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Tuesday, December 3, 2019


The purpose of this article is to compare small business federal government contracting as opposed to selling commercial products and services. The comparison may be useful for those who are considering melding commercial and federal government business or starting an enterprise involving both venues.


Small business federal government contracting is not rocket science - to succeed you must take what you do well in the commercial market place or what your experience leads you to believe you can plan successfully as a commercial enterprise and then apply it in a slightly different manner from a business perspective to accommodate federal government contracting requirements. Very few companies enter federal government contracting without some commercial experience and success. Very few startups entertain contracting exclusively to the federal government without commercial work to sustain operations while the more lengthy government procurement process is being pursued.

Federal government contracting is controlled by the Federal Acquisition Regulation (FAR). Bid and proposal types are driven by the nature of the supply or service being procured. No one reads the FAR cover to cover - It is a source book for when you need it. The FAR and associated regulations are taught in only a few colleges, such as the Defense Systems Acquisition University at Ft. Belvoir and the George Washington School of Government Contracting. Very few CPA's are familiar with the US Government FAR Cost Accounting Standards (CAS) and I am not aware of any questions regarding CAS on current CPA exams. In general one must grow to understand these requirements and that usually happens by doing business under them.


The following are some common driving business factors and a commercial versus federal government comparison for each:



The above are not all the driving factors you should consider when weighing the differences between commercial and government work, but they are some of the most significant. Becoming a government supplier may not result in the highest profit-making product/service line in your enterprise but the venue has the potential to pay the bills and be a major platform for stability and long term growth. It should not be your only endeavor but it could be a major element of your total business plan.

Please see the Table of Contents at this site and the free downloads of books and materials for further details.

Sunday, December 1, 2019

DCAA Audits and Small Business Job Cost Accounting


Small Businesses typically have a learning experience growing into government contracting. Part of that process is undergoing reviews by the Defense Contract Audit Agency (DCAA). It takes knowledge of the requirements and strategic focus to set up the type of business processes required for accommodating government contract job cost accounting and fit those processes into the way your company does business.

DCAA or other agency representatives do not approve job cost accounting software packages. They approve contractor job cost accounting practices in compliance with Federal Cost Accounting Standards (CAS). If you are a small business, you are probably going to come under modified CAS Coverage that you can read about at the following link:

What is a "Compliant" Federal Government Contracting Small Business System?

Perhaps you have already examined the above background, but I would encourage you to review it again in connection with planning for your business system. Perhaps you have discovered that CAS compliant job cost accounting effects your estimating structure, your long range planning for indirect rates, as well as your general ledger, overhead and G&A structure. You may have discovered as well that DCAA wants to see your government contracts accounted for in a separate cost center from your commercial work and that there are certain unallowable costs that cannot be charged directly or indirectly to government contracts.


Proposal audits are performed by DCAA on your cost proposal at the request of the Procurement Contracting Officer (PCO) and verify your direct and indirect rates against your long range plan, your labor category pricing, contingent hire agreements, vendor quotes, subcontractor proposals and all other data related to the cost volume of the proposal. Results go to the PCO. Arithmetic checks are made. No opinion is offered on the merit of the pricing, only that it has been documented in a long-range plan or a vendor or subcontractor quote and it is accurate.


This type of audit is on live data from your billing system. It is triggered by your submitting a progress payment under a firm, fixed price contract. Progress payments can be allowed in long-running firm, fixed price contracts that are front-end loaded with material and labor investment and have lengthy schedules for delivering the end product.

The DCAA Auditor will get the audit request from the contracting activity and will ask to examine the complete set of job cost records in your accounting system for incurred cost on the fixed price contract and tie those records out to the progress payment requested amount (usually 85-90% of the incurred cost to date - they hold some billed amount in retention). Records audited are at the time card and expense report level, as well as purchase orders, travel vouchers and any other transactions that are booked and billed in your accounting system to the fixed price contract. They will want to see the time cards and other documents and will trace them back through the system.

If you do not have a progress billing clause in your firm, fixed price contract, it is unlikely you will be audited. The contracting activity or the Defense Finance Accounting System (DFAS) will simply compare the final amount you bill to the firm, fixed price amount in your contract and pay if the item or service has been accepted and delivered. (Usually a sign-off by the PCO, Contracting Officer's Technical Representative (COTR) or a DD Form 250 signed by a government inspector on product deliveries)


Billing audits are performed by DCAA, again at the request of the contracting activity. The auditor will go into all actual cost records submitted with your billing. Cost plus and T&M billings must have all the billing detail behind them or they will not be paid. The detail must be at the transaction level and the audit is identical to the one discussed above for progress payments.


These audits are conducted when you are closing out contracts with the government and they have been billed at provisional rates, or the government needs to establish that you are billing accurately from a rate standpoint. If the contract is fixed price with progress payments, cost plus or Time and Material in nature and has been billed over a long period, particularly if it has crossed more than one government fiscal year, then a system-wide incurred cost audit will be necessary to verify the rates that were charged to the government and determine the difference between the provisional rate billed and the actual rate incurred (where applicable).

In addition it is periodically necessary for the government to establish that no unallowable costs have found their way into government contract billings.
The government allows provisional billing rates for the convenience of the contractor based on his long-range plan and mix of business. The government holds a retention amount on each billing and then at closeout determines with the contractor through an incurred cost audit the final amount due on the contract, releases the retention accordingly, and the contract can then be closed if all other obligations have been completed. At closeout the government pays the final bill.

A rate audit determines the compliance of the job cost system if it occurs while the contract is in process. If an incurred cost audit occurs on contract closeout actions, results will directly impact final contract billing approval and amounts.


My experience with job cost accounting software tools is that complete packages are pretty expensive. COTS accounting packages such as Quick Books do not provide job cost accounting. I have installed JAMIS, which is the 'Cadillac', DELTEK, which is the 'Fairlane 500', and SYMPAQ, which is the 'Volkswagen'. They are all expensive, even for single user licenses. You can go to these and other product sites on the web and examine their capabilities:




Here are some products especially designed for small business:



All of the above suppliers are used to long sales cycles and competing against each other. They will do remote demos for you and bend over backwards to show you their products. You can learn much about government contract job cost accounting just by taking the time to go through a demo. For companies whose direct job cost records are growing fast, these tools offer the utility to manage data volume and efficiently handle requirements such as changes to existing records driven by rate changes, fiscal period closing or contract closeout.


Many small companies doing government work start out with a rudimentary direct job cost accounting software package such as Peach Tree or the add-on tool for Quick Books mentioned above and crutch it with manually maintained records on spreadsheets for indirect cost allocation, time keeping, expense reporting, purchasing and supplier commitments. There is nothing wrong with such an approach as long as you can supply job cost (individual contract) records complying with modified CAS Coverage and demonstrate such things as:

Time Cards and time keeping process by worker and labor category by contract or indirect cost pool

Expense Reports and expense report process by worker by contract or indirect cost pool

Purchase Orders with job cost accounting data traceable thru invoices to contacts or indirect cost pools after payment

Overhead Allocations in a Government-unique cost center to individual contracts at month end based on individual contract direct labor cost

G and A Allocations in a Government-unique cost center to individual contracts at month end based on individual contract total cost.

A semi-manual approach gets burdensome as the company grows and the number of accounting transactions at the direct and indirect cost level increase in volume.

If you do not have a good job cost software tool, I recommend you begin looking for one and plan strategically to implement it if  significant progress billings and service contracting transactions, to include time and material and cost plus contracts, are in your future. Implementing a government compliant job cost system is a sensitive matter and must be planned. '

As companies grow and get involved in larger programs they come under full CAS Coverage that requires a disclosure statement and considerably more controls on the structure of the business system. You can read about full CAS coverage at the link contained in the introduction to this article.


If you have the investment budget available, you may wish to consider the job cost accounting system software suppliers I mentioned above and compete them against each other for a price. Installing one of these packages is critical from an accounting period standpoint. I recommend a new year starting point and running in parallel on your old system for at least a quarter.

Keep in mind that DCAA does not approve COTS job cost accounting system software. Buying the software will not make you "DCAA Compliant" or "CAS Compliant" You do that through careful process development, specific to your company, utilizing software as a tool to operate your own unique business processes. Your processes will include long range planning, pricing, job cost accounting, indirect cost allocation, time-keeping, expense reporting, purchasing and commitments and billing - all geared to accurate job cost records at the individual contract level.

To the extent that you cannot demonstrate the above features to DCAA when they audit your business you CAN demonstrate that you are aware of the necessity to set these things up, lay out your plan to do so, and specify a time frame within which DCAA can expect to see you complete your compliant government contract pricing and accounting structure.

I have found that DCAA auditors are reasonable people who understand small companies must grow into government business systems. Showing them your accounting structure and your business system plans will display knowledge they will appreciate and assure them you understand the requirements, even if you cannot demonstrate all the processes at the point in time that the government initially audits your company.

Chapters 45 and 51 through 53 of my Book, "Small Business Federal Government Contracting" provides further detail and examples on establishing CAS-Compliant small business planning, pricing and job cost accounting. The book is free as a download in the right margin of this site in the "Box Net" cube.

NOTE:  Comments at this post have been retained from previous discussions on the topic at "Small to feds" 

Sunday, November 24, 2019



1. A mix of commercial and government business is good. In fact, most small business federal government contractors who move from commercial to government work, remain in  commercial business.  They separate government from commercial work in unique cost centers of the company for pricing and cost control purposes, recognizing the market and competitive differences in the two venues.

 Cost Center Strategic Planning 

2. Your marketing efforts must be sensitized to swings in world events, geopolitics, domestic priorities and technology trends. 
3. The over 100 federal government agencies all have the same small business contracting requirement under the law. Focus on government contacting applications for your core business by exploring agencies other than those with whom you have been doing business.

SAM Contract Opportunities (Formerly FEDBIZOPPS) 
4. Industry partners are an excellent way to move into new fields.

Small Business Teaming 

5. Keep an eye on USA Spends and a close view of the domestic vs. foreign emphasis in the federal budget.  (War vs. bridge repairs). 

 USA Spends

6. Remember there is not much agencies of the federal government do not buy and they buy in huge quantities. 

 7. If your high-end navy IT customer requires support, security or related services, it is likely his or her counterpart in the Department of Agriculture or Health and Human services requires the same expertise.   This rule holds true for other services as well.

8. Maintain Your Capability Statement current with evolving trends and your growth. Seek to utilize it as a vital tool in your company marketing program.

9.   Preserve your credit rating and your finances in top shape to respond effectively when opportunities arise.
10. Remember market research is a continuing and ongoing process

Saturday, November 16, 2019


Image Source MGN
While exploring the federal government marketplace the small business will encounter programs and potential contracts that involve security clearances. This is common in the Departments of Defense, Energy, Homeland Security and many other agencies.

"FedTeDs" (Federal Technical Data Solutions) is a password-protected, web-based tool designed to safeguard the distribution of sensitive, unclassified, acquisition-related information for all federal agencies. FedTeDS allows Contracting Officers (COs) to use the internet to disseminate sensitive information in a secure way and eliminate the need to create and distribute CDs or paper documents. On some programs access to bid documentation may require a company and/or individual registration to acquire access.

Small business must grow into federal government classified programs. Individual and company clearance designations exist at various levels, depending on the relative risk to national security if unauthorized disclosure occurs. Clearances for key management are necessary to achieve a company clearance and all clearances are expensive. Either your company or a sponsor in the form of a prime contractor or government agency must pay for the process; the higher the security clearance the more costly the clearance. For facility clearances involving housing classified material, a building itself may require modifications for classified storage, communication devices or meeting accommodations (Sensitive Compartmented Information Facility or SCIF).

Becoming involved in the classified contract venue requires that you budget the time, the expense and the processes necessary and that you expense them in your forecasted overhead rate budgets so the costs can be appropriately priced and recovered via government contract billing. You must also carefully research government regulations such as the "National Industrial Security Program Operating Manual" (NISPOM) which governs the classified environment across all federal agencies:

The US Government security clearance process is based on two major principles:

1. A "Need to Know"

2. A requirement to perform a job on a specific government contract containing classified work.

Initial clearances are obtained by developing a business relationship with an agency or a prime contractor performing classified work and then getting assigned to a contract effort which is classified. Thereafter, clearances at certain lower levels can be carried by your employees or your company to other contracts at the same level of clearance requirement or even to a different agency within certain time constraints. At higher levels of clearances every employee is "Read On" and "Read Off" each and every contract on a singular basis after extensive background checks and in certain instances a polygraph. The process can involve lifetime nondisclosure commitments by an individual.

So you need a sponsor, a prime contractor company or an agency that will process your clearance based on your need to know classified information to participate in classified government contracts. Naturally they must be convinced via your marketing campaign that you can add value to the program involved. If it seems like a "Chicken and Egg" process - it is; but every business working in the venue has to go through the gates discussed in this article and maintain a vigilant program of compliance with associated regulations.

NOTE:  Comments at this post have been maintained from previous discussions on this topic at "Small to feds" in the interest of demonstrating the often complex and confusing nature of the clearances process. 

As one anonymous commentor (not published due to anonymity)  pointed out, some of the published comments are wrong and ill advised.  It pays to read the latest issue of the NISPOM, linked above. 

The anonymous commentor also maintained that clearances no longer cost the company.  I do not agree. The indirect costs of maintaining training programs to keep company and individual clearances is an ongoing tangible cost that must be planned for. The government considers  that cost allowable through the overhead on contracts, much the same way they are now considering a similar allowability for cyber-security certification.  

Wednesday, November 13, 2019

Meeting Veteran & Employer Challenges During Transition from Military to Civilian Work

Image Eastern Illinois University

Expectations and Reality are Far Apart on Both Sides of the Employment Spectrum
By Ken Larson 

Aside from the legal and moral obligations to employ returning veterans, there is a third, vital challenge in the employment transition equation: understanding the vast difference between the military and civilian work environments.  The expectations of both parties must be carefully assessed and communicated with realistic processes for effective transition from military to civilian employment by the veteran.

Civilian Knowledge of the Military Environment Has Diminished

As a country, America has been at war nonstop for the past 13 years. As a public, it has not. A total of about 2.5 million Americans, roughly three-quarters of 1 percent, served in Iraq or Afghanistan at any point in the post-9/11 years, many of them more than once.

War was much closer to home when the draft existed and military participation ran higher during WW II and the Vietnam Conflict.

The Nature of Today's Wars and a Cynicism with Regard to Their Outcome Impacts the Veteran and the Civilian Outlook

Ultimately, the military’s discontent may stem from dissonance between the commitment to, and pride in, the mission in Iraq and Afghanistan and the knowledge that these sacrifices have not yielded the desired results.

The wars in Iraq and Afghanistan arguably have prompted a crisis of confidence within the military itself.

Despite a six-year, $287 million effort to make troops more optimistic and resilient, an Army survey found that 52 percent of soldiers scored badly on questions that measured optimism, while 48 percent reported having little satisfaction or commitment to their job.

Veterans bring these issues home and find a civilian employment environment that does not have a focus on combat life and death, but rather an emphasis on long term thinking, collaboration, viewing actions with respect to the impact on internal and external customers and politically correct human resource considerations.

The assumption on the part of the employer is that the strength and training of the individual coming out of the military environment permits a reasonable transition. It does not.

We Must Educate and Develop Programs to Bridge the Gap from Both Ends.

A transition partnership between the veteran and the company is necessary. Expectations must be adjusted to reflect the differences in both venues.

Military core values such as – oaths, the Uniform Code of Military Justice (UCMJ), a culture of direct command, and a narrow focus on the task at hand are no longer available when the veteran leaves the military. 

In the civilian environment political correctness, strategic group awareness, tact, organization factors, and a broad view of mission and achievement are required.

A veteran is therefore is not so much entitled to a job as he or she is entitled to be understood, and to be allowed to understand the civilian job environment, growing into it.

Professional Roles are Vital

There are two important types of professional roles to consider when hiring and managing military veterans in the business venue.

As a veteran who made the transition to civilian professional work and ultimately owned a small enterprise, and as a counselor who supports veterans in becoming business owners, my experience over several decades indicates military men and women do well in Role 1 below. They have the most challenges with Role 2.

Role 1 Technical - Scientific, engineering, logistics, electronics, design and similar skill sets where direct supervision, team building, corporate policy compliance and human resource planning and utilization are not major factors.


Role 2- ManagementFunctional process capacities responsible for hiring, evaluation, supervision, compliance with civilian law and department activities involving group dynamics, customer relations and sensitive human factors.

Image: The Military Wallet

I came out of the military having had a leadership role in engineering, base development planning and combat support. I served in war zones in Southeast Asia and on highly classified missions. I was not a manager. I was a military leader in specialized skill sets under Role 1 above.

I knew how to direct people who followed orders without question because the Uniform Code of Military Justice to which we swore an oath said they must do so.

I felt uncomfortable in jobs involving Role 2 above because they were foreign to me. I later adjusted, learned the venue and became skilled as a manager in the corporate world. I preferred staff assignments, however for most of my career.

The corporate venue seemed enormously political and bureaucratic to a former war fighter like me. I was not that tactful. I cut to the chase often and did not always take everyone with me when I made a decision.

Once I grew into a Role 2 performer, I found in interviewing, hiring, evaluating and managing young veterans, even seasoned ones, who had retired and joined the civilian work force, that almost all were better suited for Role 1. It took years and effort on my part to fit them into Role 2 and some never made it.

Management Analysis  and Moving Forward

The principal reason for the logic conveyed above is that the military environment may seem to be structured in a way that fits Role 2, but the military does not turn out individuals who are suited in the knowledge and experience necessary in the civilian environment and they are not very good at it without extensive training and adaptation.

Enterprises have multiple-faceted challenges and they require multiple- faceted people. Even though individuals may hold a specific position job title, success in the civilian work force demands avenues where the human resource can contribute in multiple ways.

If a contributor has experience and training in several areas the business can utilize, that makes him or her a valuable resource and it is likely they will be professionally fulfilled and rewarded from doing so. Military personnel have specialty training and focus; few have a wide view of what is in front of them, particularly with respect to military vs. civilian professional settings.

It all comes down to the workers having an element of control in the future success for both themselves and the company and having the opportunity to realize their potential in that regard.

If the professional is in a narrow, technical discipline and his or her expectations are to have others support them in that role or if they are more comfortable in a "Stove-piped" professional setting and not attuned to group dynamics and the often politically correct nature of the civilian organization, they perhaps belong in technical roles and they do not belong in management roles at the onset of their employ.


In fairness to veterans and to our hopes for them in the future, we must understand these above distinctions, build on Role 1, understand the risk in Role 2 and assist wherever possible.Above all,  a respectful partnership and realistic expectations must evolve between the veteran and the company for success in transitioning  former military personnel into the civilian work force. This must be achieved through education, training, communication and assessment of both the veteran and the company personnel. 

Ken Larson 

About the Author:

Ken Larson is a 2 Tour US Army Vietnam Veteran, retired after 36 Years in the Defense Industrial Complex, having worked on 25 major weapons systems, many of which are in use today in the Middle East. He concluded his career with his own consulting firm. As a MicroMentor Volunteer Counselor Ken receives many inquiries from small companies wishing to enter or enhance their position in federal government contracting. 

Sunday, November 10, 2019

SAM Contract Opportunities Replaces FEDBIZOPPS



As of Nov. 12, 2019 Federal Business Opportunities, the website for publishing all public government procurements, will be officially decommissioned. After Veterans Day, the authoritative source for federal solicitations will be under a page on

Please see the following article for details:

FedBizOpps Will Be Retired After Veterans Day Weekend



This posting will provide strategic guidance on SAM Contract Opportunities and factors for using it in small business marketing to government agencies and prime contractors.


Established as the public announcement vehicle for federal procurement, SAM Contract Opportunities is a web-based, "Public Announcement Bulletin Board" to satisfy fairness in government contracting laws mandated by US law. It is a terrific market research tool and an absolute necessity once a solicitation has gone formal to stay abreast of modifications, changes in proposal due dates, questions and answers and other necessary information that contracting officers are required to make public.


SAM Contract Opportunities is the mandated posting point for contracting officers in all federal agencies. It is also the required notification point for GSA schedule solicitations, contract award announcements of all types and other information that is required by law for communication to the public in a fair and open manner regarding federal government procurement of supplies and services. The site contains "Sources Sought" and bidders conference notices, government requests for industry comment on draft RFP's and formally published solicitations with proposal due dates. 

A solicitation posted at SAM Contract Opportunities  generally means that a procurement has received funding and the contracting officer has been authorized to start the source selection process.

Often misunderstood, is that much has occurred in the way of marketing activities by companies in advance of notices formally published by the government on SAM Contract Opportunities. By the time the formal, solicitation is published it is too late to market for setting a procurement aside for a small business designation if it has not already been established as such. In addition, formal solicitation publication closes the window on self-marketing by HUB Zone and 8(a) firms for set asides to them individually without competition. In short, businesses have been marketing for the requirement long before it became formally announced at SAM Contract Opportunities.

Finding a solicitation that is ideal for your company for the first time on SAM Contract Opportunities is excellent market research insight into what the agency publishing the requirement is buying. However, a careful bid/no bid analysis should be conducted as to whether it is prudent to go through the expense of a proposal if the opportunity has not been a new business target for your firm earlier in the game. Please see the following article on completing a bid/no bid analysis:

Small Business Federal Government Contracting Proposal Preparation


Start by registering at SAM. Many of the features available to users are not accessible without a registration. Begin some careful searches by key words into agency solicitations that could use your products and services. 

The data base is huge and it is best to move from specific key word selections to the more general with experience to avoid being inundated with meaningless solicitations. Some companies establish a separate email address for the SAM Contract Opportunities mailings to keep the results out of the mainstream of other business. The mailings are totally automated so there are no marketing factors to consider in setting up such an arrangement.

As you examine the solicitations, see who has indicated an interest in bidding them among your competitors and the primes you are pursuing and then target such projects for participation by your firm either as a prime yourself or as a subcontractor. Pay particular attention to "Sources Sought", Draft RFP "Request for Industry Comments" and similar announcements that indicate an early requirement taking shape.

For active solicitations that you wish to monitor, check receive updates and announcements by email. Once the solicitation reaches the formal RFP stage and a due data for a proposal has been established, if you have decided to bid the job the "Follow" feature is especially critical.

If there is a bidders conference and you intend to bid the job, make plans to attend. When questions are solicited you may ask them but remember that your question and its associated answer will be published by the government so be careful not to educate your competition to your win strategy in the process.

You do not have to indicate you are interested in bidding the job by registering as an "Interested Vendor" in order to bid a solicitation. Some companies prefer not to advertise their bid intentions, seeking to avoid competitors modeling their firm.


If you are new to federal government contracting and wish to determine the best market for your supplies and services, observing what a given agency is buying on SAM Contract Opportunities is a key factor.

Keep in mind that the decision makers in government contracting are the technical managers and process people behind the scenes in an organization (either government agency or large company). They have the budget authority, program responsibility and accountability. These people pass their decisions on to buyers and contracting officers via signed requisitions. Buyers and contracting officers are really no more than gate keeping staff members, knowledgeable in legalities, terms and conditions and who sign on behalf of the agency or company AFTER an internal review by the executives who have technical and management responsibility.

Thus your real marketing targets are behind the gatekeepers and little is achieved by marketing to a contracting officer or buyer. This rule of thumb applies with prime contractor contracting specialists and administrators as well as government personnel. For further details on the roles of these personnel please see the following link:
Federal Government Contracting Customer Relations

Once again, bidding an active solicitation after it has hit SAM Contract Opportunities may be too late. The idea is to use them for market research so you can target similar projects earlier in the process. Research the technologies and services in which your targeted agencies and primes are involved through trade magazines, Internet articles, web sites, employment hiring fairs and industry conferences.

Focus your marketing campaign on finding evolving projects you can use as vehicles to approach teaming partners and agencies directly with a marketing campaign geared to your capability statement. Develop a solution to the specific needs of the project and present it to gain their attention.

Your principal challenge as a small product and services provider is finding evolving programs and projects into which your capabilities fit. Once you have found such targets it is then a matter of marketing brusquely to get into the game with eye catching solutions and capabilities.


When a procurement becomes public on SAM Contract Opportunities it stays public, but many invisible strings behind the scenes are likely already attached to it by aggressive and talented companies who may have sculpted the requirement with the agency, assisted in writing the statement of work or influenced the structure of the specifications to favor their products and services. All this is good, competitive marketing practice in the government contracting venue, just as it is in the commercial marketplace.

Use SAM Contract Opportunities as discussed here in consonance with the following teaming and marketing articles:

Small Business Teaming In Government Contracting

Multiple Front Marketing In Government Contracting

Marketing A Small Business In The Federal Government Contracting Environment

SAM Contract Opportunities is an absolute necessity once you make a bid decision. It is an extensive resource prior to such decisions and if utilized prudently it can enhance your small business government contract marketing plan dramatically.

Friday, November 1, 2019

Small Business Federal Government Contract Negotiation

Image:  Oregon State University Professional and Continuing Education


You have worked to establish your federal government contract business contacts. You have developed your company infrastructure and processes to accommodate the Federal Acquisition Regulation. Your company has effectively marketed and teamed on a prospective program. A proposal has been carefully prepared and submitted to the contracting officer. You have been selected as the apparent winner and you are ready for the next phase on the government contracting process - the negotiation. This article assumes that your are in the federal government services contracting business, that you plan to price your services at an hourly rate and sell them by labor categories with professional job descriptions to perform the government's statement of work and bill by the hour. This article also assumes that you are not contracting under FAR Part 12, "Commercial Contracting".

Unlike commercial business, the vast majority of federal government contracts are subject to negotiation. Even in competitive procurements, the government may award a contract based on best value (a combination of technical, cost and other factors) not necessarily to the lowest price bidder. The final price paid by the government is then subject to negotiation. Under General Services Administration (GSA) Schedules and Indefinite Delivery/Indefinate Quantity (IDIQ) Contracts, terms and conditions and labor hour pricing are agreed upon in advance but individual delivery orders are negotiated separately regarding the labor hours, material and travel cost necessary to complete a discrete scope of work. Cost Plus and Time and Material contracts are also negotiated procurements on many occasions. Only small, fixed price purchase orders and items purchased under FAR Part 12, "Commercial Contracting", are awarded solely on the basis of price.

This document will address contract negotiations under three (3) different business scenarios:

Negotiations directly with a government contracting officer pursuant to a federal government contract

Negotiations with a prime contractor for a subcontract under the prime's federal government contract

Negotiations with a subcontractor to establish a price and flow down the terms and conditions of your contract with the federal government.


In federal government contracting each of the above scenarios pass through the following template of negotiation steps:

A. Audit

B. Fact-finding

C. Pre-award Survey

D. Cost Negotiations

E. Final Profit Negotiations

F. Contract Award

The above template is recognized throughout the Federal Acquisition Regulation (FAR) and in the Defense Contract Audit Agency (DCAA) Handbook. All government agencies and contractors utilize it.


Your proposal represents an initial offer to a government agency or a prime contractor. Correspondingly, a subcontractor's proposal represents his initial offer to you. Government contract and subcontract negotiation is an art, not a science. You will find the above negotiation template is applied with various degrees of expertise among government agencies, prime contractors and subcontractors. Like many other aspects of business, the intellect and experience of customer or supplier personnel will vary with the agencies and the companies with whom your are dealing.

Keep in mind that your client or your subcontractor is also developing his/her position against the above template. Confirm with the other party at which step the negotiation is located and the fact that the negotiation is moving from one step to the next. If you are dealing with an agency or company representative who is unfamiliar with the process, take the time at the beginning to convey in a tactful manner your understanding of how the negotiation will proceed. Keep a careful written record of events during each step, to include information provided, offers and counter-offers made and agreements reached.

Develop a negotiation with a "target" position and a "floor" position. Your objective is to conclude the negotiation achieving a price as close to the target position as possible while never going beneath the floor.

Courtesy and politeness are mandatory. Avoid confrontations. Do not reveal your strategy in front of the other party except to objectively explain your position in terms of an incremental offer or a counter offer. Excuse yourself for outside caucuses or adjournments whenever it is necessary to study an offer, assess a situation or develop your next move.

It is always best to look at negotiations from a win/win perspective. Be honest and forthright during the audit, fact-finding and site survey steps. Look for insights into the other party's negotiation position from the questions being asked, the data being requested or the responses being obtained. Defend your cost and performance position as conveyed in your proposal with documented facts. Look for openings in your subcontractor's proposal support documentation. When cost and profit negotiations commence, offer compromises and trade-offs of value to the other party in return for acceptance of your position.


Procurement Contracting Officers (PCO's) hold warrants to represent the federal government. PCO's must have internal approval of a contract within their respective agencies before they can sign a contract. Only a PCO is authorized to officially commit the government. For smaller contracts a PCO may delegate his authority to an Administrative Contracting Officer (ACO). This often occurs in larger industrial plants where the ACO is resident in the facility or in remote locations where the ACO is a member of the Defense Contract Management Area Office (DCMAO) in the city where the contract is being performed.

A. Audit - Upon receipt of your proposal the contacting officer will order a Defense Contract Audit Agency (DCAA) audit. The Request for Proposal (RFP) to which you responded may in fact have ordered a copy of your proposal be submitted to the DCAA Office nearest your location. If you are a new supplier to the government, DCAA may ask for a copy of your long-range plan containing your direct and indirect rate structure. They will verify the rates utilized in your proposal against your LRP, evaluate escalation factors utilized for long term projects and check the math. The auditor will ask for copies of major material and travel quotations and insure that government per diem rates are utilized for lodging and meals in the cost proposal. DCAA may also visit your facility and complete a "Pre-award Survey of Prospective Contractor Accounting System" form. The survey checks compliance with Cost Accounting Standards 401 and 402 to insure that the company sets up each new government contract on job cost accounting in the identical manner in which it was proposed; in effect identifying direct labor, direct material and other direct costs to each contract monthly and allocating overhead and G&A utilizing the same numerator and denominator relationships upon which the contract was originally estimated. DCAA is paid by the PCO to perform the audit. The audit does not extend to negotiations and at the audit conclusion the auditor files a report with the PCO. The report will contain information on any errors uncovered and findings on the adequacy of the accounting and long range planning systems. DCAA will not express an opinion on the cost content of the proposal in terms of a value judgment regarding prices for prospective supplies and services. If the auditor does not offer an exit interview, ask for one. Better yet, ask for a copy of the audit report to the PCO. Many DCAA offices will provide a copy to audited contractors. DCAA does not have the authority to direct a proposal revision based on audit findings. An astute contractor will immediately correct any errors found by the auditor in the proposal and examine other audit findings in preparation for negotiations.

B. Fact-finding - Assuming your proposal met the requirements specified in the RFP, fact-finding usually involves the PCO or his ACO requesting additional information. These areas of interest are early indications of where the negotiator is looking for weaknesses in your cost justifications or disconnects between your technical approach and the cost your are estimating to do the job. If you have subcontractors or major material suppliers, the government may ask for copies of your vendor proposal evaluations. The government may wish to examine cost history for the last time you performed similar efforts. Keep in mid that most government agencies put together an independent cost estimate of what they feel the item or service should cost. These s are commonly called "Should Cost Estimates". The additional requests for information during fact finding are feeding the should cost . The PCO typically has an end user for the product or service who will become the Contracting Officer's Technical Representative (COTR) when the contract is awarded. The COTR has a strong influence on the negotiations and will usually be present when negotiations commence. On many occasions, the COTR is the real internal customer at the agency. He has fiscal, technical and schedule responsibilities to his management for the program you are servicing. He simply cannot sign for the government. The PCO has the agency warrant for that function and knows the most about public law and the Federal Acquisition Regulation (FAR) as it is applied to contracts the agency undertakes. It is the COTR who is likely feeding the PCO requests for fact-finding data. Keep in mind that the COTR and the PCO are formulating their assessment of the cost and the risk associated with the program during the fact-finding process. Cost is the first item of negotiation and risk has a direct influence on the government's position on profit.

C. Pre-award Survey - A pre-award survey is an extension of fact finding in the form of a visit to a new supplier's facility. The PCO or the ACO and the COTR usually attend. In some instances the local Defense Contract Management Area Office (DCMAO) is involved. As you become a regular supplier to an agency, site survey visits will normally cease or occur only rarely. The site survey team is interested in establishing the physical presence of a new supplier, the technical capability and the human resources to perform the prospective work and the quality of the environment in which the effort will be performed. A "Pre-award Survey of Prospective Contractor" Form is completed and becomes part of the contract file. Select the person who will meet with the government survey team. This person should be empowered to speak for the company and should be completely familiar with details of the solicitation and of your company's offer. If relevant, make available one or more technicians to answer questions. Identify any disparities that may exist between the solicitation and your company's offer that should be resolved during the initial meeting with the survey team. Think about how you can demonstrate actual technical capability or the development of technical capability on the proposed contract. Make sure your plant facilities and equipment are available and operable. If they are not, be prepared to demonstrate that they can be developed or acquired in time to meet proposed contract requirements. Make sure that your labor resources have the proper skills or that personnel with the needed skills can be hired expeditiously. Gather and make available to the survey team documentation, such as previous government contracts or subcontracts or commercial orders, to demonstrate a past satisfactory performance record with regard to delivery, quality and finances. Gather financial documentation for the team financial analyst, including the company's current profit and loss summary, balance sheet, cash flow chart and other pertinent financial information. Make sure the plans are in place for vendor supplies and materials or subcontracts to assure that the final delivery schedule can be met. Make sure that these plans are verifiable. Review any technical data and publications that may be required under the proposed contract and make sure you understand them. If the contract is a type other than a firm-fixed price or if you have requested progress payments, prepare adequate accounting documentation for review. Review your quality control program and make sure that it is workable and consistent with the quality requirements stated in the contract.

D. Cost Negotiations - At the conclusion of audit, fact-finding and pre-award survey steps, the PCO and the COTR complete their should cost and open negotiations. They may make a counter offer to your price proposal at this time. Such a counter-offer reflects the government's initial position on cost and a reasonable profit. Assess how far from your negotiation target the counter-offer is and how close to your floor the government wants to take you. In the vast majority of cases you and the government determine that further negotiations are necessary. The profit issue is set aside and negotiations commence on the elements of cost, comparing the government's position to yours. This is perhaps the most important step in negotiations, since fully loaded cost makes up the vast majority of the prospective contract price. The parties address each direct and indirect cost element and factor in the cost proposal and attempt to come to an agreement on the total cost for the contract. As agreement is reached the government will adjust their cost to reflect the agreed upon amounts. You will do the same. The following discussion will address cost elements least and most likely to undergo negotiation and the associated reasons:

Cost Elements Least
Subject to Negotiation

(1) Direct Labor Rate - The contractor can supply cost history, salary surveys or other documentation to support direct labor rates.

(2) Labor Overhead & Material Handling Rates - DCAA has reviewed the company forward pricing rates

(3) G&A Rates - DCAA has reviewed the company forward pricing rates

(4) Direct Material Cost - The contractor can supply vendor quotations and demonstrate competitive bidding

(5) Travel Costs - The contractor can supply airline and rental car quotes and government per diem rates are used for lodging and meals

(6) Terms and Conditions - All clauses required by the government and public law were contained in the RFP when the solicitation was provided for contractor response. In a competitive environment very few contractors take exception to these requirements. However, if the procurement is a HUB Zone or 8(a) Set aside to your compan there may be certain terms which the government is willing to negotiate. The FAR is written for protection of the contractor as well as the government. During the draft RFP stage when contractors are asked for comments it is wise to highlight any omissions.

Cost Elements Most

Subject to Negotiation

(7) Labor Category - The government may choose to question or have an alternative assessment of the skill level and mix necessary to perform the statement of work. A mutual agreement on the labor skill mix must be achieved.

(8) Labor Hours - The government may choose to question or have an alternative assessment of the quantity of labor hours necessary to perform the statement of
work. A mutual agreement on the labor hours to do the job must be achieved.

(9) Number of Travel Trips - The government may choose to question or have an alternative assessment of the quantity of trips necessary to perform the statement of work. A mutual agreement on the number of trips must be achieved.

(10) Data Items - Some data item requirements are negotiable, such as the level of reporting in the product hierarchy for cost and schedule reporting. Agreement must be reached on these fields. Although data items are normally not quoted separately in the proposal, their preparation cost can be dramatically influenced by content requirements and heavily effect direct labor hours.

(11) Material and Labor Escalation - The government generally recognizes the consumer price index as a reasonable projection of annual labor and material cost
increases. This index has been running plus or minus 3% per year for several years. In the event the contractor proposes escalation values in excess of 3.5% per year compounded for multi-year contracts, the rationale must be supported and agreed upon.

At the conclusion of the cost negotiation, all elements of cost for the base price of the contract have been agreed upon. During the course of the cost negotiations this agreement can be reached by arriving at a fully negotiated amount for each of the above cost elements one by one, or offering and counter-offering at the total cost line until agreement is achieved. Very few contractors are willing to accept negotiated changes in cost elements IV. D. 1-5, above because the nature of these cost elements is fixed across the company for all projects or is firm in quotations by vendors, suppliers and government-mandated per diem rates.

E. Final Profit Negotiations - During the offer/counter-offer process the preliminary profit positions which may have been conveyed from one party to the other must be finalized. Under Federal Acquisition Regulations (FAR) a PCO must place in the negotiation file a memorandum on the derivation of the profit rate awarded to the contractor in the final price. The general rule of thumb from the government perspective is that once the costs for a contract have been agreed upon the profit rate is determined by the amount of risk to the contractor in the deal. In government contracting profit is rarely proposed at a higher rate than 25% and only at that level on firm, fixed price contracts where the risk to the contractor is the highest. In some time and material contracts, profit cannot be calculated on a cost base containing material, travel or subcontractor cost elements. Profit in these cases is only awarded on fully burdened labor through G&A. The following broad profit ranges apply in general to the various types of government contracts :

Contract Type

Firm, Fixed Price (FFP) - 15% to 20% profit on total cost

Time and Materials (T&M) - 5% to 15% profit on fully burdened labor cost

Cost Plus (CP) - 5% to 15% profit on fully burdened cost

The Federal Acquisition Regulation (FAR) prohibits profit awards above certain levels for certain types of contracts where the government is bearing virtually all the risk. The PCO has the authority to negotiate the profit rate with the contractor but his profit memorandum to the file must specify the logic he utilized. PCO's must therefor justify the profit by discussing risk and certain other factors in the memorandum. To assist PCO's the government has provided the "Weighted Guidelines Method" of profit determination for use by government representatives in developing a position on profit. Ask for a copy of the government's weighted guideline analysis. It lends structure to the profit negotiation process. As you will see when you analyze it the government assesses risk and certain other factors such as management/cost control, contract type, working capital and cost efficiency factors in determining the profit to award on the contact. Your job is to influence the government with regard to risk and other factors and obtain the highest possible profit considering the nature of the prospective contract and the risk involved in performing it. Remember that the PCO's opinion of the risk in the contract is being regularly influenced during all steps of the negotiation process.

Certain cost plus incentive fee and cost plus award fee arrangements are available to the government and are usually specified in the RFP. Contractors are required to provide proposal input to these arrangements. A base fee is negotiated and then an incentive fee range or an award fee pool is also negotiated. The contract requires regular awards of additional increments of fee based on the performance achievements negotiated in advance with the contractor. A "Best Value" performance fee arrangement proposed by a contractor may be a key discriminator in winning a competitive procurement.

F. Contract Award -. Agreement on a final price for the contract is determined by the total negotiated cost plus the negotiated profit. The negotiation result is documented by the contractor in the form of a letter to the PCO specifying the date negotiations were concluded and the agreed upon price. A Certificate of Current Cost and Pricing may be required if the RFP contains the FAR clause for Certified Cost and Pricing Data. The clause has serious implications with regard to avoiding defective pricing and should be carefully researched before a company or an individual signs the document.

Upon receipt of negotiation confirmation from the contractor and the Certificate of Current Cost and Pricing, if required, the PCO and his staff prepare the contract document. The document is forwarded to the contractor for review, approval and signature. The PCO then signs the contract and returns a copy of the fully executed document to the contractor. You are now authorized to commence work. The government is obligated for the full amount of the contract and will pay invoices up to the incremental funding level. Many contracts are fully funded at award. Other contracts, particularly multi-year programs, are incrementally funded by year.

You are obligated for delivery of the supplies and services specified in the negotiated and signed contract in accordance with the delivery schedule and terms and conditions contained therein.


You signed a teaming agreement with a prime contractor during the RFP stage of a solicitation. You prepared your proposal and submitted it to the prime contractor who incorporated it into the submission to the government. Your submission contained flowdown versions of terms and conditions from the prime's federal contract as well as a technical description of the effort you intend to perform. Your cost proposal contained fully loaded rates for the labor categories and material as well as the travel you will perform on the subcontract. The government has awarded the prime contract to our team member. You are now undertaking negotiations with the prime to convert your teaming agreement to a subcontract. The subcontract will replace the teaming agreement between you and your prime.

Most prime contractors prefer to negotiate subcontracts with their team members before they negotiate the final prime contract with the government. Therefore, you will likely be approached by your prime with a certain element of urgency to finalize your subcontract and enable him to negotiate his deal. Keep in mind that your prime contractor is preparing his cost for negotiations with the government and may be seeking to obtain cost benefits at your level which will offset elements of his proposal which he may have bid ambitiously.

A. Audit - Prime contractors do not have a right to your direct and indirect rate information. Subcontractors propose fully loaded labor and material through profit and do not disclose their rates to primes. Your teaming agreement may specify the profit rate your team member and you have agreed to apply. Other than profit, your prime does not know the make-up of your direct labor, overhead, material handling and G&A rates. Your proposal disclosed labor hours at a fully loaded rate and burdened material and travel cost. If your prime wants to audit any other cost element of your proposal he must request an assist audit through his PCO. If an assist audit is requested it will be identical to paragraph IV.A., above, except that the PCO will get a copy of the audit report but the prime contractor will get only a general statement regarding the adequacy of our rates and systems. Thus, the PCO on the procurement is in possession of more information than the prime contractor in terms of the cost elements in your proposal. This may seem a disadvantage, but it is the only way the federal government and its contractors have been able to protect proprietary information in an environment where a contractor is teaming with a company today and competing against the same company tomorrow in a different program.

B. Fact-Finding - Prime contractors have similar limitations to subcontractor proprietary data during fact-finding as they do during audit. However, as the government’s buying agent for the subcontractor supplies and services, the prime is expected by the government to conduct a thorough source selection, to include market surveys, competition, technical qualification and contract negotiation. However, prime contractors cannot demand access to what subcontractors deem proprietary data without first signing a non-disclosure agreement with that subcontractor during the teaming agreement phase. Even then, most subcontractors will not disclose closely held process information, software source code and market sensitive data to a prime. When such data are disclosed they are clearly marked company proprietary. Therefore, for fact-finding the prime will utilize end items specifications for products, warranty details, personnel resumes for labor, financial performance information from Dunn and Bradstreet and customer satisfaction information from other clients. The prime may also request a tour of your facility if you are a first time supplier. The business relationship with a prime contractor is formed during the teaming agreement stage when the parties determine that they have complimentary capabilities. Keep in mind that the teaming agreement is replaced with a subcontract when the program is awarded by the government.

C. Pre-Award Survey - Same remarks as IV.C., above. The government PCO may request the Defense Contract Management Area Office (DCMAO) to complete the survey of a major subcontractor on a program where the subcontractor has a major portion of the effort and in cases where the subcontractor is new to the defense business. The PCO will always work through the prime contractor in arranging for the survey and the prime will receive a general statement when the survey is completed that the government either concurs or does not concur with your selection as a supplier. Once again, the relationship formed with your prime contractor during the teaming agreement stage is key in determining your selection as a source.

D. Cost Negotiations - Same remarks as IV.D., above, except that you will be negotiating with a representative of the prime contractor, deemed a "Subcontract Administrator" or a "Subcontracts Manager" instead of the government. Only this person is authorized to commit the company and care should be taken not to undertake matters of negotiation with other members of the prime contractor organization without an authorized contracts representative present. The prime will not have access to your direct or indirect rates [(IV.D. (1) through IV. D. (3)], or the DCAA Audit Report or DCMA Fact-Finding Report. The other party will be viewing your labor, material and travel cost from a fully loaded standpoint and will likely focus on items IV. D. 7 through IV. D. 11, above in pursuing his negotiation target.

E. Final Profit Negotiations - The profit rate will be agreed upon with the prime as either a function of the teaming agreement or as a function of subcontract negotiations identical to IV. E. above except that you will be negotiating profit with your prime contractor instead of the government. Make use of weighted guidelines to support your proposed profit.

F. Contract Award - Identical to IV. F, above, except that you will receive your subcontract from the prime contractor and the prime's subcontract manager instead of the government and the PCO.


You signed a teaming agreement with a subcontractor during the RFP stage of a solicitation. Your subcontractor prepared a proposal and submitted it to you. You incorporated it into the prime contract proposal to the government. You have negotiated flowdown versions of terms and conditions from your federal contract to the subcontractor as well as a technical description of the effort the subcontractor will perform. The subcontractor's cost proposal contained fully loaded rates for the labor categories and material as well as the travel he intends to perform on the subcontract. The government has awarded the prime contract to you. You are now undertaking negotiations with the subcontractor to convert your teaming agreement to a subcontract. The subcontract will replace the teaming agreement between you and your subcontractor.

It is preferable to negotiate subcontracts with team members before you negotiate your final contract with the government. Going into negotiations with the government having definitized your subcontracts reduces your risk in terms of unknowns contractually at the supplier level. It also eliminates the subcontractor wanting to know the result of your prime contract negotiations so that he can use it as a frame of reference for his negotiation position with you. The baseline when you go to the table with your subcontractor is your teaming agreement specifying his statement of work and your collective proposal to the government containing the prospective cost and price for his effort as part of the total proposal.

A. Audit - You do not have a right to subcontractor direct and indirect rate information. Subcontractors propose fully loaded labor and material though profit and do not disclose their rates to primes. Your teaming agreement may specify the profit rate you and your team member have agreed to apply. Other than profit, you do not know the specific make-up of your subcontractors direct labor, overhead, material handling and G&A rates. The subcontractors proposal has disclosed the labor hours at a fully loaded rate and burdened material and travel cost. If you wish to audit any other cost element of his proposal you must request an assist audit from DCAA through your PCO. If an assist audit is conducted, it will be held at the subcontractor identical to paragraph IV. A., above, except that the PCO will get a copy of the audit report and you will get a general statement regarding the adequacy of the subcontractor's rates and systems. Thus, the PCO on the procurement is in possession of more information than you are in terms of the cost elements in our subcontractor's proposal. This may seem a disadvantage, but it is the only way the federal government and its contractors have been able to protect proprietary information in an environment where a firm is teaming with a company today and competing against the same company tomorrow in a different program.

B. Fact-Finding - You have similar limitations to access subcontractor proprietary data during fact-finding as you do during the audit. However, as the government's buying agent for the subcontractor's supplies and services, you are expected by the government to conduct a thorough source selection, to include market surveys, competition, technical qualification and contact negotiation. However, you cannot demand access to what subcontractors deem proprietary data without first signing a non-disclosure agreement with the subcontractor during the teaming agreement phase. Even then, most subcontractors will not disclose closely held process information, software source code and market sensitive data to a prime. When such data are disclosed they are clearly marked company proprietary. Therefore, for fact finding you will utilize end item specifications for products, warranty details, personnel resumes for labor, financial performance information from Dunn and Bradstreet and customer satisfaction information from other clients. You may also request a tour of the subcontractor's facility, especially if he is a first time supplier. The business relationship with a subcontractor is formed during the teaming agreement stage when the companies determine that they have complimentary capabilities. Keep in mind the teaming agreement is replaced with the subcontract you are negotiating.

C. Pre-Award Survey - Same remarks as IV. B., above. The pre-award survey will be completed by the government and results will be supplied to the PCO. You will get a general statement that the government either concurs or does not concur with your subcontractor selection.

D. Cost Negotiations - Same remarks as IV.D., above, except that you will be negotiating with a representative of the subcontractor, deemed a "Contract Administrator" or a "Contracts Manager" instead of the government. Only this person is authorized to commit his company and care should be taken not to undertake matters of negotiation with other members of the subcontractor's organization without an authorized contracts representative present. You do not have access the subcontractor's direct or indirect rates [(IV.D. (1) through IV. D. (3)], or the DCAA Audit Report or DCMA Fact-Finding Report. You will be viewing your subcontractor's labor, material and travel cost from a fully loaded standpoint. Focus on items IV. D. 7 through IV. D. 11, above in pursuing your negotiation target. Remember you are acting in the role of the government in this negotiation.

E. Final Profit Negotiations - The profit rate will be agreed upon with the subcontractor as either a function of the teaming agreement or as a function of subcontract negotiations identical to IV. E., above except that you will be in the contracting role instead of the government. Make use of weighted guidelines to support your proposed profit.

F. Contract Award - Identical to IV. F., above, except that you will issue a subcontract to your partner.