Pass-Through Risk vs. True Partnership
Pass-Through Risk: Staying Compliant with Subcontracting Rules
Teaming with SDVOSB or DVBE-certified firms can be a powerful way to win contracts — but only if it’s done correctly. Too often, businesses get into trouble by setting up “pass-through” relationships that don’t meet federal or state requirements.
Here’s how to avoid risk and build true, compliant partnerships that stand up under scrutiny.
1. What Is a “Pass-Through”?
A pass-through occurs when a certified small business (like an SDVOSB or DVBE) is listed on a proposal but doesn’t actually perform a commercially useful function. Instead, the prime does nearly all the work and uses the certified firm only to meet requirements.
Risk: This can lead to disqualification, audits, or even suspension from contracting programs.
Exceptions: There are circumstances where this is a legitimate business relationship, SDVOSB and DVBE companies that act as a reseller of products or software or routinely subcontract certain services as a normal operation of their business, for example.
2. Federal Rules: Limitations on Subcontracting
SDVOSB Contracts: The SBA requires that SDVOSBs perform a minimum percentage of the work themselves (generally 50% for services).
FAR Compliance: Agencies may audit workshare to ensure subcontracting limits are respected.
3. State Rules: California DVBE “Commercially Useful Function”
Definition: A DVBE must perform a role that adds value beyond simply acting as a shell.
Examples of compliance: Project administration, staffing support, reporting, specialized services.
Risk: If a DVBE is just “on paper,” agencies can reject the bid and bar the prime from future opportunities.
4. Signs of a True Partnership
Clearly defined scope of work for each partner.
Revenue split aligned with actual labor and deliverables.
Joint proposal development, not just signature approval.
Ongoing role for the SDVOSB or DVBE during contract execution.
5. How to Stay Safe and Compliant
Document all roles and responsibilities in the teaming agreement.
Ensure certified firms contribute skills or services essential to performance.
Avoid agreements where the small business has no staff or deliverables.
Key Points
Government agencies value partnerships — but they also scrutinize them closely. Building a true partnership with SDVOSB or DVBE-certified firms doesn’t just keep you compliant; it makes your proposal stronger and more competitive.
👉 Learn how to structure teaming-friendly proposals in Your First Government Contract.
If you are a contractor in need of an SDVOSB or DVBE contracting partner, get in touch with us today.
