DCAA Service Contract Audits and Small Business Job Cost Accounting Software Tools

INTRODUCTION

Small Businesses typically have a learning experience growing into government services 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

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.

PROGRESS BILLING AUDITS UNDER FIRM, FIXED PRICE CONTRACTS

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)

COST PLUS AND TIME AND MATERIAL CONTRACT AUDITS

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.

INCURRED COST AUDITS (OFTEN REFERRED TO AS "RATE AUDITS")

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.

JOB COST ACCOUNTING SOFTWARE TOOLS

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:

DELTEK

SYMPAQ

JAMIS

Here are some products especially designed for small business:

ICAT

PROCAS

ASPIRE

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.

GROWING YOUR JOB COST SYSTEM

Many small companies doing government work start out with a rudimentary direct job cost accounting software package such as Peach Tree (now SAGE) 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.

SUMMARY

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" 

Pricing Small Business Federal Government Service Contracts

Integrate Long-term Company Strategy

 With Short Term Proposal Pricing Objectives 
For Success

Small businesses entering or growing into federal contacting often struggle with developing a pricing approach. They must design a pricing structure to pass an audit and win competitively. A winning strategy for federal services contracting must involve a view of the horizon as well as the instant bid on the table.

If you are a small enterprise selling off-the-shelf commercial items under FAR Part 12 or marketing commercial products on a GSA schedule, you may be initially challenged by the government contracting venue. With persistence you will establish selling relationships through agencies and prime contractors. Your pricing challenge is minimal. A service contractor faces a far greater challenge in understanding the nature of government contact pricing and winning at it.

Strategic thinking must therefore be applied to structuring a government service contracting cost center in your company. It must involve long term planning and designing a business system as well as establishing rates and factors to bid new work.

LONG TERM COMPANY STRATEGY

Build a Business System With Pricing in Mind:

We have previously discussed the basics of small business government contracting business system design: Job Cost Accounting Basics

The structure or your pricing approach from the cost element level through burdens must use the same template as your job cost accounting and billing. The parallel mapping provides the consistency required to pass audits or get your billings approved on a service contract.

Please read the above article and its related references. Then design your processes recognizing the guidance there and applying it to your company organization, and the way you produce your supplies and services:

Sculpt the DCAA Auditor

As you begin submitting government contracting proposals you will encounter your local DCAA audit office. They learn about your company by auditing your cost proposal rates, job cost processes and systems, billings and contract closeouts.

Keep in mind that you are shaping opinions in these encounters on the part of these government personnel that will influence your future and be passed on in reports to contracting officers. Your unique company business system structure must be carefully explained to them against what they know best; their DCAA Audit manual and FAR Cost Accounting Standards:

DCAA Audits and Job Cost Accounting Systems

Protect Rate Information

Your fully loaded rates will appear on your GSA schedule in the public domain, in subcontracts from prime contractors and in data acquired under the Freedom of Information Act (FOIA) by competitors.

It is generally recognized by all industries participating in federal government contracting that internal overhead and G&A rates and the data that support them are proprietary data. The reason for the proprietary nature of rate data between companies is that in government work firms are teaming with each other exclusively on one project and competing against each other on additional contracts or projects at the same time.

Companies do not disclose the details of their rates to other companies and they do not expect to see another company’s proprietary rate information. So companies view each others rate information on a fully loaded basis, meaning the total of the base cost, any proprietary indirect cost and an agreed upon profit percent.

If a prime contractor requests that subcontractor proprietary rate information be supplied with a proposal the detail should be double wrapped and the package stamped, ‘Government Eyes Only’. The prime will then hand the package off to DCAA without opening it and receive only the fully loaded result of the burdened rate pricing.

For further information on intellectual property protection and protective markings on government contract proposals please see the following article:

Protecting Intellectual Property

Recognize Overhead and General and Administrative Expense Rates Are Critical

Assuming your competition pays a generally similar labor rate to their employees as you do and that fringe costs about the same for everyone, then overhead and general administrative expense are what wins and loses contracts.

Please read the following articles carefully with regard to long range planning and setting your overhead and general  administrative  rates:

FAR and CAS Compliant Systems

Provisional Indirect Rates

Keep in mind that if you are performing work inside a government facility the government will expect to be charged a lower overhead rate than if you were paying the space and occupancy costs and the light bill. This is normally achieved by establishing a separate cost center for “On site” (Internal to government quarters) work with lower overhead expenses applied to project direct labor dollars in that cost center.

Price Set Aside Contracts the Same as Full and Open Competitions

If you are a small business lucky enough to receive a sole source set aside contract under an 8(a) or Hub Zone award, or if you are participating in limited competition under a small business set aside designation, use the same sharp pencil you use on the full and open market. Your goal is to compete for the long haul and inflating estimates on particular jobs due to limited competition has an inflationary effect on your business as a whole.

Your company past performance is being constantly evaluated by the government and prime contractor community. Consistency attains and retains new business. You will eventually grow to the point where set asides and sole sourcing will no longer be available; prepare early.

Know the True Value of Your Proposal

Develop risk thresholds (ceiling and floor) for your bids. The ceiling is the price for which you can bid a job, perform to meet specifications and win. A floor is the lowest possible price for which you can accept a contract and survive.

Do not bid or be negotiated out of these thresholds. “Buying In” does not work and sacrificing the future of your company by “Low Balling” cost proposals and hoping to get well on scope changes later is dangerous.

In government contracting the only worse scenario than losing a contract is winning it, performing poorly (cost, schedule or technical) and getting a black eye on your company past performance record that takes a long time to go away.

Understand a Proposal is the Opening Chapter a Baseline for Your Contract

Your proposal represents an initial offer to a government agency or a prime contractor. Please read the following articles on how this baseline is initially set and controlled through the negotiation process and ultimately through careful contract management.

Project Baseline Managment

Contract Negotiation

SHORT TERM PROPOSAL OBJECTIVES

Make Bid/No Bid Decisions Wisely

Conduct your bid/no bid decisions effectively. Please see the bid/no bid analysis process at the beginning of the following article:

Contract Negotiation

Be Conservative in Rough Order of Magnitude Pricing

A common government planning technique in the early phases of marketing is to ask questions and review and approve a concept paper by a company then informally request for “Planning Purposes”, a rough order of magnitude cost estimate (ROM).

If you provide a ROM be very careful. It tends to get cast in concrete in the customer’s mind, even though it is not the final, formal proposal. Make it conservative in cost content and schedule duration, then plan to beat it with your formal proposal.

Make sure you caveat the ROM if you are asked for it with the statement in your cover letter that it is for planning purposes only and is not a commitment on the part of your company. State that you will be happy to make a full formal proposal/commitment upon receipt of a formal RFP from an authorized contracting officer. Keep in mind that contracting officers are the only people who can commit the government:

Customer Relations

The government usually goes forward with the concept paper and the ROM for approval of the funding necessary for the job. The “Agency Higher Ups” either give the project personnel the approval to do a set aside or they require a competitive procurement.

You may want to read the following article on Statements of Work:

Contract Statement of Work and Technical Specifications

Know the Difference Between Firm, Fixed Price, Time and Materials and Cost Plus Contracting

During the solicitation and proposal process the contract type is specified.

Firm, Fixed Price (FFP) is the riskiest type of contracting and should be undertaken only when you have a definitive grasp of a precise statement of work with known variables and end products. You should have achieved similar work scope in the past or be delivering follow-on products and services that are mature in nature to undertake a firm, fixed price contract.

FFP is particularly risky in software development contracts or high technology program pressing the state of the art. You will receive no more in the form of funding than your bid price on a firm, fixed price contract.

Time and Materials (T and M) contracting places the risk on the government and is suited to long term service contracts of a development nature. Time and Material may be contracted with fixed labor rates, making the hours and pass through materials and other direct costs the only variables.

Cost Plus (CP) contracting is the least risky of all contract types and you are assured of receiving every dollar of cost incurred under this type of contract.

The lower the risk to the contractor the lower the expected negotiated profit rate you can expect, since the government considers risk the principal factor in profit negotiation.

For further explanation of contract types in more detail, please see the following article:

Government Contract Types

Develop a Price Profile of the Competition

Use a copy of your own forward pricing long range plan (LRP) to model your strongest competitors. Profile your best intelligence regarding their size, location, contract base and estimated overhead and G&A expenses. Then interpolate, from your knowledge of the market, their labor and fringe costs, as well as other direct costs as you prepare your proposal. Incorporate any unique approaches you estimate your competition may offer that impact cost.

Modeling Your Competition

Adjust your competitor cost model to perform “What If Analysis” during your risk assessment and proposal review process. For an example of an LRP cost model please see the Box Net Cube in the left margin of this site: Small Business Federal Government Contracting It is Appendix B to the book, “Small Business Federal Government Contracting” and is available as a free download in Adobe format from the BOX in the right margin of the site.

Understand “Best Value” Source Selection

When the government declares a “Best Value” proposal award process the agency will perform a weighted trade study of cost verses technical and management factors in reviewing proposals. They will announce the weight of each factor in relative terms within the solicitation so contractors can focus on the most important elements.

What best value means quite simply is that if you are the low price bidder you may not win. If a competitor proposes a superior technical and management approach, a higher weighted rating in those factors may offset an otherwise non-competitive bid price, resulting in an award. This is a fact you must keep in mind when preparing your own proposal. In short you must perform your own trade study on your own bid.

Past performance has also become a significant weight factor in proposal evaluations in recent years. To address this challenge, please see the following article:

Past Performance Challenge

A balanced proposal, with specific, heavy emphasis on government-designated weight factors and an economical, yet realistic cost/price usually wins. Offsetting weaknesses in any designated government weighted area by proposing excellence in other weighted areas is vital.

Beware of Unallowable Costs

Over the years the federal government has determined that certain costs cannot be allowed in prices, cost reimbursements or settlements under contracts with the US Government. The government is unwilling to pay for these costs as direct charges to federal government contracts or through indirect expense pools applied to federal government contracts.

A company is not prohibited from incurring unallowable costs, but they cannot be recovered either directly or indirectly under federal government contracts. To manage unallowable costs, separate accounts must be established for these type expenses and they must not be priced directly into federal government contracts during the proposal process.

Such costs cannot be made a part of the expense pools which are applied to federal government contracts through an overhead, material handling or G&A cost allocation at accounting period close or during forward pricing rate planning. For more detail on unallowable costs please see the following article:

Unallowable Costs

Integrate Pricing With Technical and Management Approaches

Establish price targets as soon as possible for major tasks, evolve a program plan, or if you are bidding a T&M, IDIQ type program develop a sample work order for a typical representative effort.

As the technical and management proposal move toward completion, use established checkpoints to evaluate the efficiency of your cost estimate, escalation factors, labor, material and other direct costs. Then apply your indirect rates and subject your total proposal to a credibility check with regard to a believable cost estimate considering your solution and its time frame.

Run your competition price model and bring in some outside experts to review the end product proposal “Cold” before it is submitted.

Manage Best and Final Offers (BAFO) Carefullly

Most government solicitations require a format and terms and conditions with submission that permit contract award without further discussion. However, many involve a down-select process, briefings by those selected in the “Competitive Range”, a call for best and final offer (BAFO) or negotiation to achieve a final price.

The best and final offer period is a sensitive time. Most contracting agencies that call for a BAFO will cite weaknesses or concerns in the selected contractor proposals. They wish to hear about solutions to those weaknesses during BAFO briefings and require a re-submitted offer to correct them. The price may be adjusted as well and that is a key consideration. Pay particular attention to the way the BAFO instructions and concerns, specific to your down-selection, are worded. Look for hints that indicate critical opinion about your pricing, and then adjust your costs.

Consider the cost, schedule, technical and past performance implications of the BAFO request letter from the government and revise your proposal by the required submission date. Close the loop on all matters with your suppliers, subcontractors and prime contractors, and then conduct your briefing to the customer when it is scheduled. Present a united front to win. Your price should be your best. You will not be offered a chance to bid another competitively on that program.

On some procurements you may be asked to undertake additional discussions to determine final contract pricing. Please see the negotiation template at the following article for guidance on that process:

Government Contract Negotiation

SUMMARY

This discussion has conveyed how pricing should be a natural outgrowth of the organization structure, market strategy, competitive analysis, business system design and long range planning.

We have further explained how your long and short term pricing factors should be integrated with the management and technical elements of any given proposal. Take the long and the short view of your business by integrating long-term company strategy with short term proposal objectives

Security Clearances In Federal Government Contracting

       Image:  Fedweek

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.

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" (NISP) which governs the classified environment across all federal agencies:

National Industrial Security Program

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 request 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. 

The Defense Counterintelligence Security Agency (DCSA) then conducts and grants your security clearance.  

It may seem like a "Chicken and Egg" process - but every business working in the classified 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.  

Maximize FREE Social Media Utilities to Promote Your Small Business

Utilize social media to promote your small business. The process requires a front-end loaded investment in time, but it is well worth the effort when using free or very low cost utilities on the Internet. The return may surprise you.

Set up a free Google or Word Press blog as an extension of your web site.  A blog is quite different from a web site. Provide good, solid information free of charge and use blog searches for synergistic business teaming. Teaming is an absolute necessity these days. 

SmallBusiness Teaming 

Be prepared to provide information, samples and valuable service gratis as a marketing tool. Introduce yourself and then immediately engage the client or potential teaming partner with your presentation tools available to bring your expertise to whatever topic they are interested in. 

Let them take you where they want to go with their concerns and their needs. Apply your presentation tools and expertise dynamically The idea is to refer clients to article links at your web site and your blog to avoid having to repeat yourself over and over in new business marketing, thereby keeping yourself available for specific inquiries and closing deals. 

Link everything together and begin answering questions as well as registering at many of the free applications for networking web sites on the Internet to see how that can benefit your product and services. Utilities like LinkedIn, Twitter, Alignable, Pinterest and About Me will serve your site well. 

You may wish to consider Google Ad Sense for cash flow.  It is free and could supplement your income with ads in the margin of your blog. 

Integrating and networking platforms together is the best approach. Most of the free applications of the type discussed here have profile features to link back to your blog and many will automatically publish your content on their site, once linked. 

Content is king and the queen is a hub of strong useful information with spokes emanating from it like those of a wheel to many free social networking platforms where your brand, your consistency and your offerings drive the engine that is your enterprise.

Please see the below link for an example of how the above principles have achieved. 

Integrated Utilities Linked as a Composite on "About Me" 

Small Business Government Grants Versus Direct Government Contracts

INTRODUCTION

Start-ups, entrepreneurs and new small businesses regularly seek information regarding small business grants. There are many misconceptions about the nature of such instruments, who qualifies for them and what constitutes a small business grant. The misunderstanding stems from advertising on the Internet and other media creating the impression that grants are readily available and that they are "Free Money".

Other than the special circumstances surrounding the COVID-19 Pandemic, there is generally no such thing as “Free” small business government grant money. In many instances individuals seeking grants should be looking to direct government contracting; this article will explain why.

DEFINITIONS

Small Business Government Grants

Small Business government grants are a type of contract and involve performance of a statement of work for agencies that are in some socio-economic endeavor serving the public, such as health care, public information, communications, high technology, or similar undertakings. A small business entity receiving a grant from a government agency becomes an extension of the agency mission and obtains funding to enhance that mission while growing as an enterprise.

Small Business Direct Contracts

Small business direct government contracting differs from grants in sheer numbers and regulatory control. Direct contracts are used by all agencies of the federal government to acquire supplies and services. Both for-profit and non-profit organizations compete in direct government contracting. A direct government contract has a very specific work scope, schedule, deliverable items, pricing and in many instances incremental funding. A grant has a more generic functional orientation to funding and may or may not include deliverable items.

There are some programs, such as Mentor/Protege and Small Business Innovative Research (SBIR) that appear to be hybrids of grants and direct government contracting and are often mistaken for grant instruments. They are not grants and are governed under the Federal Acquisition Regulation (FAR) as direct government contracts.

REGISTRATION
Guidance on registering to become eligible for both small business grants and direct contracts is at the following link:

Registering For Government Contracting

STRUCTURE AND STRATEGIC PLANNING

Non-Profit Organizations

Most small business government grants go to non-profit organizations because of the nature of the work such entities do.

A non-profit organization operates in much the same way that a for-profit company does except that the founder (s) work for a board of directors that pays them a salary and, upon registration with state and federal governments under IRS provision 501 3 (c) or a similar designation, the business pays no taxes.

What would normally be considered profit in a for-profit company is re-invested back into a non-profit to further its work. Annual reports are required by the IRS to demonstrate the re-investment and maintain a tax-free status.

Non-profit organizations are usually initiated to pursue a religious or socio-economic endeavor serving the public, such as churches, health care, public information, communications, high technology, or similar undertakings.

No one owns a non-profit organization. A board of directors, a charter, articles of organization filed with the state and the IRS designation with the federal government establish it as a public entity. In the event it is discontinued, all proceeds and assets are distributed by the government for public use and no one individual benefits. A non-profit charter must include that provision.

For-Profit Organizations

A for-profit organization is founded by individuals specifically defined by name as owners in the articles of incorporation with the state and registered with the federal government for tax purposes. There are many different types of for-profit entities (S Corp, Sole Proprietorship, LLC, Partnership, etc.); each type has its own unique tax and operating characteristics.

A for-profit organization exists for the specific purpose of providing a return on investment for the owners. All assets on the books of the company are the property of the company, and although certain types of corporations, such as a Limited Liability Company (LLC) reduce the risk and insulate the owners' private assets to some degree, in general what is invested by an owner in the firm is the property of the firm and subject to business risks and the laws governing such matters. In return the owner or stockholder is entitled to the return on his or her investment as an individual in the form of dividends, direct proceeds after costs or other forms of entitlement (conveying what is commonly known as profit).

GRANTS VS. DIRECT CONTRACTING

Small Business Grant Funding

Small Business Government Grants have the effect of supplying lump sum funding to a non-profit organization for a specific period once the grant is awarded. In general the funding is used to further the stated mission of the business. However, the grant provider may reserve the right to receive reports on how the money was spent and may require deliverable items associated with performance of the work under the grant.

Certain grants take the form of cooperative agreements, whereby the non-profit and the agency commit to supplying mutual funding amounts to a project. Under limited or special circumstances involving 0 profit, a for-profit entity may be eligible for such a cooperative agreement with the federal government.

Federal Government grant regulations are at the following link:

Grant Regulations


A Web site for researching federal grants as well as additional information on grants in general is at the following site:

Government Grants

Small Business Direct Contract Funding

Federal Government direct contracting regulations are at:

Federal Acquisition Regulation

“Small to Feds”, the web site you are reading, was initiated to assist small businesses in understanding the above regulation and direct federal government contracting. Please see the table of contents in the right margin of this site for topics.

As stated in the introduction above, both for-profit and non-profit entities compete for direct federal contracting. A non-profit entity will bid grants and direct contracts at 0 profit. The following links are suggested as an introduction to direct federal government contracting:

Introducing Federal Government Contracting Into Your Commercial Small Business

Small Business Government Contact Set-Aside Designations

Should You Consider Small Business Federal Government Contracting?

 SUMMARY
This article has provided a brief (and admittedly general) overview of the difference between non-profit and for-profit business entities and the small business government grants and direct contracting available to each. 

Both small business government grants and direct government contracts are highly competitive. Selecting potential agency sources and submitting winning proposals are acquired skills. For assistance in writing grant and direct contract proposals please see the following links:

Proposal Preparation


When considering forming an enterprise, please assess in your business plan the potential of both types of entities in direct contracting or grant competitions. Go to the SBA web site that guides you through the business planning process. I suggest you follow the site presentation and note the factors to consider:

Write Your Business Plan

The following site contains samples of business plans:

Sample Business Plans

Look for examples in the above of both for-profit and non-profit organizations at the above link.

Ask yourself some strategic questions, such as what competition you envision and what your marketing plan will be. Addressing these questions may take some research and that is all part of the process of putting in place your plan. It is your road map for the future.