The federal government is by all means the world’s largest consumer of goods and services, and government contracts are how it does business with private entities. The federal market is lucrative, and businesses that sell to federal agencies enjoy steady revenue streams among a host of other benefits.
While it is in most ways similar to a regular private customer, there are key differences in how the federal government conducts its procurement. This article will outline everything you need to know about government contracts before venturing into the federal market.
Introduction to government contracts
A government contract is a formal agreement that outlines business arrangements between the government and a private entity to supply products and/or services. The government consists of various agencies that perform various functions.
Federal agencies act like corporations, and each has its own way of procuring goods and services. Some prefer to bundle their requirements and award a contract to a business which then subcontracts other businesses. Others prefer to break up their federal contracts and award them to different businesses
Who is eligible to become a government contractor?
Any duly registered business firm can become a federal contract. However, before you can bid for a government contract, you need to have a Unique Entity Identifier (UEI), which is a unique 12-character, alpha-numeric code.
Tip: Federal agencies can reach out to suitable suppliers in various situations, such as for micro purchases under $3500. When registering your business, use the correct NAICS codes to classify your business to boost the chances that your business is found by federal agencies.
Some government contracts are reserved for competitive bidding by special groups of businesses. The Competition In Contracting Act was established in 1984 by Congress to promote maximum competitiveness that would help the government save money and promote disadvantaged businesses. The Act allows for three levels of competition:
- Full and Open Competition (FAR Part 6.1) – allows all qualified sources to submit sealed bids or proposals
- Full and Open Competition After Exclusion of Sources (FAR Subpart 6.2) – allows the federal government in certain circumstances to limit competition to subgroups, such as small businesses.
- Other Than Full and Open Competition (FAR Subpart 6.3) – used in situations where competition is not possible, or the government has objects of higher value than competition.
Small Businesses Set-Asides
To level the playing field for small businesses against corporation giants that have been contracting for the government for years, in 1988, Congress laid out the government’s small business contracting goals. These goals ensure that the government directs a certain percentage of spending dollars towards small and disadvantaged businesses to promote them as agents of economic growth.
As a result, contracts less than or equal to $250,000 are reserved for small and disadvantaged businesses which include:
- Women-owned small business
- Small disadvantaged business
- Historically underutilized business zones (HUBZone)
- Small disadvantaged business
- Veteran-owned and service-disabled veteran-owned businesses
To qualify for these set-asides, a business has to be certified as a small business. To find out if your business qualifies, use the SBA standard sizes tool.
General Administration Services Multiple Awards Schedule
Another way of accessing government contracts is to join the GSA MAS, which offers over $39 billion in contracts every year.
The General Services Administration, in an effort to streamline the procurement across all federal agencies, enters in long term, governmentwide contracts with a pool of qualified vendors. This contract is known as the Federal Supply Schedule and the Multiple Awards Schedule, and allows the government to access products at reasonable prices.
To qualify for award of government contracts in the MAS, a business must provide at least 2 years worth of financial statements as well as show measurable past performance in executing federal contracts.
Solicitations, types of contracts & awards
When the federal government needs to procure something, it publishes a “solicitation notice” which outlines its needs and methods of awarding the contract. There are different types of solicitations made for different purposes and include:
- Request for proposals (RFP) – communicates the requirements and requests for proposals.
- Request for quotes (RFQ) – used when simplified acquisition procedures are sufficient, and requests for quotes on costs and related information from suppliers
- invitation for bids (IFB) – awarded without negotiations to the lowest qualified bidder.
- Request for information (RFI) – used to research the price, delivery and other information for planning purposes
There are two types of contracts that the federal government enters into:
Fixed-price contracts
Most government contracts have fixed prices, meaning that the contractor is never paid more than the contract amount, and these types of contracts are used by all federal agencies. A fixed-price government contract places maximum responsibility for losses and profits on the contractor.
However, some fixed-price government contracts may allow for an economic adjustment when conditions change such as increase or decrease in market prices that were previously agreed on in the contract, or when the labor market prices change due to conditions beyond the contractor’s control. Firm-fixed price contracts are not adjustable on the basis of the contractor’s costs.
Fixed-price government contracts can be of any fo the following types:
- Fixed-price contracts with economic price adjustment – allows the adjustment of the price based on changes in market conditions.
- Fixed-price incentive contracts – allows the profit to be adjusted based on a comparison on negotiated and target costs
- Fixed-price contracts with prospective price redetermination – allows the price to be redetermined at set intervals for the remainder of the contract.
- FixedFixed-ceiling-price contracts with retroactive price redetermination – retroactive redetermination of the price occurs after the contract is completed, and is mostly used for research and development contracts.
Cost Reimbursement
In some situations, it is nearly impossible to know what will be the final cost. To cover these scenarios, a federal agency may assume some risk towards the cost of completing a project, and issue a cost-reimbursement contract.
A cost-reimbursement contract is a government contract in which a federal contractor undertakes to do some work and the federal agency reimburses them for the expenses incurred, plus an additional amount to help the contractor make a profit. The cost of the work is estimated beforehand, and the agency sets a budget for the project. The contractor cannot exceed the maximum budget set by the agency.
Cost-reimbursement government contracts can be of any of the following types:
- Cost contracts – the contractor absorbs all the costs of a contract and is only reimbursed the cost with no additional payment.
- Cost-Sharing Contracts – the contractor receives no additional fee other than reimbursement of a portion of the costs, and relies on compensating benefits
- Cost-plus-incentive-fee contracts – allows the initially negotiated fee to be adjusted based on performance in terms of actual versus target cost.
- Cost-plus-award-fee contracts – based on judgemental evaluation, this contract allows the government to pay a certain award amount to the contractor as motivation.
- Cost-plus-fixed-fee contracts – allows for the contractor to be paid a fixed fee above the cost incurred that was agreed upon at the inception of the contract
There are two types of contract awards:
- Single award
- Multiple award
Federal Contracting Rules and Procedures
The federal government spends tax dollars, and as a necessity, it has elaborate rules and procedures that guide how it procures goods and services. These rules and procedures are aimed at making the process open, fair, and competitive, to ensure that the contracts are legal, and that the federal government gets what it pays for.
The Federal Acquisition Regulation (The FAR)
The main regulation that every aspiring federal contractor should have a look at is the Federal Acquisition Regulation. Also known as the FAR, it acts as a rulebook and is regarded by many as the “bible” of government contracting. It is composed of 53 parts, each dealing with a different aspect of the process, and is continually being revised and improved.
Supplements to the FAR
In addition to the FAR, government agencies create their own adaptations to supplement it with their own regulations, known as Supplements. Example of these are:
- Defense Federal Acquisition Regulation Supplement (DFARS)
- General Services Acquisition Regulation Supplement (GSARS)
- National Aeronautics Space Administration FAR Supplement (NASFARS)
In general, these FARS commonly contain specifications/rules for:
- Sourcing rules eg. your company cannot manufacturer its own materials
- Minimum amounts you must spend on contractual work or materials
- Size standards – determine who qualifies as a small business; varies by industry
- Legal requirements eg. the Buy American Act
- Subcontracting rules
How to become a government contractor
The key to getting a government contract is learning how the agencies that use your products or services usually go about their procurement, and getting your business known to them.
→ Research the federal market
Do thorough market research about the products and services you want to provide to identify agencies where you stand greater chances of landing a contract.
The Federal Procurement Data System (FPDS) – All contract activities worth more than $10,000 must be reported by agencies to the Federal Procurement Data System (FPDS). This tool will help you identify who is buying your type of product, how much they are buying, and your competitors. Additionally, the FPDS shows you the contracts that are about to expire and become opportunities.
→ Market your business
Registering a government contractor does not guarantee that you’ll get any business. Thus, marketing your business is crucial to getting yourself in front of potential buyer agencies. Here are a few tips you can follow:
- Maintain an updated website – A website with current information about what you do is crucial, as contracting officers often refer to business websites to find out if the business will meet their needs. Ensure to promote the strengths that set you aside from other businesses with offerings.
- Make connections – find potential customers by attending industry days and other federal events.
Pros & Cons of becoming a government contractor
Pros
- Steady stream of revenue – with an annual budget in excess of $600 billion, the government pays a good price for what it buys, promising good returns for businesses. Additionally, while it’s nice to know that the government will never run out of business, it’s even better that a government contract lasts between one and three years, promising a steady flow of revenue.
- Marketing opportunities and business connections – executing a government contract comes with the possibility of exposure to the public, which would hugely supplement a company’s marketing effort and build it a positive image in the private market.
Cons
- Extensive learning curve – learning the extensive Federal Acquisition Regulations and other policies that govern government contracts can be a daunting task. Luckily, one only needs to start with the specific sections that apply to their industry
- Sovereignty of the government – the government is a sovereign entity, meaning that it can revise or terminate a contract at will
- Bureaucracy and red-tape – dealing with government employees has been said to be an unpleasant experience, as they can be disrespectful and rude. Additionally, the complexity of administration procedures and rules increases the blockades that a business faces when seeking to do business with the government.
Conclusion
There are promising opportunities for businesses wishing to become government contractors. While the process of getting there is undoubtedly not simplistic, being armed with the right information can help you meet the requirements and pinpoint where you should be looking for opportunities.
