Pros & Cons of being a Government Contractor

I talked the other day to a company that was considering the pursuit of a government contract.  The company had a fairly successful business in the commercial market but wanted to expand and pursue a government contract.  As we discussed this I thought some of the thought process would be beneficial to all small businesses that were considering a venture into the world of government contracts. 

First let's look at the positives.  The US Federal Government is the single largest purchaser of goods and services in the world.  The US government spends nearly $400 Billion in goods and services each year.  In other words, they are the world's biggest customer.  They also pay their bills so they are a low credit risk.  Here is a list (not necessarily all inclusive) of the benefits of becoming a government contractor:

• The Federal Government spends nearly $400 Billion per year

• The Federal Government credit rating is still very high (they pay their bills)

• The Federal Government wants to do business with Small Business

• Small Business means jobs

• 23 percent of prime contracts for small businesses;

• 5 percent of prime and subcontracts for women-owned small businesses;

• Small business subcontracting plans and goals from large business primes

• 5 percent of prime contracts and subcontracts for Small Disadvantaged Businesses;

• 3 percent of prime contracts and subcontracts for HUBZone small businesses;

• 3 percent of prime and subcontracts for service-disabled veteran-owned small businesses.

• There is a lot of help available for small businesses

• SBA Loans

• SBIR Programs (non-dilutive funding)

• PTAC Centers

• SBA's SBIC Program

• Federal Grants

• Government published market information

• How much the government has purchased

• Who they bought from

• How much they paid

Certainly this is not an exhaustive list but I tend to think there are benefits here that most companies overlook, like information on the market and on your competitors (how much the government paid the last time they purchased your goods/services).  Also, the fact that the government has a quota for the number of dollars going to small businesses is a plus. 

This all sounds good and most small businesses are ready to submit at this point.  I think it is prudent to evaluate the "costs" of doing business with the world's largest customer first.  It is important to know what you are signing up for and to see if you are willing to "pay the price".  For instance, the Federal Government has a complex set of rules and regulations for guiding their transactions and they follow them relentlessly.  These rules include specifying how a company does their accounting for instance (depending on the type of award).  If a company is not familiar with these regulations, they can be costly to comply and confusing to the uninitiated.  I always recommend that a company evaluate the compliance issues, the costs that will be incurred to comply and then compare this to the increase in business opportunity to evaluate if this is a lucrative deal or not.  Many times this is a lucrative deal but there are instances where it just doesn't make sense for a small business to contract with the Federal Government.  Only you can evaluate that.  Here is a brief list of some of the "cons" of doing business with the Federal Government:

• The Federal Government can require you to do your accounting in a specific way

• The Federal Government can require that you do purchasing in a certain fashion

• The Federal Government can limit your profit (6-7% is common)

• The Federal Government is a Sovereign entity therefore they can:

• Revise the contract unilaterally

• Can Change Quantities on the contract

• Can alter the priority of work at the contractor facility (DPAS)

• Can demand project management tools and updates

• Can terminate the contract for convenience

• The Federal Government is spending taxpayer dollars and therefore may:

• Audit the financial records of suppliers

• Install surveillance at the contractor's facility

• Demand your most favorable pricing

Some of these demands can be shocking to a company only familiar with the commercial market.  Some of the demands come with large overhead (like a compliant accounting system, a compliant project management system or a compliant purchasing system).  Not all of these con's apply all of the time but is a good idea to know which ones apply to you.  If you have difficulty with this evaluation, give me a call and I can help you line things out so you can make an informed decision.