So you are thinking of becoming a government contractor, or perhaps you have just won your first contract. Congratulations! Get ready to change the way you do business. Every year, the United States government spends billions on defense, homeland security, public health, education and more. While current budget and national debt discussions focus on how to achieve a balanced budget and where to cut spending, the reality is that the US government will continue to spend billions every year on much-needed products and services, research and development and construction. The US government can be one of the best customers a business can have; however, doing business with the government requires an understanding of how the government contracting system works, including the additional regulatory, operational and financial impacts on how you operate your business. Strategically, every business needs to understand the potential impact that having the government as a client will have on the business—not just the government projects, but the entire business. If you are getting ready to pursue the first dollar of contracts, or have just received your first dollar, make sure you have your bases covered and know just what you need to do to be successful and profitable.
One of the biggest differences between bidding on government projects versus commercial projects is that there are rules in how you arrive at the price and costs for items (goods and services). In the private sector, the price you charge is what you negotiate or the market has set. Your price can be whatever the customer is willing to pay, with little to no relationship to costs (except that you want price to exceed the cost). The government expects to receive the best price for anything it purchases. Regardless of what contracting/purchasing mechanism the government uses (e.g., GSA schedule, RFP/RFQ, fedbizopps) price and cost must be based upon allowable costs, reasonable profit (where allowed), and other factors set by regulations, project scope, mission and other elements.
From the moment you offer your products and services to the government, you position yourself as an organization that is capable of delivering the promised item(s) and that you are compliant with all the requirements of being a government contractor—of which there are several. Government contractors have requirements on how they operate their business, financial and management oversight, reporting, and many other often-overlooked items that impact the cost of doing business and how competitive you are both for government and commercial business.
Doing business with the government is a great opportunity, but it is not without costs or risks. The key points of being a government contractor involve the following:
- Generation of cost estimates and pricing consistent with the project requirements and compliant with cost/price requirements.
- Compliance with requirements, including qualifications, capability, financial strength and business processes.
- An establishment of “sound” business systems including:
o Earned value management
o Internal controls
- Maintenance of competitive cost/price structures.
To succeed as a government contractor, you must win awards that cover costs and include a profit (where allowed). All too often, would-be contractors learn the hard way that there is a fine line between profitability and losing money on a project. The bottom line is dictated by a number of factors that reflect the business system components previously mentioned.
To get the best price for your work, start with a thorough and comprehensive understanding of just what the project is going to entail, not just the “direct” work, but also the support activities and the costs associated with doing business. In developing your proposal, you need to understand the detail of the government’s requirements, the scope of the work (what is and is not included) and assumptions being made (by you and the government agency)—and be able to cost out these elements. What you miss can cost you significantly, both figuratively and literally. Once you have committed to executing the full scope of a project as outlined by the government agency making the request, and they have accepted your proposal and the price has been set, you MUST deliver. You may think that when a “change” occurs, you will have the ability to add in some funding to cover the change; maybe … and maybe not. Real changes can be costed and funded, but perceived changes that are something you missed in understanding the project? Those are on you to pay for.
Furthermore, as a new contractor there will be investment in the compliance and business systems of your organization necessary to satisfy the requirements of being a government contractor. Today you may have an “okay” accounting system as far as running your business as a commercial endeavor, but rarely does that standard of accounting measure up to the government’s requirements for detailed project cost and reporting, variance tracking, costs segregation and other elements. Another aspect that is frequently overlooked is the systems and processes for time tracking, subcontracting, procurement and management oversight. The cost of doing business as a government contractor is an investment for your organization to be eligible and capable of receiving awards … and staying in business.
Doing business with the government is a great opportunity for your business. It is also a strategic decision with far-reaching consequences if you are not prepared and capable of doing it well. Invest early in understanding the requirements and being compliant; it is far less costly to setup your organization for success upfront, than it is to bear the costs of cleanup later.
Author: Lea A. Strickland, MBA CMA CFM CBM GMC
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