over the project. It's essential to be informed about these limitations and understand how much of the work you’re allowed to subcontract.

The Micro-Purchase Threshold: A Loophole?

But there’s a twist—a sort of hidden loophole in this process. While subcontracting limitations are strict, they do not apply to contracts that fall under the Micro-Purchase Threshold. At the time of this writing, that threshold is $10,000.

What does this mean for you? For purchases below this threshold, the government is not mandated to follow the same strict rules that apply to larger contracts. Subcontracting limitations don’t apply here, allowing you more flexibility. You’re essentially free to subcontract the work as you see fit.

The purpose of these procedures is to streamline the procurement process for low-value purchases, reducing the administrative burden on both the government and contractors. Because of this, many of the more complex requirements found in the FAR, including the limitations on subcontracting, do not apply to micro-purchases. This gives contractors more leeway in handling these small contracts, including the extent to which they can subcontract.

In Conclusion

While the idea of subcontracting all your work might seem appealing, federal contracting regulations impose significant limitations to prevent this. However, understanding these rules, particularly the exceptions like the Micro-Purchase Threshold, can help you navigate the system more effectively. Stay informed and make sure you’re aware of how much work you can actually subcontract—because in federal contracting, it’s not just about winning the contract; it’s about executing it within the rules.