Governing rules and responsibilities

Small businesses must comply with regulations that govern the government contracting process.


Business regulations for federal contracting

Regulations dealing with government contracting programs for small businesses are outlined in the Title 13 Part 125 of the Code of Federal Regulations (CFR). The government's purchasing process is governed by the Federal Acquisition Regulation (FAR). Some government agencies are authorized to have their own supplement to the FAR.

As a government contractor, you also must comply with labor standards statutes (Service Contract Act, Contract Work Hours, Safety Standards Act, and more), as well as other statutes, unless the contract states that a particular statute isn’t applicable.

You should understand the contract provisions protecting the integrity of the government procurement process. These provisions include the "officials not to benefit" clause, the "anti-kickback" provisions, organizational conflict of interest provisions, "gratuities" clause, and more. Look for these clauses in any contract the government provides.

Limitations on subcontracting

Under set-aside award conditions, small business prime contractors are required to perform minimum levels of work on a government contract.

These limitations ensure that otherwise ineligible businesses don’t use small or disadvantaged businesses merely as vehicles to access set-aside contracts.

The limitations apply to contract set-asides for small businesses when the contract amount exceeds $150,000, and all other set-aside contracts under the 8(a), HUBZone, service-disabled veteran-owned, or women-owned small business programs.

  • Service contracts: The small business prime contractor must provide at least 50% of the contract cost for personnel.
  • Supply contracts: The small business prime contractor must perform work for at least 50% of the cost of manufacturing the supplies, not including the cost of materials, unless the business qualifies as a non-manufacturer.
  • General construction contracts: The small business prime contractor must perform at least 15% of the cost of the contract with its own employees, not including the cost of materials.
  • Specialty construction contracts: The small business prime contractor must perform at least 25% of the cost of the contract with its own employees, not including the cost of materials.
  • Under the HUBZone, women’s contracting, or disabled veterans’ programs, the small business prime contractor can utilize similarly situated subcontractors to meet these performance requirements.
  • Under the HUBZone program, there are higher performance requirements for construction contracts.

The prime contractor's limitations on subcontracting are explained in detail in 13 CFR 125.6.

Non-manufacturer rule

Typically, a contractor supplying goods to the government is required to perform at least 50% of the cost of manufacturing those goods. The non-manufacturer rule is an exception to that requirement. Simply put, it allows a small business to supply products it did not manufacture — as long as those products come from another small business.

SBA may waive the non-manufacturer rule if it determines there are no small business manufacturers available to supply a product. To do this, the contracting officer must apply for a non-manufacturer rule waiver.

The regulations that govern the non-manufacturer rule are outlined in 13 CFR 121.406.

Important elements of a government contract

Government contracts are generally similar to commercial contracts. However, there are some key differences that you need to understand.


The government has exact specifications for most of the products and services it buys. As a contractor, you must deliver the product or service as described in the specifications. If you don’t, the government may terminate your contract.

Inspection and testing

You’re responsible for controlling the quality of the products and services you deliver to the government.

The government may inspect and test your products to determine if they meet contract requirements and specifications. The government won’t accept a contractor's product unless it passes inspection. The type and extent of inspection and testing depend largely on what’s being purchased.

Contract changes

The contracting officer may change the specifications and other contract terms. The changes must be "within the general scope of the contract." You must fulfill the contract as changed by the contracting officer.

If the government changes the general nature of the contract after it's been awarded, then you're entitled to a fair adjustment in price and delivery schedule.

The contracting office may make some unilateral changes, while other changes may be bilateral requiring your agreement. The contract provides a provision for resolving disagreements under the disputes clause.


If you don’t meet your contractual obligations, the government may terminate — or cancel — the contract for default. The government may terminate a contract for default if:

  • You fail to deliver within the time specified in the contract
  • You fail to make progress so as to risk the performance of the contract
  • You fail to comply with any provisions of the contract

If your contract is terminated for default, you’re entitled to payment for any goods or services you’ve already provided. If the government still needs the items that you failed to deliver, it can get them elsewhere and, if they cost more, charge you for the excess costs.

However, before terminating a contract for default, the contracting officer must give you a chance to improve your performance or show why the contract shouldn’t be terminated.

If you can show that your performance is excusable, your contract won’t be terminated. To be excusable, a delay must be beyond your control and not caused by your fault or negligence. If your contract is terminated for default and you can prove that the government's action was improper, the termination will be treated as being done for the “convenience of the government.”

The government may terminate all or part of a contract for its convenience. Termination for convenience is not the fault of the contractor. Rather, it allows the government to cancel contracts for products or services that become obsolete or unnecessary.

The government must give you written notice of termination for convenience, but it’s not required to give advance notice. After, the government will pay you for any work you’ve already done.


Your contract will specify the government office responsible for payment and will contain invoicing instructions. The more accurate your invoices, the more quickly you’ll be paid. Under certain circumstances, if the government doesn’t pay on time, you can request interest payments.

Under fixed-price contracts, the method of payment can vary with the dollar value of the contract. For relatively small contracts with a single item of work, you’ll generally be paid in one lump sum after you deliver the product or service.

For larger contracts with many items, you can receive payments for partial deliveries. For larger fixed-price contracts and subcontracts where the first delivery is several months after the award, you may be able to receive progress payments based on costs incurred as work progresses.

Because progress payments are based on work that’s not completed, you must repay the government if you fail to complete the work. To qualify for progress payments, you must have an accounting system that can accurately identify and segregate contract costs.

A contracting officer can assign payments under a contract to a separate institution, like a financing source. This can be valuable for contractors who are trying to secure financing.

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Last updated June 27, 2024