Paid for Passing It Along: The Limit on Pass-Through Charges

Published 2026 | TIKC NewsWire

Here is a model that looks tempting when you are growing: win the contract, hand most of the actual work to a subcontractor, and add your markup on top. A little of that is normal and fair. Doing it to excess is not. The rules limit what are called excessive pass-through charges, where a contractor adds significant cost for work it is not really performing or meaningfully managing. If you are essentially a middleman billing the government a premium to forward a sub’s work, that markup can be disallowed, and in a bad case it can look like you misrepresented the value you add.

What a pass-through charge is

A pass-through charge is the markup you add on top of a subcontractor’s cost. When you genuinely manage the sub, add oversight, integration, or real value, a reasonable markup is fair. The problem is the excessive pass-through, where you add little or no value but still bill the government a meaningful premium for being in the middle. The FAR limits this, and on covered contracts you may even have to disclose when you expect to subcontract most of the work, so the government knows what it is really paying you to do.

Why the government cares

The government is willing to pay for value you actually provide, not for simply forwarding someone else’s work at a markup. When most of the effort flows to a sub and you add a fat margin for little management, the taxpayer is paying extra for a layer that did not earn it. This connects to your flow-down responsibilities, because being the prime means actually managing the work below you, not just collecting a toll. It also ties to honest labor and cost reporting, since the premium has to reflect real effort.

Add real value, and document it

The fix is not to stop subcontracting, which is normal and healthy. The fix is to make sure that when you mark up a sub’s work, you are actually earning it with management, oversight, integration, quality control, or other real contribution, and that you can show it. If you truly add little, your margin should reflect that. A clean, documented picture of what you do versus what the sub does keeps your markup defensible and keeps your cost and billing records consistent with reality.

What to do now

• Know the rule. Understand that excessive pass-through charges can be disallowed on covered contracts.
• Earn your markup. Only add a premium where you provide real management, oversight, or value.
• Disclose heavy subcontracting. Where required, tell the government when you expect to subcontract most of the work.
• Document your value. Keep a clear record of what you do versus what the sub does.
• Right-size the margin. If you add little, do not bill as if you added a lot.

Subcontracting is a strength, and bringing in the right partners is how you take on bigger work. Just make sure the government is paying you for something real, not just for standing in the middle. Earn your markup, document the value, and your role as prime stays honest and defensible. Brick by brick.

FAQ

What is an excessive pass-through charge?

A markup a contractor adds on top of a subcontractor’s cost when it provides little or no real management or value for that premium. The FAR limits it on covered contracts.

Is marking up a sub’s work allowed?

Yes, when you genuinely manage the work and add value. The problem is charging a significant premium for simply forwarding a sub’s work.

Do I have to tell the government about heavy subcontracting?

On covered contracts you may be required to disclose when you expect to subcontract most of the work, so the government knows what it is paying you to do.

How do I stay compliant?

Only mark up where you add real value, document what you do versus the sub, disclose heavy subcontracting where required, and right-size your margin to your actual effort.

Sources

Federal Acquisition Regulation. (2026). FAR 52.215-23 and 15.404-4, Limitations on Pass-Through Charges.

U.S. Government Accountability Office. (2026). Guidance on pass-through charges and added value in subcontracting.

This article is general information, not legal advice.