GOVERNMENT CONTRACTS



Throughout the 1990s the U.S. government has expended some $200 billion annually, or between 2 and 3 percent of U.S. gross domestic product, through more than 20 million contracts to procure goods and services from private-sector firms. Slightly more than half of this amount (around 55 percent) has gone for services, with the rest going to acquire products. All of this buying is done through a highly decentralized, and often confusing, procurement structure. In addition, each year state and local governments collectively spend about the same amount as the federal government. Government contracts range in value from a few thousand dollars each to a billion or more dollars; likewise, contractors range in size from small businesses to major corporations.

Government contracts spell out precisely the goods or services that the government needs and the exact terms of payment. Therefore a contract is not the same as a grant, which is an outright award of money that the government makes to a grantee, with no expectation of a particular product or service in return. A government contract for a sum smaller than $25,000, moreover, is issued by means of a purchase order and is much less onerous to apply for than a large contract. Purchase orders are so common in government that their exact amount has not been determined, making aggregate procurement statistics only approximate.

Despite the occasional revelations of grossly overpriced goods that a government agency may have bought, or mistaken payments to vendors who had never sold the government anything, these are exceptional incidents. Government procurement is guided by a few basic principles: contracts are generally awarded to the lowest bidder; in addition, they are open to all qualified bidders; and there are prohibitions against favoritism. Moreover, the government is required by law to set aside contracts for small, disadvantaged businesses, including those owned by women and minorities.

THE ADVANTAGES OF GOVERNMENT
CONTRACTS FOR BUSINESSES

Because the lowest bid is usually the one awarded a contract, many businesses in the private sector cite low profit margins as the reason for not pursuing government contracts. Those who tenaciously seek business with the government, however, do so because of the distinct advantages. The stability and reliability of the government make it an attractive client, and even a small contract by government standards can often be significant for a small enterprise. If the contract involves developing patents or copyrighted materials, the contractor may have a significant competitive advantage because in all likelihood it will retain the potentially lucrative intellectual property rights in a government project. Furthermore, a business can often pick up multiple smaller contracts, which do not require the full bidding process, for many procurements under $100,000.

The rule of thumb in government contracting is that the government buys everything that ordinary people buy, only in gigantic quantities. While traditionally government contracts have fallen into two categories—military and civilian—there is much crossover, since both sectors purchase many similar items. There are more procurement agencies within the civilian sector than in the military, and these in turn are not always centralized. Moreover, purchasing needs change frequently. In April 1993 President Clinton issued an executive order that stipulated that all government agencies had to purchase vehicles that used either alternative fuels or electricity. Another executive order required that the government use only recyclable paper. Since the U.S. government is the biggest consumer of paper in the world, such actions had a significant impact on private industry.

Aside from the executive departments, there are the Library of Congress, the Government Printing Office, and the General Accounting Office (GAO), considered to be under the legislative wing, that have huge procurement needs. Besides all of these, there are at least 60 independent agencies that answer to the federal government. Moreover, government spending cuts during the 1990s increased the demand for outside services as federal personnel were trimmed.

SMALL BUSINESS CONTRACTS

Government agencies are required by law to earmark a percentage of their contracts for small enterprises. Despite this, many small businesses find the government's practice of bundling, or combining multiple tasks or responsibilities into one large contract, excludes their participation. Legislation passed by Congress and advocacy by the Small Business Administration (SBA) have sought to reduce bundling. Currently, about one-quarter of government contracts fall to small business. The SBA has proposed increasing the number of small business contracts to 35 percent of the total value of all federal prime contracts and subcontracts, with at least 10 percent of all contract funds going to minority-owned businesses.

The SBA also advises small businesses on how to acquire government contracts. Through its regional offices and Internet site, the SBA makes pertinent databases available and offers seminars on government contracting. In 1999 there were approximately 100 Procurement Technical Assistance Centers operated by various government and private organizations to help businesses understand and participate in the government contracting process. An important aspect of government contracting that is especially appropriate to small businesses is subcontracting from a prime contractor (at times, a "prime subcontractor" also farms out subcontracts). The SBA and many business libraries maintain the Small Business Subcontracting Directory, a valuable source of current opportunities with subcontracting published by the U.S. Government Printing Office (GPO). The SBA also maintains a small-business vendor database, Procurement Automated Source System (PASS), which makes it easier for a government purchasing office to locate and to contact the right small business.

Many prominent businesses got their start with government contracts; indeed, sometimes it is the government that turns out to be the best customer for a product, especially a new one, since the government is mandated to encourage technological innovation. That is how Teflon nonstick cookware got its start, as well as Tang, the instant orange juice drink, and such companies as IBM, McDonnell Douglas (now part of Boeing), and the clothing retailer Haggar.

FEDERAL CONTRACTING REFORMS

Related to the federal government's general cost reduction initiatives, two key laws were passed in the mid-1990s that have begun to transform the federal contracting process. The Federal Acquisition Streamlining Act (FAS A) of 1994 was a major revision of the requirements and procedures for federal procurement. In general, it (1) reduced paperwork, (2) made it simpler for the government to obtain goods and services worth less than $100,000, (3) created a framework for electronic transactions with government vendors, and (4) attempted to unify disparate procurement practices across federal agencies. The law also called for government purchasing officers to prefer commercial-sector goods over specially produced ones when doing so does not compromise the government's needs. FASA also established a government-wide goal of awarding at least 5 percent of federal contract funds to businesses owned by women, although this was a very modest target, as women own 35 percent of all U.S. businesses.

The second piece of procurement reform legislation was the Federal Acquisition Reform Act (FARA) of 1996. Less sweeping, FARA's main reforms were to limit some forms of competition for federal contracts when the competitive bid process is seen as costly and unnecessary (mostly for smaller contracts) and to expand some of FASA's measures. FARA also created stiffer sanctions against government officials who leak confidential bid details and provided a uniform policy on former federal employees' eligibility to be contractors.

In support of the legislative goals, the Federal Acquisition Regulations (FARs, see below) were revised to address such issues as meetings between potential contractors and government contract officers (which are permitted), prescreening of bidders to eliminate ones that are not serious contenders early in the process (also permitted under some circumstances), and considerations of vendors' past performance in awarding new contracts (past performance is becoming more important). The various regulations began taking effect in 1998 and 1999. While the new regulations lend themselves to a faster, less expensive contracting process, they may also lead to excluding some smaller bidders without track records.

THE GOVERNMENT CONTRACTING
PROCESS

Obtaining any government contract begins with targeting the relevant agency or agencies that use the particular product or service, becoming familiar with the names of the procurement officers in charge of contracts, and establishing personal contact with them by phone or letter. The handiest source for obtaining information about procurement offices within the vast government jungle, with names and addresses of contracting officers, is the United States Government Manual or the U.S. Government Purchasing and Sales Directory, found in business libraries, or available from the Government Printing Office and its outlets. The Government Manual is also available on the Internet.

There are three basic types of government contracts:

  1. Direct purchase (DP) contracts, usually for purchases under $2,500 (also known as micro-purchases), may be fulfilled through simple credit card transactions or purchase orders. These do not require any competitive bidding.
  2. Simplified acquisition contracts, usually for amounts under $100,000, require only an abbreviated notification and competitive bidding process. Usually at least three vendors are considered, but the bids may be obtained informally, as in the course of a telephone conversation.
  3. Competitive contracts, usually for amounts greater than $100,000, require an elaborate procedure of notification, qualification, sealed bid submission, and possibly negotiation.

A variety of government periodicals and databases inform the prospective vendor of contracting opportunities. The most complete list of all upcoming competitive contract opportunities (those valued over $100,000) is contained in the Commerce Business Daily (CBD), which is available for print subscription, at many libraries, and on the Internet. Besides containing notices of upcoming contracts, divided into categories of goods and services, the CBD also informs the reader of contracts already awarded, to whom, and the amounts, a useful indicator of the types of goods and services getting contract awards. Lastly, the CBD contains information about upcoming meetings of interested contractors and contracting officers, events at which businesses may develop important government contacts.

Notices in the CBD and other sources are subject to stringent regulations. In general, they must be posted for a minimum number of days in advance of the work they request in order to ensure interested parties have time to respond. The Federal Register is a useful indicator of the kinds of goods and services the government will be needing in the near future. Like the CBD, the Federal Register is a daily publication and is obtainable at libraries. Besides informing the public of all new federal laws and regulations, the publication also contains proposals for upcoming ones. Knowing which way the wind is blowing helps to make the future vendor aware of opportunities that will eventually materialize in the CBD.

The next stage in applying for a government contract requires one to write to the agency listed in the CBD announcement, asking for the requisite application materials (or "solicitation document"). If the contract is for a tangible product such as stationery, office furniture, or certain computer equipment, the solicitation document will require a detailed description of the items and the bidding price. For simple contracts, the government procurement office then evaluates these bid offers and usually the lowest bid price is accepted, and announced publicly. For larger and more elaborate deals, the procurement agency requires a proposal in writing, referred to as a "sealed bid," since these are not announced in public and are considered to be negotiated contracts. Applying for these is time consuming and difficult, and the largest firms employ a proposal writing staff that does nothing but work on government contract proposals full time. The government evaluation process for written proposals takes longer and requires the prospective vendor to be interviewed. The great majority of written proposals are rejected because they fail to address the precise needs of the government, despite the fact that a contracting officer is always available for specific information. A vendor can appeal a rejected proposal to the Government Accounting Office, which will investigate and adjudicate the matter.

Government contracting is controlled by a multitude of strict rules that are known as Federal Acquisition Regulations (FARs), which are part of the Code of Federal Regulations (CFR). Consisting of hundreds of pages of rules and guidelines, FARs are jointly developed and periodically revised by the Defense Department, the General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA). FARs regulate approximately 80 percent of all federal contract spending.

CONTRACTING TRENDS AND ISSUES

Probably the two greatest federal contracting trends at the dawn of the 21st century were a move toward fixed-price contracts and an emphasis on results. Traditionally, a large number of government contracts used a cost-plus valuation method, which enabled vendors to bill the government for documented and necessary expenses in excess of the contract amount. Naturally, this practice lends itself to projects going over budget or having an unknowable net cost at their inception. Under fixed-price contracting, most of the cost uncertainties are removed because the vendor assumes the liability for delivering the product or service at the amount specified in the contract.

The shift to fixed-price contracting has required government officials to specify more clearly and definitively what their needs are. Cost-plus policies were popular because they allowed contracting officials to modify or add things to contracts over time, and thus they did not necessarily plan out all of the exact results they expected in advance. This habit also often got the government involved in micro-managing how the work was done rather than simply requesting a finished product or service. Using performance-based contracting, the government concerns itself less with the means and instead focuses on the ends, saving the government money by needing less oversight/processing time and by potentially reducing net fees paid to vendors.

In spite of the government's attempts to make its contracting system fairer and more efficient, many incumbent and would-be contractors have criticized it. Common complaints include:

While the legislative and regulatory reforms attempted to correct some of the most egregious problems, the stigma of government contracting as hyper-regulated and partisan has at times convinced even large firms not to actively pursue government contracts.

FURTHER READING:

Celarier, Michelle. "Catch-23." CFO, June 1998.

Federal Acquisition Regulation Secretariat. Federal Acquisition Regulation. Washington, 1999. Available from www.amet.gov/far/

Figura, Susannah Zak. "New Purchasing Rules Take Root." Government Executive, August 1998. Available from www.govexec.com .

Glover, Jere W., and Jim O'Conner. Procurement Opportunities: A Small Business Guide to Procurement Reform. Washington: Small Business Administration, Office of Advocacy, 1996. Available from www.sba.gov .

Nelton, Sharon. "Women Owners and Uncle Sam." Nation's Business, April 1998.

Ravitz, Robert A. "So You (Don't) Want to Work for the Gov't." Advertising Age, 23 February 1998.

Whitaker, Barbara. "Fed by the Hand That Bites." New York Times, 23 September 1998.

Worsham, James. "Bundles Too Big for Small Firms." Nation's Business, December 1997.



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