Published 2026 | TIKC NewsWire
It feels natural to keep work in the family. You need a subcontractor, and your spouse owns a qualified firm, or your other company can do it, or a trusted affiliate is right there. On commercial work that is just convenience. On government work, buying from a company you or your insiders control is a related-party transaction, and it sits on a fault line between smart efficiency and self-dealing. Handled openly and fairly, it can be fine. Handled quietly, it inflates costs, defeats competition, and creates a conflict of interest that can unravel a contract.
What a related-party transaction is
A related-party transaction is any deal between your company and a person or entity connected to it: an owner, an executive, a family member, a sister company, or an affiliate under common control. In government contracting these raise three immediate concerns. Is the price fair, or inflated because nobody negotiated at arm’s length? Did the relationship, rather than merit, decide the award? And when you bill those costs to the government, are you passing along a markup the relationship created? Each concern turns a routine purchase into a compliance question.
The cost-and-pricing problem
The government generally expects that costs you bill are reasonable and reflect arm’s-length dealing. When you buy from a related party, that assumption breaks, so the rules often require you to treat the transaction specially, frequently allowing only the actual cost to the related entity rather than a marked-up price. Bill the inflated intercompany price as if it were an independent vendor’s, and you have overcharged the government. This is close kin to cost mischarging, and it is exactly the sort of thing an auditor is trained to unwind. The relationship you did not disclose becomes the finding.
The conflict and the kickback line
Self-dealing is a conflict of interest in its purest form: the person choosing the subcontractor benefits personally from the choice. That is the same hidden-interest problem your personal conflict of interest controls exist to catch. And if value flows back to the decision-maker for steering the work, say a quiet payment or an ownership cut, you have crossed from a disclosure problem into kickback territory. The direction of the money and the honesty of the disclosure are what separate a legitimate related-party deal from a crime.
The eligibility trap
There is one more danger small businesses miss. Routing work to affiliated firms can trigger SBA affiliation, where the government combines your firm with its related entities for size purposes and finds you are not actually small. So a cozy intercompany arrangement can cost you cost-allowability, invite a conflict finding, and strip your small-business eligibility, all at once. The convenience is rarely worth the stack of risks.
What to do now
- Map your related parties. Know which potential subcontractors are owned or controlled by your owners, executives, family, or affiliates.
- Disclose the relationship. Tell the contracting officer about related-party arrangements rather than hiding the connection.
- Bill at actual cost. Follow the cost rules for related parties, generally charging the related entity’s real cost, not a markup.
- Compete and document. Where possible, test the price against the market and keep records showing the deal was fair.
- Watch affiliation. Consider whether intercompany work could combine your size with affiliates and cost you eligibility.
Keeping work in the family is not forbidden, but on government contracts it has to be done in the open, at a fair price, with the relationship on the record. Disclose it, price it honestly, and document it, and a related-party deal stays a convenience instead of becoming a case. Brick by brick.
FAQ
What is a related-party transaction?
A deal between your company and a connected person or entity, such as an owner, executive, family member, sister company, or affiliate under common control.
Can I subcontract to a company I or my family own?
Sometimes, but only if you disclose the relationship, follow the special cost rules that often limit you to the related entity’s actual cost, and can show the arrangement is fair.
When does it become a kickback?
When value flows back to the person who steered the work, such as a payment or ownership benefit for choosing the related firm, the self-dealing crosses into kickback territory.
How can related-party deals affect my size status?
Work routed among affiliated firms can trigger SBA affiliation, combining your company with its related entities for size purposes and potentially making you other than small.
Sources
Federal Acquisition Regulation. (2026). Subpart 31.205-26, Material Costs, and the treatment of transactions between related parties.
U.S. Small Business Administration. (2026). Affiliation principles, 13 CFR 121.103.
This article is general information, not legal advice.
About the Author
Melanie Patterson
Founder and CEO of Team Integrity Knowledge Center and creator of GovCon iSource. Former nurse turned entrepreneur with over 10 years guiding small, women-owned, and minority-owned businesses to over $10 million in government awards. Build, grow, scale, brick by brick. Contact
