Most small business government contractors understand the importance of complying with the Limitation on Subcontracting clause. Commonly referred to as the "50 percent rule," Federal Acquisition Regulation (FAR) 52.219-14 requires a small business offeror for a contract for services to agree that at least 50 percent of its personnel costs under the contract will be expended for employees of the small business. In a decision issued last week that upheld the termination of a small business set aside contract, The Centech Group, Inc. v. The United States and Tybrin Corporation, CAFC No. 2008-5031 (Feb. 3, 2009), the U.S. Court of Appeals for the Federal Circuit (CAFC) confirmed how critical compliance with this rule can be for small businesses and reinforced that small business offerors should affirmatively demonstrate in their proposals that their own employees will perform at least 50 percent of the work under the contract.

The case has a lengthy and complicated procedural history that is not worth repeating here. In sum, relying on an Air Force Policy Memorandum that permitted small business prime contractors to count the personnel costs of their small business subcontractors towards the 50 percent threshold, the Air Force awarded Centech a small business set aside contract even though Centech only proposed to perform 43.2 percent of the work with its own employees. Following a successful protest of the award at the Government Accountability Office (GAO), which was upheld by the U.S. Court of Federal Claims (COFC), the case was appealed to the CAFC. In affirming the decision of the COFC, the CAFC held that the Limitation on Subcontracting clause "is a material RFP term and a condition of a solicitation to which the offeror must agree in its proposal" and "a proposal that, on its face, leads an agency to the conclusion that an offeror could not and would not comply with the subcontracting limitation is technically unacceptable and may not form the basis for an award." On this basis, the CAFC held that Centech's failure to demonstrate in its proposal that it would meet the 50 percent requirement using its own employees made it ineligible for award.

This decision reinforces for small businesses the importance of complying with the Limitation on Subcontracting clause set forth at FAR 52.219-14 and, more specifically, of ensuring that their proposals affirmatively demonstrate to agencies that they will comply.