In This Chapter

The federal government is the largest purchaser of goods and services in the world—hands down. Add state and local governments (S&Ls), and Uncle Sam has even larger purchasing power. Small businesses aren’t exactly peanuts, either. Small business activity is the driving force behind the United States economy. Ninety-nine percent of employers in the United States are small businesses, and small businesses employ about half of the private (nongovernment) workforce. Yet, of the approximately 23 million small businesses in the United States, only a tiny percentage actually sells to the government. So it’s worthwhile at least to consider going after government contracts, no matter how small your business is.

This chapter describes the various types of opportunities you can seek within the large and growing government market for small businesses. You also learn about the advantages of multiple-award contracts, including the very important GSA Schedule Contracts, and about unsolicited proposals—what to include in them and how to use them. The chapter concludes with a look at 13 common mistakes small businesses make regarding government contracts. Before getting into all that, though, let’s first look more closely at what exactly a small business is.

Is your business a small business? What exactly is a small business, anyway? Precisely what we can classify as a small business is an important matter when it comes to government contracting. You might think of a small business as a business that just hasn’t grown up yet, and you’d be right. You might consider yourself a small business because you have very few employees or small revenues. But only the Small Business Administration (SBA) has the official authority to determine what constitutes a small business. Founded in 1953, the SBA is an independent agency of the federal government that assists and protects the interests of small businesses. The SBA’s mission is to help Americans start, build, and grow businesses.

The first part of the SBA’s classification of a business as small is that it is a business organized for profit. (No wisecracks about how you’re not actually profitable yet!) The business can be a sole proprietorship, partnership, Subchapter S Corporation, Limited Liability Company (LLC), or some other form of legal entity. Second, it pays taxes and uses American factors of production, such as labor, products, and materials. Third, it operates in the United States. And fourth, it does not exceed the size limitations for its specific industry. A small business in one industry may not be a small business in another.

Always consult the SBA website (www.sba.gov) for the most accurate information, but here are recent general standards. If a business comes in at or below these levels, it is considered a small business.

If you do qualify as the special classification of small business according to the SBA guidelines, you may now declare the SBA your new best friend—a very helpful friend. Before you can take advantage of that help, though, be aware that the opportunities for selected categories of small businesses require that you first get a certification from the SBA to confirm that you are, in fact, a small business. In other words, just reading the guidelines on the SBA site is sometimes not enough. Some opportunities require that you be officially certified.

This situation applies only to two classifications of businesses: Small Disadvantaged Business (referred to as the 8(a) Program) and Small Business Disabled Veteran-Owned Business. If you wish to be classified as either of these types of small business, you must submit data to prove you are such a business. You must meet strict criteria for certification, but the effort is worth it as the certification gives you access to contracts not available to other businesses. (Consult the SBA website for more details on the criteria for these designations.)

Due to federal government regulations, large contractors are required to show that a major percentage of their subcontractors are small businesses. So there is an open invitation to qualified small businesses to get and retain a large number of contracts to supply government needs, and the total value of these contracts is very large.

Increasingly, S&L governments follow the federal lead by encouraging small business participation, both as subcontractors and prime contractors. So the market is ripe for small business participation if you know how to participate. There are four basic categories of contract opportunities for small businesses:

Don’t worry if you don’t know exactly what these categories are. I’ll explain all of them in the sections that follow.

The first specific class of opportunities for your small business is as a subcontractor or a supplier to a larger company already under contract to the government. That company is the prime contractor. If it’s an existing contract, you’ll most likely be coming in as a supplier because the opportunity to be a subcontractor in the way used in this book has now passed. But don’t be confused by that label. The arrangement you’ll be making with the prime could be termed, legally (in the view of the government), as a subcontract. Or it could be under a blanket order or some other arrangement that works for all parties. The important thing is that your participation benefits the prime contractor, and you, too, of course.

The prime might be very interested in using you as a supplier because you might be able to improve the prime’s performance or profitability. And your status as a small business helps fulfill the requirement for small businesses participation under the prime contract. If you meet these criteria, then you should seriously consider launching a business development effort to find these opportunities. See Chapter 4 for tips for doing this.

The second class of opportunities is set-asides. Under the general program the SBA supervises, there are many competitions in which the bidders, and therefore the contract awardees, must be from that special classification of businesses. There is a wide spectrum of such arrangements. The HUBZone and 8(a) small businesses are two.

This list of the SBA Set-Aside Programs gives a basic description of which businesses qualify for each designation.

The above business classifications are easily understood, except for HUBZone Businesses. A HUBZone is government language for a Historically Underutilized Business Zone. Typically, these are cities or rural areas, characterized by high unemployment, low wages, and limited economic opportunities, over a long period of time.

Each of these previous categories has a set of specific criteria a candidate business must satisfy before it is officially classified as being in that category. Some categories have restrictions on the length of time a business may be classified in that way. For example, the 8(a) Program is usually limited to eight years. In addition, the number of employees and gross revenues averaged over the past three years have size limits. These limitations vary by the industry classification, designated by an NAICS Code, which we explain later in this chapter. When the eligibility for 8(a) contracts ends, the term you’ll hear is that the business has “graduated” from the 8(a) Program.

The 8(a) Program is among the most valuable of the SBA programs. Therefore, it is to your advantage as a small business contracting with the government to get your 8(a) certification.

A third category of opportunities is when an existing contract is expiring or is being terminated for some reason. If the contract is now held by a large business or a small business that is no longer eligible for special consideration, then you may, as a small business, have a good opportunity to get in on the action. The industry term for this is recompetition.

For example, Northrop Grumman may have had a support contract at the Army’s Fort Dizzy for the last 20 years, under a total of six different contracts. (Fort Dizzy is fictional.) The current contract is ending in 12 months, and all possible extensions of that contract have already been exercised, so the Army is legally required to conduct a recompetition. The Small Business Advocate within the Army notes the Army is now below its legislated goal for small business participation (the actual level is 8 percent, while the goal is 10 percent—these are fictional numbers for the sake of illustration). So in surveying the field of planned new contracts, the Small Business Advocate has decided a small business could handle the opportunity. When the (draft) solicitation becomes available, the competition is limited to small business, sometimes all small business and sometimes a subset. This represents a golden opportunity for some small business to get a rather large contract and replace the large business now doing the work.

So far, so good. But there’s a stumbling block you may not know about. When you become registered as a small business, you may register as a small business in certain NAICS Codes. NAICS stands for North American Industry Classification System. The United States Census Bureau maintains NAICS Codes—about 2000 of them, in fact. The six-digit NAICS Code shows the type of work a business does. You can win contracts for any NAICS Code for which you’re registered. So the lesson here is that you want to be not only registered but also registered in as many NAICS Codes as you can reasonably perform. You can find a complete list of the NAICS Codes in the NAICS section of the United States Census Bureau site, www.census.gov.

The fourth class of opportunities is sole source. Under certain circumstances, agencies may award contracts without having a competition. Typically, KOs have the right to award contracts, especially but not exclusively to small businesses, on a sole source basis. What that means practically is that the KO has determined that a specific company, and only that company, has the experience and expertise, the people, the assets, or whatever to perform the work. The regulations of each agency are different, and the legality of awarding sole source contracts depends on the circumstances. The size of the contract in dollars or full-time employees is an important factor. The urgency, such as an emergency as declared by an agency head or the United States President (or a state’s governor or local mayor), is another important factor. Perhaps there isn’t enough time to conduct a competition, so a sole source contract is allowed.

Here is a short list of the justifications the KO uses to justify awarding a sole source contract (FAR references are given for each):

What’s the lesson here? If you want a sole source contract, you’re in a much better position if you use face-to-face contact with the customer (see Chapter 4). Being in the right place at the right time is important to getting that type of contract. You’ll be way ahead of any competition if you’ve already built name and face recognition with the decision-makers in the customer organization. That decision-maker can then work with the KO to achieve a sole source contract.

Many government solicitations result in a single winner. There can be only one contractor to manage the mailroom at the National Institutes of Health and one contractor responsible for managing the Nevada Test Site for the Department of Energy. But the single-award model does not fit well for some government needs, such as providing technical services for the Department of Commerce (DoC) or supplying personal computers to agencies for the next five years. First, the exact needs of the DoC are not known at the time of contracting. Second, the needs over the life of a contract—say five years—are even more highly uncertain. So the government has developed a different format, the multiple-award contract, which means that a single solicitation can result in many awards to different companies. So if you, as a small business, bid on that type of solicitation, you need not win out over everyone. You can be one of several and maybe even many awardees. That’s the good news.

But here’s the bad news: winning a multi-award contract typically guarantees you nothing—or almost nothing—and is instead a sort of hunting license—a license to hunt for work. Why? Typically, but not always, there is an award minimum, but that minimum is often very low in relation to the total possible value of the awards under that contract. The award amount could be, say $250 million, and an award minimum something very low, like $100,000. An awardee would be very disappointed with a total award of $100,000, over the say 10-year life of the contract, especially when the company has spent four times that in risk money just to get the contract. So your award, when it’s a multiple-award scenario, means what you’ve won is a license to hunt for work.

What is contained in this type of contract? What are you committing to do as a winner? Typically, in the contract, you provide the customer a schedule of rates and products. For contracts for man-hours of labor, the customer’s solicitation includes a list of job categories by function and by skill level, such as Programmer I, Programmer II, Systems Analyst, or System Architect. In response, you then provide the KO with the labor rates for each category. For multi-year contracts, and these ID/IQ contracts typically are, you give labor rates by year (calendar year, government fiscal year, or contract year). This means that if you’re awarded a Task Order under this contract, you will provide people with those skills and skill levels at no more than the rates stated in the contract for that period. It is always permissible to offer and then provide people at rates lower than those shown on the schedule, but you’re not allowed to offer and then provide people at higher rates. The process is similar for products. You can offer to provide products at a lower price than the schedule shows, but not a higher price.

The good news is that once you have a basic contract under a multiple-award solicitation, it’s always possible to suggest more categories at a newly provided price. For an example that goes way back, consider the original award for personal computers that may have been given to IBM for their 286 machine. Two years into the contract, no one was buying 286 machines; everyone wanted the 386 machines instead. So all those winners had to do, under the contract modification clause contained in the original contract, was to go back to the government KO and ask for a new line item (the 386) with a new price and new performance specifications.

Another way to get a sole source contract is to give the decision-maker in the agency an unsolicited proposal, usually through the KO, if possible. An unsolicited proposal is one your company creates and submits to the customer but not in response to any specific solicitation.

To be successful with an unsolicited proposal, you should have at least these three things going for you:

Chapters 16, 17, and 18 provide detailed information on how to write a proposal that addresses those three areas. For now, just know that an unsolicited proposal might be the way to go if you’ve done your homework on what a potential customer needs and can build a good case for why you’re the business to meet those needs.

Following are the basic elements of a proposal:

Make sure any proposal you submit is thoroughly vetted by not only your own contracts manager but also your legal counsel. Failure to do so will certainly get you in trouble, either with program execution or in offering something that cannot really be done the way you propose it.

Your prospects of getting a contract from an unsolicited proposal are greatly enhanced if you have a champion with the customer. Usually, this person has a pressing need and sees your solution as being a good one.

If you do not now have any government contracts but are exploring the opportunities in this market, it is entirely possible that one or more of these unlucky thirteen applies to you and your company.

Opening your books to the government is the exception rather than the rule. Usually, and especially for small contracts, the government gets all the competitive information it needs and is entitled to through the competitive procurement process. So it’s usually not necessary to reveal your cost or your margin. Of course, for larger contracts, especially those involving services, the buyer is entitled to see your costs and margins. Don’t be afraid to bid on opportunities that don’t entail revealing your own costs and margins.

You can’t get past all that stuff that real government contractors already know—the jargon, acronyms, contract terms, red tape, and more. Certainly, jargon is involved. But every sub-set of our society has its own “tribal customs” and vocabulary, which are usually easy to get a basic understanding of. Use the glossary of this book to learn the lingo.

That the government is slow in paying is a myth. You worry that you could go broke waiting, but this is absolutely not true. In fact, the government is exemplary in its payment procedures. Yes, before the Prompt Payment Act of 1996, government was notoriously slow in paying. But the Congress realized that the slow-pay policies were counterproductive to encouraging small businesses to be suppliers to the government. So the current law makes it so painful for government agencies to pay in more than 30 days, that it rarely happens now.

Further, a signed government contract is rock-solid collateral to banks. The banks love lending you money until the government pays you. Lenders know you’re going to get promptly paid.

You may feel there’s too much competition, and skilled competitors at that. This is simply not so. A very large percentage of the smaller opportunities go to the one and only bidder. So you can’t win if you don’t bid.

Many sources inside and outside of government are willing and able to help. At the national level, the SBA website (www.sba.gov) offers a great deal of information on how to succeed. And in general, KOs are in the business of encouraging, not discouraging, bidders. At the local level, you can find Procurement Technical Assistance Centers through www.dla.mil.

You’ve been trying but have never actually gotten a contract award, and you have no idea why. Someone else might be able to say this more politely, but “Shame on you for not knowing why you lost.” It’s easy enough to find out why—just ask the KO. Also go to the website that had the solicitation and look for “awards.” Usually you can find out who won and at what price.

Some small companies and many one-person or fractional-person companies (those with only part-time help or a single person spread over many different niche markets) actually win government contracts. In fact, within the SBA, there’s a specific category of small business called “Very Small Business Concerns.” These are businesses with no more than 15 full-time employees during the last three years and average annual receipts less than $1 million.

You may think the small jobs are not worth your while and you can’t afford to fund the larger ones. However, remember any contract you win can be profitable. Once you have a contract, you establish some presence and momentum with the government. The government is slow to get started, but it’s also slow to make any turns and even slower to turn entirely around. If you treat your government customers with the respect they are due and cultivate those critical personal relationships, history shows that government customers are at least as loyal as commercial ones, and in many cases more loyal.

Maybe your products are all commodity products. You have nothing to distinguish yourself from many others, and your competition has the market all wrapped up. While it may be true that the KOs already have preferred sources, it’s also true that right-minded KOs have the best interests of their government employer in mind and, therefore, consistently seek more competition, new sources of supply, to achieve better quality at a lower price. If you can catch your competition taking a customer for granted and being lazy in fully servicing him, you have an opening to take that business away and make that KO your customer.

If your products are made outside the United States, you assume the Buy America Act prohibits the government from buying from you. But just having products made outside the United States is not in and of itself a disqualification. The more than a dozen exemptions to this act are largely common sense and based on the nonavailability of products within the United States. Who would dispute that a government buyer would have a difficult time in obtaining cobra venom from a domestic source? See FAR Section 25 for the details. In addition, as long as your delivered product has at least 51 percent of the cost of the finished item incurred in the United States, Mexico, or Canada, it is not considered an imported item.

Maybe the government market has sounded good to you, but you’ve been putting off getting involved because you’re doing just fine in the commercial market. How many of your commercial customers are required, by law, to pay within no more than 30 days? How many often pay on receipt of the approved invoice, instantaneously, via electronic transfer of funds? How many have a sterling credit rating and therefore allow you to go to the bank with rock-solid collateral if you need the money in less than 30 days? Isn’t it worth at least trying for government contracts because the government would be such a good customer?

The government posts the specifications publicly as a part of the solicitation. Do your commercial customers do that, or do they make you guess at the specs? Government business is transparent. Many agencies now are posting such things as travel expense reports, submitted by and paid to their employees. Such transparency is unheard of in the commercial world.

You can quickly overcome the lack of experience through getting a small contract at first. Then build up to the larger ones, with a higher buy-in cost and larger pay-offs in winning. No guts, no glory.

The Least You Need to Know