So you want to be a government contractor?

Many small businesses are looking to the Federal Government for either a solid first market or a market expansion for their business.  I think the Federal Government is a good customer to have, as long as you understand the pros and cons of doing business with this customer (in other words, the risks). 

First, lets look at the benefits of contracting with the Federal Government.  The Federal Government is the largest organization in the world for purchasing goods and services.  The US Government spends over $400 Billion per year on goods and services.  Essentially, they buy everything from janitorial services to complex computer IT systems to paper clips to nuclear powered aircraft carriers and everything in between.  If you provide a good or service, most likely the US Government purchases that exact good or service for some purpose.  There are a list of reasons why you should do business with the federal government and I can list some of those reasons here.

Pro's For Contracting with the US Government

-The US Government is the largest customer in the world
- They pay on-time
- There is almost no risk of default
- They pay a reasonable market price for goods and services
- The US Government will pay for their share of indirect expenses
- There is a mandate to purchase 23% of all procurements from Small Businesses

As you can see, this can be very attractive to a small business.  Over the last 10 years, as the Federal Budget has grown each year, this became more attractive to all businesses.  This was especially true as the great recession of 2008 took hold on the business world. What many small businesses didn't realize is that doing business with the Federal Government has more "requirements" than commercial business does.  There is a "price" to pay for some of the benefits we listed above.  For instance, one of the biggest is the belief within the US Government that as the largest single purchaser, they deserve the most favored customer status and therefore the lowest possible price offered by their suppliers.  They will negotiate to that position, and rightfully so.  Let's look at some of the other "costs of doing business" with the Federal Government.

Con's For Contracting with the US Government

- There are always lots of Terms and Conditions in a contract from the Federal Acquisition Regulations (FAR)
- Certain types of contacts require a very specific type of accounting system not commonly found in commercial practice
- The government contractor may be subject to Federal audit by the DCAA
- The government contractor may be required to pay for an independent financial audit to YellowBook standards or OMB A133 requirements
 - The government contractor may be required to purchase health insurance for all employees
- The new Executive Order will require a minimum wage of $10.10 for all employees of a government contractor
- There is a limit on the amount of profit to make on a government contract
- There is a specific format and procedure for invoicing the government.  Not following this protocol can result in a delay in payments
- Some expenses are unallowable and not re-imbursable by the US Government
- There is a limit on executive compensation and on other types of compensation as well
- There are restrictions on exporting goods & services and on who may view data related to some contracts

Some of these limitations come to a surprise to the uninitiated.  It always pays to evaluate the cost of these restrictions prior to accepting work with the US Government.  Costs may include costs that you can see (such as the cost for an external audit or the cost to make an accounting system compliant) but there can be "hidden" costs as well.  For instance, what is the cost of installing a DCAA compatible timekeeping system?  How much time does this require for all employees to comply with?  How much time does it take to enter this labor into the accounting system?  How much time does it take to distribute the labor properly within the accounting system.  All of this could be tasks not familiar to the commercial company. 

I'm not suggesting that new companies don't do business with the US Government.  To the contrary I think it is a good thing to do, as long as you evaluate what the requirements are and plan for those costs.  Once you do that, you can have a business that can make a regular and fair profit for a long time.  It takes work.  You might need help figuring this out - give me a call.


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