When your federal contract involves multiple layers of subcontractors, the markup at each level can stack up quickly. Progressive markups limitation exists to prevent cost inflation through the supply chain—essentially capping how much overhead and profit can accumulate as work passes from prime contractor to subcontractor to sub-subcontractor. This matters most on cost-reimbursement contracts where the government pays actual costs plus agreed-upon fees.
How It Works
Every contractor in the chain wants to add their overhead and profit margin. Without controls, a $100,000 subcontract could balloon significantly by the time it reaches the government's invoice. The Supply Manual establishes that contractors must monitor and limit these cumulative markups when proposing costs to departments like PSPC or DND.
In practice, you'll need to trace pricing through each tier of your supply chain. If your prime contractor adds 15% markup, and they hire a subcontractor who adds another 12%, and that subcontractor brings in a specialist with an 8% markup, you're looking at compounding percentages. The policy requires transparency in your cost proposal. You can't just present a single total figure. You must break down each layer, showing how markups accumulate and demonstrating compliance with established limits.
The government reviews these breakdowns during contract negotiation and audit. Contracting officers at departments like SSC or Treasury Board entities will scrutinize your subcontracting structure, looking for reasonableness in both the percentages charged and the justification for each tier's existence. A simple administrative subcontract shouldn't carry the same markup as specialized technical work requiring unique capabilities—and your documentation needs to reflect that distinction.
Key Considerations
- Documentation is everything. You need written agreements with subcontractors that clearly state markup percentages. Verbal arrangements or vague fee structures will get flagged during contract audit.
- Not all costs are treated equally. Material purchases typically receive different markup treatment than labor or specialized services. Make sure you understand which limitations apply to which cost categories.
- Sole-source subcontracts face extra scrutiny. If you didn't compete the subcontract, expect to provide additional justification for any markups. The government wants assurance that non-competitive pricing remains fair.
- Changes during performance matter too. If you modify your subcontracting approach mid-contract, those changes need approval. You can't quietly restructure to increase cumulative markups.
Related Terms
Allowable Costs, Cost-Reimbursement Contract, Subcontractor Management Plan, Fee Structure, Contract Audit
Sources
- Government of Canada Supply Manual - Official federal procurement policy and procedures
- Canada Buys - Procurement Portal - Federal government procurement information and opportunities
- Buy and Sell - Federal government tender opportunities
The bottom line: transparent subcontracting structures with defensible markups will save you headaches during negotiation and audit. Plan your supply chain strategy before you submit your proposal, not after questions arise.