The Real Scoop on Government Contracting
IN THIS ARTICLE
Procurement in government, as well as in industry, is going through a tremendous change as a result of globalization, technological breakthroughs, and the surge in outsourcing services to outside vendors (Giallourakis, 2008, p. xiii, Preface). The contracting world is growing by leaps and bounds, with no signs of letting up in the near future. To accentuate this fact, the Defense Department is beginning the process of increasing its contracting workforce by adding 20,000 new employees by 2015, including converting approximately 10,000 contractor support positions to full-time government slots. The government is using computerized systems to record purchasing transactions across its agencies, leading to more centralized purchasing (government-wide acquisition contracts, or GWACs), especially of commercial items, and cost cutting. Hence, the urgent need for procurement managers to manage a worldwide network of reliable supplier relationships and be thoroughly knowledgeable not only of what is to be purchased but also of the processes necessary to manufacture a satisfactory product (Giallourakis, 2008, pp. xiii-xiv).
This article introduces readers to the big picture and background on government contracting, the inner workings of the acquisition process, specific benefits/problems, recent breakthroughs/solutions and revelations for the future.
Introduction to Federal Contracting: How It Works
The federal government initiates more than 450,000 contracts yearly of which two-thirds are granted to contractors outside the Washington, D.C., area. The best way on getting in on these deals is on who you know, but, most importantly, on finding out and understanding how the federal government does business. The government is by far and wide the biggest consumer in the world. No other nation or corporation can match its purchasing power and along with this power comes the authority to tell other businesses what to buy, where to buy & from whom it will conduct purchases (Stanberry, 2009, p. 4).
The government operates under what is known as a monopsonistic”—one who operates with only one buyer and many sellers. As a result of this sovereignty, the government possesses certain unusual powers and immunities that differ significantly from your typical buyers. Congressional mandates, rather than state laws, control federal policy. These differences, for example, government contracting vs. commercial/private contracting include: 1) Federal policy sets the standard for formal competition criteria for procurement or purchases vs. a company determining competition rules and regulations; 2) Congress grants all appropriate funding vs. funding from many sources for companies; 3) Laws, directives, policies and procedural regulations are combined to make up procurement actions vs. a company defines the procurement actions within legal barriers (Stanberry, 2009, p. 6).
Contracting can be a great boon for business once you get your foot in the door, but, it can be very cumbersome. Unlike dealing with your typical business, doing business with the government requires the patience of a saint; one must patiently go through the government procurement process which makes for a very slow and complex sale. But, if you are willing to learn the system and be patient and assertive, dealing with the federal government can be a great and steady source of income for both new and established businesses (Stanberry, 2009, p.7).
According to Ellen McCarthy, Washington area firms earned an estimated $52.6 billion from federal contracts in 2004 alone—a figure that has prompted the formation of countless small start-ups and lured many private companies to try and win federal contracts. But, as I stated before, selling/doing business with the government is not an easy task, and even veteran companies can be surprised by a market that operates with its own language and rules, where business is conducted more by committee than by a handshake-type deal (The Washington Post—February, 2006). “It’s not a market for the faint of heart. If they’re looking for a quick hit, it’s not going to happen,” said David M. Nadler, a government contracting lawyer with Dickstein Shapiro Morin & Oshinsky LLP. The government “moves slowly, is risk adverse, it’s financially restrained, and there are watchdog groups watching the watchdogs.” (Stanberry, 2009, p. 8).
During FY 2005, the federal government purchased over $390 billion worth of supplies and services. The following table shows the major movers and shakers in federal procurement (Stanberry, 2009, pp.10-11):
The federal government is a huge place, with many agencies across the nation. You hear it all the time on the news: The government is too big and bureaucratic. Both Republicans and Democratics have over the years been vying for a smaller bureaucracy, with all but the most essential work functions being outsourced to the private industry. During Clinton’s administration, there was talk of making the government smaller; recently, there is more and more talk of doing away with government positions. Current projections estimate that the number of nonpostal governmental positions will shrink from 1.8 million to 500,000 within the next dozen years. But these jobs are being done away with; they are just outsourcing them out to the private sector. There is a strong belief that the competitive forces of the commercial industry will produce better products and services at a cheaper price. Having worked for the federal government as both an employer and a contractor, I have to say it is a prime time to look for contracting opportunities with the federal government; there is always work to be had if you are persistent and watchful.
Government Rules & Regulations
Probably one of the biggest obstacles of doing business with the federal government is finding your way around all the rules and regulations. From the outside, it appears that the government wants you to fail in obtaining their business, but nothing could be further from the truth. Companies are expected to know and understand the technical and administrative requirements of a signed contract. In short, the government will not rescue a company from the consequences of a bad business decision. Far too many contractors have seen project shrink or contracts simply disappear because they overlooked, misunderstood or just plain ignored the appropriate rules and regulations (Stanberry, 2009, p. 18).
The bottom line is that the more you research, read and understand the rules of the game, the more successful you will be in conducting business with the federal government.
Let us take a closer look at the laws and regulations that will affect you as you conduct business with the government. Recent laws include the Federal Acquisition Streamlining Act of 1994 (FASA) which was revolutionary in its impact on the federal acquisition process. It repealed or significantly modified more than 225 statutes and pushed the contracting process into the 21st century. The act also simplified the procurement process, reduced paperwork and transformed the simplified acquisition process to technology. Before the law could be fully implemented, the Federal Acquisition Reform Act of 1996 (FARA, also known as the Clinger-Cohen Act) was passed to correct some mistakes in the earlier legislation and to make more changes. These two laws are important events because of the major changes they made in the way the government conducts its business (DiGiacomo & Kleckner, 2005, p. 30).
The U.S. Constitution grants the federal government the authority to conduct business within both the local community with private citizens and commercial organizations. Congress is responsible for passing the legislation that controls federal contracting. More than 4,000 of these laws are currently in effect. In addition, there are laws pending in Congress that could affect how the government conducts its contracting affairs in the future. Congress is also responsible for drafting and passing laws and statutes that establish the various federal agencies along with the specific programs run by these very agencies. They are called “authorization acts.” Congress obtains authority to do these things from article 1, section, of the Constitution—General Powers of Congress (Stanberry, 2009, p. 19).
Congress supports federal agencies and their programs by putting into place an appropriations act. This, in turn, provides the funding needed for each agency to function. Appropriations acts can be done for one year, multiple years or unrestricted. Usually, the government prefers multi-year appropriations—they tend to save a lot of money for both the government and contractors alike. Once the funding is approved by Congress, they are available for use (Stanberry, 2009, p. 20-21).
Regarding the budget process, it can be a long and tortuous process. The government conducts their business according to fiscal years, which run from October 1 to September 30, and they are required at this time to submit their budgets for the upcoming year. Preparing these budgets can take up to several years to be completed by federal agencies. Once this portion has been done, it is brought before the President through the Office of Management and Budget (OMB). Hearings are held and once all parties are in agreement, OMB passes it on to Congress. From there, it is forwarded onto the Congressional Budget Office and the individual budget committees for in-depth review. Hearings are held at this point and, if all parties are in agreement, a draft legislation is moved onto both the House and the Senate for debate and approval. If an agreement is not reached by either before the start of the fiscal year, business operations are in danger of being shut down due to lack of funding. Nothing can be done at this point until the approval process has been completed. When I was on contract with the D.C. Government, I saw this happen first-hand and it was not a pretty sight. Some projects had to be put on hold & contractors went unpaid – this went on for a period of time. Eventually, all was worked out to the department’s satisfaction, but, in the meantime, there were a lot of unhappy people onboard.
No discussion of government rules and regulations is complete without bring up the one and only Federal Acquisition Regulation, simply referred to as “the FAR.” The FAR had its beginnings in the Armed Services Procurement Regulation established in 1947 and is considered “the Bible” for federal government contracting. It contains all the rules governing the contracting process as well as all the forms and clauses used in contracts—the FAR is constantly being changed to make sure the information within is always up-to-date. The FAR is divided into 53 parts, each part dealing with a separate aspect of the acquisition process. The first six parts deal with basic government acquisition matters and the next six parts deal with specific aspects of acquisition planning. The remainder of the FAR states other topics such as simplified acquisition threshold (formerly known as small purchases), labor laws, contract administration and other clauses (DiGiacomo & Kleckner, 2005, p. 33).
Once you have gained a working knowledge of the federal rules and regulations, you can play the contracting game with greater confidence and be both successful and profitable (DiGiacomo & Kleckner, 2005, p. 34).
The Key Players & Different Types of Contracts
A federal contract is a mutual agreement with one or more parties involving a tendering of an offer, with terms and conditions, and serves as a proof of obligation. In contracts, the offeror is the party who makes the offer and looks for acceptance from the offeree. The offer is placed on the table, via electronic commerce unless otherwise stated, then accepted by the buyer or a counteroffer is made, and this process is continued until the appropriate parties are “in acceptance” of the revised offer (Giallourakis, 2008, p. 47). The final executed document is the “contract.”
Government contracts are solicited and awarded on behalf of the United States, the principal, by specially trained agents, who are known as contracting officers. Only the contracting officer has the explicit authority to commit the United States government to a third party. The contracting officer is the agent of the government with the authority to enter into, administer, end contracts and make determinations of findings. A single contracting officer may be responsible for any and all of the above-mentioned duties. They also have the power to delegate certain functions, but not responsibility, to other officials in the contracting office. This obligation goes to contract specialists, contracting officer’s representatives (COR), the contracting officer’s technical representatives (COTR), the administrative contracting officers (ACO), and others (Giallourakis, 2008, pp.48-49).
Delegation of this type should be put in writing, and a contractor informed of such and provided a copy of the instructions. Contractors can get in trouble by making changes to statements of work, the scope of work to be performed, quality control, delivery dates, and other matters that would affect/change the original terms of the contract. For compensation to be made properly, contractors must be in direct contact with the contracting officer and the government official in a particular area or specialty regarding the product or services being provided (Giallourakis, 2008, p. 49). With the government as the buyer, a contractor should have total faith that they will be fully compensated for the services provided. One need not worry about bankruptcy, a bounced check or someone disappearing on them. Business dealing with the government may be slow and tedious, but, nevertheless, you will be paid at the end of the day (Giallourakis, 2008, p. 51).
The type of contract used is determined by the circumstances of the acquisition deal and the extent of risk the government wishes to accept regarding cost. The type of contract used will have a significant effect on the way the contract is priced & reflect the risk involved in contract performance (DiGiacomo & Kleckner, 2005, p. 93). There are three basic types of contracts:
1. Fixed-price – these types of contracts are used primarily by small businesses. The final price is determined before any work is done. There are different types of fixed-price contracts: firm fixed-price, fixed-price with economic price adjustment, fixed-price incentive and firm fixed-price, level-of-effort.
2. Cost-reimbursement – these types of contracts provide for final price to be stated either when the work is completed or at some specified point during contract performance. The risk for this contract type usually falls on the government. Different types of cost-reimbursement contracts: cost, cost-sharing, cost-plus-fixed-fee, cost-plus-incentive-fee and cost-plus-award fee.
3. Special situation – These special contract types include the following: time and material, labor hour, definite-quantity and requirements. (DiGiacomo & Kleckner, 2005, pp. 93-95).
The Importance of Small Businesses to Federal Contracting
Probably one of the most important and complex social policy in government procurement is the one which favors small businesses, primarily because a lot of new jobs and ideas derive and are generated from small businesses. The Small Business Act of 1953 states that a fair portion of government contracting be placed with small businesses. The Small Business Administration, commonly known as “The SBA”, was born from this act to aid, assist, counsel and protect as much as possible the interests of small businesses (Giallourakis, 2008, p. 146).
Before a small business conducts any business with the government, it first has to be determined whether or not the company is eligible to participate in any small business program. If a company has been determined to be a small business and is qualified, it may be afforded the opportunity to participate in one or more of the following programs:
1. Competition among one’s own peers for set-aside acquisitions by firms that are similarly classified including small businesses, Historically Underutilized Business Zone (HUBZone), small disadvantaged business (SDB), women-owned small business (WOSB), veteran-owned small business, and service-disabled veteran-owned small business. This program is called the Small Business Set-Aside Program, which is one of the oldest, if not the original, program created to help small businesses win government contracts (DiGiacomo & Kleckner, 2005, p. 200; Giallourakis, 2008, 147).
2. The competency program which allows you to call on the SBA for help and assistance.
3. Becoming a part of the 8(a) Program which means to obtain this type of contract, a small business must be performing at least a portion of the contract (DiGiacomo & Kleckner, 2005, p. 201).
4) The Subcontracting Assistance Program
5) The Small Disadvantaged Business Program
6) Sole-source awards to HUBZone small business and Service-Disabled Veteran-Owned Small Business (SDVOSB) concerns (Giallourakis, 2008, p. 148).
There are plenty of other sources to check out that are in place to help out small business owners. The Procurement Technical Assistance Centers (PTAC), located in most states (www.dla.mil/db/procurem.htm) will provide most services at little to no charge. However, it is important to first do your homework by developing a preliminary business plan (Giallourakis, 2008, pp. 165-166).
It would be in the best interest of every small business who wishes to conduct business with the government to first check out their local SBA office or procurement center representative and agency small business specialists. They are most proficient at providing assistance to how to bid and win government contracts, team with a major contractor as a subcontractor to get your foot in the door, or be included in a joint venture with a more established company (Giallourakis, 2008, p. 166).
Specific Benefits/Problems of Contracting
I believe one of the biggest problems we have in respect to federal contracting is the overspending of the federal budget and the financial impact it is having on contracting. The total deficit for 2009 is fast approaching one trillion dollars with only four months to go before the fiscal year ends. How does this affect the spending for government spending? One Internet source stated that it will mean that the monies in the discretionary side will begin to shrink which also includes defense spending. There will be less funding available for contracts, which will affect the purchasing of supplies such as airplanes, IT support or office pens. More companies will be bidding less work which means the price demand will drop down affecting the salaries and benefits of contractors. President Obama stated before he came into office that he wished to have less contractors and more federal employees. That wish is now becoming a reality as the Obama Administration has committed on paper to hiring more government employees at the expense of contractors making even less funding available for the type of specialized services contractors provide (BNET Government, 6, 2009 June 11).
If the worst were to happen and the government runs out of money either not being able to raise revenue or to borrow, the contracting business will start to dry up. This situation will no bode well and, to be honest, this is as bad a situation as you can imagine and will represent a major depression. Once the economy revitalizes, there may be some stability in the federal budget which will affect the contracting business. This would also affect the defense budget – it is like a domino effect (BNET Government, 6, 2009 June 11).
Another major issue in contracting deals with the acquisition workforce. According to an online article, Rep. Chris Carney (D-Pa.) said today the Homeland Security Department’s problems with contracts stem from its “overlooked and underdeveloped” acquisition workforce: “Independent government investigations have told the tale, as has testimony before Congress…there simply aren’t enough personnel in the DHS acquisitions shop,” said Carney, chairman of the Homeland Security Committee’s Management, Investigations and Oversight Subcommittee (FederalComputer Week, 17 Sept 2008).
But, according to the same article, there appears to be some solutions on the horizon. According to Richard Gunderson, deputy chief procurement officer at DHS, officials are pushing to provide additional training for employees, certifications and the funding necessary for this type of training. Gunderson also said DHS is focusing on attracting acquisition staff members through internship programs and then working to retain those people. In fiscal 2004, the department's Office of Chief Procurement Officer had four employees while the entire department had 603 contracting officers. By the end of fiscal 2005, that office had 30 staff members handling policy and oversight, and DHS now has more than 1,000 contract specialists, he said (FederalComputer Week, 17 Sept 2008). One of the most crucial positions is those of contracting officers – they are the explicit authority in dealing with contracts. However, according to Gunderson, they are difficult to find. “The great demand far exceeds the number of qualified midlevel and senior-level contracting professionals,” he said. Although the department is hunting employees, James Taylor, deputy inspector general at DHS, said recent budget increases have allowed DHS to fill vacant acquisition jobs. In April, the Government Accountability Office reported that DHS has approximately 61 percent of the necessary acquisition staff members in place. That leaves more than a third of the jobs unfilled, he said (FederalComputerWeek, 17 Sept 2008).
The Future of Government Contracting
Federal procurement since World War II has been constantly evolving over the years into a world-class sourcing and contract administration system. By standardizing and streamlining the acquisition processes, productivity has improved over time. This process could be labeled a “contract-centric” approach to procurement. Remember that the acquisition procedures are both regulation and compliance-driven (Giallourakis, 2008, p. xxvii).
Also, with the economy the way it is now, people are looking for new ways to generate income. What better place to start than the federal government? The government is one source of business that never slows, no matter what the economy does. It may pause for a minute or two, but will never completely go out of business. If one area is temporarily shut down due to lack of funding, there will always be another door open elsewhere in the government. Many people hold back from federal contracting because it can be a difficult process, with the endless paperwork, cumbersome rules and regulations and long waiting periods. But, for the persistent few and the economy heading into what could be a prolonged recession, the federal government is a good place to start (JSOnline, 8 Oct 2008).
No procurement system is perfect – there is and always will be room for growth. Still, the procurement system in place in the United States is the best overall in the world, despite its many shortcomings. From a personal standpoint, I am a former federal government employee and, until recently, was a government contractor. I have been on both sides of the coin and, if I had to choose a preference, I go with government contracting. For those who love flexibility, independence and change, the world of contracting is a wonderful place.
The premise of this article was to enlighten the readers with a heightened knowledge of government contracting, the ins and outs of the process as well as the pros and cons of doing business with the federal government. Also, I hope to have given you a better understanding of what goes on behind the scenes, those things that people may have heard rumors about, but not having a real sense of what exactly is involved or how complicated the whole process can be, especially for those trying to get a foot in the door.
One may ask why commit valuable resources to chase government opportunities whose profit margin is historically low? The answer is how hungry you are for work and the project risk involved. More important, commercialization and global marketing may make it worthwhile, as, for example, Raytheon found out by selling its U.S. air defense systems to countries in the Middle East (Giallourakis, p. xxviii).
No one is saying it’s a piece of cake to win a government contract, especially for a start-up without venture capital, but, as one saying goes, “Nothing beats a failure but a try.” You have to start somewhere. Why not the federal government? That is our goal. All we need is our first slice of the federal procurement pie. Let’s get started! (Giallourakis, p. xxviii).
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Giallourakis, B.C. (2008). Contracting with Uncle Sam: The Essential Guide for Federal Buyers and Sellers. Maryland: Naval Institute Press.
Johnson-Elie, T. “Government contracts help businesses in unstable economy.” JSOnline, 8 Oct 2008 , http://www.jsonline.com/business/32441779.html
Potter, M. “Federal Money Problems Piling Up & Will Affect Contracting.” BNET Government. Retrieved June 21, 2009, World Wide Web,http://industry.bnet.com/government/10002069/federal-money-problems-piling-up
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Stanberry, S.A. (2009). Federal Contracting Made Easy, 3rd Edition. Virginia: Management Concepts, Inc.
Weigelt, M. “Acquisition Workforce called underdeveloped.” FederalComputer Week, 17 Sept 2008 http://fcw.com/articles/2008/09/17/acquisition-workforce-called-underdeveloped.aspx