What are the benefits of a government contract?
Often contracts are awarded for a very reasonable price and the contract can span several years. There are several contracting vehicles such as the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer Program (STTR) that are smaller contracts and yet still can fund $500,000 to 1,000,000 for a one or two year contract. Several other agencies often contract for 10,000,000 or more, often for five years and longer.
Having a good mix of Government and commercial work is an excellent way to create a stable funding stream. The award of a contract is a stable source of income over the life of the contract and could provide a revenue stream that will rocket a business into several stages of growth. In today’s market there are fewer opportunities to create business relationships with the long term revenue a government contract may provide.
One good way to enter into the government market is to subcontract with a larger government contractor. This allows a company to prepare their business systems for government contracting before actually having the accountability stringency the government places on its prime contractors. If the subcontract is over $700,000, the prime contractor needs to conduct a thorough analysis on the subcontractor. This analysis, along with the standardized way proposals are prepared will help a business to understand some of the greater administrative challenges of government contracting.
What are the challenges to government contracting?
Patience, this is not fast money. It is a longer term, strategic decision to go the route of government contracts. There is quite a bit more administrative effort and cost to research, prepare, propose, win, and maintain government contracts. It may take several tries before you are awarded a contract. The proposal process can take anywhere from a few months to over a year. It can take up to six months or more after your company is awarded a contract for funding.
It is best to consider government contracting when your company is established, with a solid product or service, good business systems and policies and procedures, a strong accounting system and a very clear ability to differentiate your product from your competition.
The biggest difference is that the government is paying you to produce a product or service for them. They do this through different contracts. Cost plus contracts (CPFF, CPIF etc.) pay you for all the expenses it takes to produce a product or service plus a negotiated fee. Firm fixed price (FFP) contracts are bid in the same way as cost type, especially when the proposal is over $750,000 and subject to the Truth In Negotiations Act (TINA) guidelines, with many of the same regulations and requirements. However, once an FFP contract is issued, the government has very little financial oversight in the actual costs it takes to deliver what was contracted. What this means is the government is most interested in the cost proposed and incurred. Incurred expenses will be used for follow up proposals and contracts. We will go over some of the financial efforts a company must engage in next.