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So, you want to be a government contractor?
Considering an entrance into the federal marketplace? Intrigued by the opportunity but intimidated by the unknowns? Sometimes it helps to start with (or return to) the basics. Through our collective years of experience helping both established and emerging contractors find their way in the federal marketplace, we’ve broken down some of the most common myths surrounding government contracting through a quick round of ‘fact or fiction.’
FACT: The U.S. government is the largest buyer of goods and services in the world.
In fiscal year 2022, the federal government spent roughly $1.1 trillion on contractual services and supplies. And while the Department of Defense (DOD) accounts for roughly half of that spending any given year, it’s not just planes, submarines and ammunition the government is purchasing. The U.S. government purchases virtually anything you can think of— medical equipment and personal protective equipment (especially post-pandemic), research and development services, information technology and related services, plus goods and services surrounding transportation, agriculture, energy and beyond. Simply put, the federal government is and continues to be the largest buyer of goods and services in the world. [1]
FICTION / FACT (it depends!): Working with the government means making sweeping changes to a company’s accounting practices.
This simple bit of wisdom reigns supreme: read your contract. Depending on your type of contract, you won’t necessarily have to upend your entire accounting structure or system. For instance, if you have a commercial item contract or a competitively awarded firm-fixed-price contract, the requirements and government audit oversight are more limited. Accounting requirements can get complicated if you have a change order issue that affects cost/price, when dealing with non-commercial or sole-source awards, or when dealing with flexibly priced contracts including cost reimbursable or time and materials arrangements. In each of those cases, you would need to consider your accounting system for things like separating direct and indirect costs, establishing an indirect rate structure to ensure that all indirect costs are allocable and so on. It’s easy to get lost in the weeds on the “what ifs” here, but the bottom line remains: just because you’re doing business with the federal government does not mean everything has to change.
There will always be compliance requirements to consider that could relate to pricing, contract management and performance, labor, reporting, cybersecurity, vendor management and other areas, but in many cases an accounting system overhaul will not be necessary. It is always necessary to read and understand your contract(s). As a federal prime contractor or subcontractor, understanding your contract is very important. Further, it’s simply good hygiene (no matter the contract type) to implement a compliance program.
FICTION (depending on your definition): Because the U.S. government is looking out for the taxpayer, there is no opportunity for reasonable profit.
It is important to recognize the government is always going to pay. No matter your contract vehicle, the U.S. government will pay their bills for the goods and services you are providing. The assurance of a stable and consistent government business partner, especially in uncertain times (the 2008-9 recession, Covid-19 disruptions, etc.) is an invaluable truth to consider.
A fair and reasonable price should be the government’s negotiation objective on commercial item contracts issued under Federal Acquisition Regulation (FAR) Part 8 or FAR Part 12. Prices can be based on those that are established in the free markets and profit typically should not be a consideration (and, in many cases, it isn’t). It is true that a prospective contractor may be required to submit data to support their commercial prices, but this will not necessarily include information related to costs or profits.
On some commercial item contracts and on other contract types, when weighing actual profit (over reliability), the question must be asked — what is reasonable? The government doesn’t want to pay an exorbitant amount of profit and, in certain contracts, there are limits to the amount of profit that can be included. However, let’s say you’re estimating on a fixed-price engagement and you think it’s going to take 10 people, with varying degrees of experience, 10 weeks to execute the statement of work. However, during the life of the contract you realize you can complete the work in a better, more efficient and ultimately cheaper manner than originally anticipated. Since the risk is on you to perform the work and deliver the expected results for the established fixed price, you may have some leeway during the execution of the contract to maximize your profits and reap the reward.
Keep in mind this does not apply to certain types of time and materials contracts or to cost reimbursable contracts which put a percentage or fee amount cap on your contract. Furthermore, for these contract types you shouldn’t expect to bake a 20% profit margin into your proposal. The key takeaway is simply this: the government will always pay their bills and you will have the opportunity to reap some sort of profit (whether you deem it to be reasonable).
FACT: The Small Business Administration (SBA) is a wealth of knowledge for companies trying to break into government contracting.
For small businesses, utilizing the SBA to enter the federal marketplace is a solid (and highly recommended!) strategy. The SBA offers a mentor-protégé program in which they team small, emerging companies up with a large government contractor to essentially hold your hand through some of the nuances of government contracting. Furthermore, the SBA offers centers for procurement assistance, subcontracting assistance, technical assistance and development assistance all to help small businesses both win contracts and graduate out of the small business realm and into the middle market (often a substantial challenge for emerging contractors). Essentially, the SBA doesn’t just help small businesses win contracts — they also prepare said businesses for graduating out of the program to become successful contractors in the general federal marketplace.
So, you still want to be a government contractor?
Great! As you may have noticed, there’s no one-size-fits-all approach to government contracting. That being said, embracing these three small steps can help ensure a smooth transition into the federal marketplace, whenever you’re ready.
- Read your contract (we can’t stress this enough!).
- Understand there are caveats galore.
- Seek out a trusted team of experienced advisors to help you navigate the challenges and maximize your opportunities.
