Marketing A Small Business In The Federal Government Contracting Environment

INTRODUCTION

You have positioned your existing or start-up company for doing business with the federal government. You have registered your enterprise at the System for Award Management to include determination of your North American Industrial Classification (NAICS) Codes, applied for Small Business Set Aside Designations , if applicable, researched your HUB Zone status HUB Zone Information and developed a Capability Statement for marketing purposes.

You are embarking on the utilization of SAMContract Opportunities, the gateway for federal government agencies advertising prospective contracts on the Web. 

Now is the time to think through your marketing strategy and the various venues for contracting with the federal government. This article will discuss these venues and the opportunities they offer your small business.

WHAT TYPE OF SMALL BUSINESS ARE YOU?

A. Commercial Contracting Under FAR Part 12

Are you planning to market an existing commercial product which has been on the market, such as software, hardware, a commodity, a report, a conference, a survey or a study, sell it to meet a government specification or statement of work and bill for the end product when delivered? 

If the answer to this question is "Yes", you may be able to do business under Federal Acquisition Regulation (FAR) Part 12, "Commercial Contracting", which is a simplified and fast form of selling to the federal government. 

The vast majority of purchases by the federal government in this category are Firm Fixed Price (FFP) with a product warranty of some type. You may be able to sell under FAR Part 12 if your product meets the definition of commercial items specified by the government.

B. Non-Commercial Contracting

Are you planning to market your services at an hourly rate, sell them by labor categories with professional job descriptions to perform the government statement of work and bill by the hour for labor and at cost for material and travel? 

Or is your product or service a development effort or not readily available to customers in the commercial marketplace. If you fall into this category for either reason it is unlikely you will be contracting under FAR Part 12 and you will be pursuing long term government contracts. 

If the above apply, much of the remainder of the Federal Acquisition Regulation (FAR) will apply to you, together with the various contract types other than FFP which are used for efforts where the contractor and the government may share the business risk in development, implementation or production of a new product, system or service.

C. Commercial and Non-Commercial Contracting

You may decide to market under both (A) and (B) above. Some small businesses sell their product commercially, but contract for product implementation and support on a service contract basis.

If you are selling under (A) and (B) or just (B) above you should examine this web site further to obtain sufficient detail to develop your business system in estimating, proposing, accounting and billing the government for contracts not qualifying under FAR Part 12.

YOUR CUSTOMER

Although all requirements in the federal government market emanate from the US Agencies there are several ways for meeting these requirements with a business arrangement that suits your small business.

A. U.S. Government Agency As a Customer

There are many agencies or "Departments" in the Federal Government. Each of these agencies has a statutory obligation to contract from small business for 23% of everything it buys. Contracting officers must file reports annually demonstrating they have fulfilled this requirement. Not fulfilling the requirement can put the agency annual funding in jeopardy. You have a motivated customer in federal government contracting officers and buyers.

As a prime contractor to one of these agencies your small business proposes, negotiates and contracts directly with a federal government contracting officer. You may or may not have subcontractors or suppliers. 

A subcontractor is a teaming partner who agrees to accept a portion of the effort under your prime contract and abide by the prime contract terms and conditions flowed down to him from you. On competitive procurements the business arrangement is usually mutually exclusive on the part of the subcontractor and your company. 

A supplier is a purchased finished vendor or off the shelf retailer who sells you items or components necessary to produce your product but does not accept the flow-down provisions of your prime contract other than the most general terms and conditions such as US Public Law , EEO, Tax Provisions, Warranty and the like. Supplier relationships are not usually mutually exclusive arrangements.

You may be able to fulfill the entire prime contract scope of work or meet the product specification from within your company. However, major government procurements are increasingly geared to teaming arrangements involving a prime and several subcontractors. As the prime on such a procurement you normally have the lead share of the work scope, you have a product critical to the program, you know the customer the best or a combination of these factors. Your subcontractor team members are usually not your direct competitors but are involved in lines of work that complement your business and enable the team to fulfill a scope that is larger than any single member could undertake alone Your direct competition is most likely forming similar teaming arrangements in an attempt to win the larger jobs which can span a number of years in duration and mean good, solid cash flow for all participants.

A General Services Administration (GSA) Schedule is a pre-qualifying way to obtain business directly from all federal government agencies. The GSA performs the service of negotiating with you for multi-year pricing of labor, products and equipment, together with pre-established terms and conditions. Your schedule and terms are posted to the GSA Web Site and all federal agency buyers can expeditiously buy from your schedule. A GSA Schedule is normally set up for 5 years. Achieving and Utilizing a GSA Schedule

The GSA also sponsors and manages major Indefinate Delivery/Indefinate Quantity (IDIQ) procurements such as "Alliant" and "Alliant Small Business" for Information Technology. These contract vehicles pre-position large and small contractors and teams of contractors to accept competitive delivery orders under established terms and conditions and standardized solutions for technological areas in high demand across the federal government. An IDIQ procurement can span a period as long as 10 years.

B. A Government Prime Contractor As A Customer

Government Prime contractors who are large businesses (roughly defined by the SBA and the banking community as having over 500 employees and annual sales in excess of $20M) and who hold federal government contracts have the same requirement as government agencies to buy at least 23% of the supplies and services in support of those contracts from small business.

Large business, under federal procurement law, must prepare and submit annual "Small Business Contracting Plans" for approval by the local Defense Contract Management Area Office (DCMAO) nearest their headquarters. These plans must include auditable statistics regarding the previous 12 month period in terms of contracting to small businesses and the goals forecast for the next year. The federal government can legally terminate a contract in a large business for not meeting small business contracting goals. Approved small business plans must accompany large business contract proposals submitted to federal government agencies. You have a motivated customer in large business subcontract managers, administrators and buyers. A small business who becomes a prime contractor does not have to meet the annual small business contracting plan requirement until it becomes a large business.

In selling to a prime contractor you propose, negotiate and subcontract with a company who holds a contract with a US government agency and in turn flows down its provisions to you. Or you sell under purchase orders on a commercial basis (FAR Part 12) to another company who holds a federal government contract.

C. Selling Via a Joint Venture

There are occasions when two companies wish to combine their respective products or resources and form a separate entity to undertake a contract, usually a prime contract with the federal government. The marketing considerations for such a venture involve impressing the client with the resources being dedicated to the program or addressing government concerns about broadening the technology and assuring redundant capability in the industrial community. A joint venture consists of human and other resources from the participating companies. However, it stands alone as a legal entity. Joint venture agreements are difficult to craft. Protecting proprietary information, together with intellectual property is especially demanding. Dividing the contractual effort and ultimately integrating it into a final product or service is also a challenge. Complicating the scenario is the fact that the US Government reserves the right to approve joint venture agreements before a contract can be issued to the entity. One company usually assumes the lead role in the joint venture. Some joint ventures hire a joint venture administrator who is the only legal entity authorized to sign a binding document on behalf of the two companies once it has been approved by each firm through a joint venture board, with equal representation by both organizations. Administration, accounting and billing at the joint venture level is a third tier of administrative cost which must be born by both companies.

Your customer in the federal market is either the government itself or a prime contractor. You will sell as a prime contractor, as a commercial supplier or as a subcontractor and on occasion you may have the need to establish a joint venture with another firm.

MARKETING AVENUES

A. Small Business Certifications

Your small business designation at your SAM registration places you in the small business set-aside market for 23% of the total goods and services the federal government buys. Within small business, there are additional self-certifications and SBA certifications to which you can apply if you qualify.small business designations 

Self-certification occurs when you respond to government requests for proposals, cite you registration number and state in your proposal certifications and representations that you are a Small Business and whether or not you have set-aside designations.

Procurement contracting officers and prime contractors are responsible for verifying self-certifications. Owners claiming designations must have a major equity share in the business and must be involved in running the business operations.

The SBA certifies Small, Disadvantaged Businesses under their "8(a) Program". The application for this certification is available at the SBA Web Site for businesses who qualify by virtue of minority ownership and minority involvement in running the business operations. The SBA reviews, approves and grants 8(a) Certifications to small minority-owned businesses. Please see the following link:

SBA 8(A) Certification Program

Federal agencies and prime contractors are required to set goals and contract to achieve annual objectives for each of the above certifications within the overall 23% small business contracting mandate required by statute. Procurements are regularly "set-aside" for these designations to achieve government and prime contractor annual objectives. Procurements are also set-aside for small business in general, which includes companies who may not qualify for the additional small business certifications discussed above.

B. Capability Statement

With your small business SAM registration and additional certifications, you are ready to develop your capability statement. This document will be a promotional brochure which on paper and through the electronic media advertises who you are, what your do and why the government or prime contractors should buy from you. Major elements of your capability statement in addition to your small business designation and certifications are as follows:

(1) Company overview

(2) Supplies and services description couched utilizing your marketing ideas and strategy.

(3) Past performance of your enterprise or your personal background and qualifications (experience, education, etc.)

(4) Facilities or capabilities overview (How you perform your service couched in a manner that will appeal to your target market)

(5) Explanation of the positive results the client should expect.

(6) Points of contact and ways to contact you for meetings, placing an order and contracting your services.

Your Capability Statement

Your capability statement can be distributed on paper to your target market as a brochure, emailed as an attachment and linked into related industry web sites or partner web sites to get the word out about your product or service. The capability statement targets contracting officers and prime contractor buyers who are seeking to fulfill their small business buying goals. It is a way to get you in the door and speak to or correspond with the management and technical personnel who are the decision makers in sourcing small business buys.

C. Self-Marketing for SBA 8(a) Small Disadvantaged Business (SDB)'s and Historically Under-Utilized Business (HUB) Zone Contractors

If you qualify for a SDB Certification or can attest that you are located in a HUB Zone, these items can be valuable marketing tools. Presenting your capability statement to a prospective federal customer and meeting the management, technical and procurement decision makers puts you in a position to self market projects. All federal agencies and large business contracting to the federal government have to meet SDB and HUB Zone annual buying objectives. They have processes for competitive procurements. The processes are generally lengthy to comply with regulations governing solicitation on the open market, request for proposals, source selection, negotiation and award.

Under the 8(a) SDB Program and the HUB Zone Program if you can assist a federal agency or large business in identifying a product or service they need and that you are a qualified source to fill that need then the your customer can buy it directly from you and bypass the competitive process entirely. The key to achieving this type of targeted marketing is to contact and/or visit your customer regularly and get in front of the solicitation process. Once a project has gone to the "Sources Sought" or "Solicitation" stage you can still convince the customer to set it aside for 8(a) or HUB Zone firms, but you will be competing with other SDB's or HUB Zone contractors in your NAIC's Code for the business. The "Early Bird Gets the Worm", adage is useful for SDB and HUB Zone organizations. Some buying agencies even permit an 8(a) SDB or HUB Zone Contractor to assist in writing the product or performance specification for a project to expedite the process. Federal agencies and large businesses are motivated to use the non-compete, set-aside features of the 8(a) SDB and HUB Zone Programs. Doing so permits them to meet their small business procurement goals and enables a swift buying action of a product or service for which they may have a critical need. 

D. GSA Schedules and Indefinite Delivery/Indefinite Quantity (IDIQ) Contracts

The General Services Administration (GSA) pre-qualifies contractors with a terms and conditions package and negotiated rates for products or services. Your GSA schedule is then posted to the web at:

This site is searchable by all government agencies who want to buy products and services. A GSA schedule allows you to offer a pre-existing contract vehicle with established pricing to any federal government agency or prime contractor. This shortens the procurement process considerably. In some procurements, a GSA Schedule is necessary to qualify for bidding certain jobs. You can read more about applying for a GSA Schedule by going to the General Services Administration Web Site at:  GSA Web Site

Under Indefinite Delivery/Indefinite Quantity (IDIQ) Contracts, terms and conditions and labor hour pricing are agreed upon in advance with an agency for a period of time (usually a multi-year arrangement). Many large government agencies contract utilizing IDIQ contract vehicles and often make multiple awards to several companies who then compete for work on a delivery order basis thereafter. 

The GSA also manages large scale IDIQ procurements in high technology areas such as Information Technology (IT).  Individual agencies then compete and procure IT products and services against the standard with established terms and conditions and known pricing. Once qualified, winning in this type of environment is simplified to submitting the best technical solution to a given delivery order with the lowest man-hours or product pricing. It is not uncommon for competitors to offer discounts during the competition.

Under both GSA Schedules and IDIQ Contracts individual delivery orders are negotiated separately regarding the labor hours, material and travel cost necessary to complete a discrete scope of work.

E. Teaming

Because the federal government buys on such a large scale and in many acquisitions chooses to package related technologies or services, it is a necessary part of your marketing plan to consider teaming with other companies. As discussed in paragraphs II. and III., above, large businesses who are in the same line of work as you are have a requirement to subcontract to small businesses under federal government contracts. In addition, large and small companies who are in related or synergistic businesses to yours actively seek partners in the federal government market to permit access to larger packaged procurements.

Attend trade conferences, join trade organizations, get into technical blogs on the web. All large businesses contracting with the government have a small business liaison officer which you can locate at the company web site. Present your capability statement electronically or preferably in person to local large businesses engaged in federal government contracts who may need your services.

Many large businesses are willing to team as a subcontractor to a small business to get access to the small business set-aside market. A large business cannot receive an amount in excess of 50% of the dollar award of a small business set-aside, but many large businesses are willing to subcontract to multiple small businesses on federal government contracts to broaden their business base.

For SDB companies, the "Mentor - Protege' Program is available. This is a federally sponsored program whereby a large business sponsors a smaller business through active teaming and mentoring. Your can learn more about this program at:

Mentor Protege Program

The best way to approach a large business or another synergistic small business is to have a program target as a discussion vehicle. If you find a project for which you need a partner or partners, carefully research the firms you are considering, check their D&B's, see if they have entered their company in the "Interested Parties" frame of the solicitation at The System For Award Management (SAM).

When teaming with another company, most arrangements become mutually exclusive if you are subcontracting to one another and not just supplying off the shelf products. As the business relationship evolves and you begin sharing information a two way Non-Disclosure Agreement (NDA) is usually necessary to protect proprietary information.

As the business relationship matures and the parties agree to become exclusive, a teaming agreement is also necessary. At this point you have agreed upon who will be the eventual prime contractor and who will be the subcontractor. The areas regarding work share and proposal preparation are particularly critical in terms of thorough definition to avoid future misunderstandings among the parties. If and when the prime contract is awarded, the teaming agreement is replaced by a subcontract from the prime party to the subcontracting team member.

F. Small Business Innovative Research Program

Other federally sponsored programs are the Small Business Innovative Research (SBIR) and Small Business Technology Transfer (STTR) Programs for high technology small business. These are competitive programs awarding small business fundng in critical high technology areas. Your can learn more about the SBIR/STTR Programs by going to:

SBIR/STTR Program

SUMMARY:

This article has offered a template of avenues for small business federal government contract marketing. You should apply the template to your business plan and explore which avenues suit your enterprise. The federal government contract customer is motivated to buy from you. Your marketing task is to target and find your customer considering the supplies and services you sell. The federal government offers competitive advantages to various types of small business, depending on ownership and size. Federal government contracts offer small purchases and long term contractual arrangements from firm fixed price purchases to cost type and time and material contracts.  The opportunities are there for small business entrepreneurs’ to pursue.

Baseline Management in Government Contracting

It is in the long term interests of astute contractors to assist in contract baseline management. The only way to achieve such an objective is through sound technical, cost and schedule definition and control via an iterative process with the government. This article will address that process.

SOLICITATION AND STATEMENT OF WORK BASELINE

If you are selling a straight commercial product off the shelf, the problem of baseline management is minimal, assuming your product meets the specifications required and you deliver on time. Is is during development programs for new products or service contracts involving labor supplied to the government that lack of definition and poor communication are high risks. The initial benchmark for managing this risk is in the government solicitation and statement of work.

A wise customer farms the preliminary draft solicitation and statement of work out to prospective bidders and requests comment. A wise supplier is constructive, yet critical in pointing out weaknesses in the document.

Part 1, Section C, is where the technical specifications and statement of work are located in the solicitation and will reside in your negotiated contract.Without a well written Statement of Work (SOW) and associated supplies and services specifications there is unacceptable risk in the future contract and is it exceptionally high risk to bid or contract the job. Both the contractor and the government must come to an understanding regarding the scope of effort to be performed. That understanding is conveyed in the SOW and confirmed in the specifications referenced therein. A good SOW should have the following principal attributes:

* Clear identification of the products, services, skills, materials and performance factors required to complete the contract

* A description of the conditions under which the contractor will be required to perform and any related environmental or location factors

* Specific references to product specifications that govern an acceptable product or services performance outcome and delivery acceptance

* A schedule for the contract that identifies discrete delivery dates for products and specific start and end dates for supporting labor.

* A precise description of government furnished material or facilities required and when it will be made available to the contractor.

If your customer does not provide the above, offer a revision to the document during the comments period, during your proposal or during negotiations that represents a version to which your company will commit. Do not let the fact the program is competitive sway you from the facts. Signing off on a poorly written SOW results in a difficult contract to manage, a high probability for disputes during the contracting period and a poor past performance record you will have to deal with in the future on other jobs.

You should also do a complete review of the Contract Line Item (CLIN) Structure in the solicitation and cross foot SOW requirements to insure the scope is covered by the CLIN'S.

Please see the following article on how to perform this analysis:

Contract Line Items - The Heart of Your Contract

NEGOTIATION BASELINE

The following article discusses the standard template for negotiations through which government contracts generally pass:

Government Contract Negotiation

During the audit, fact-finding and subsequent negotiation steps, a growing definition of the contract occurs and a clear understanding between you and your customer evolves. If you find the process slow and unknowns frequently surfacing, that is a barometer of future difficulty unless the issues are resolved. Technical work scope, schedule, cost and terms and conditions regarding inspection and acceptance as well as payment provisions are especially sensitive.

CONTRACT AWARD BASELINE

Signing the contract represents full agreement on the proposal and conclusion of negotiations. Award is the benchmark baseline for contract performance.

BASELINE MAINTENANCE - THE CHANGES CLAUSE

During the period of performance on a development or services contract, effort does not always go as planned. The article on Earned Value Performance Measurement (EVMS) at this site is one technique to control this situation:

Earned Value Mangagment

Not all programs warrant EVMS or have the funding to perform that type of control. The simple rule of thumb is that the changes clause in your contract allows you to request additional funding and schedule relief, as well as a modification to the SOW if you are being driven by customer directed work scope change events to depart from the baseline to which you committed at contract award.

To the extent you do not remain sensitive to this provision, on a firm fixed price contract you will lose money. On a cost plus and time and materials type contract you will consume funding at a higher rate and faster than the contact baseline anticipated and your customer may or may not be able to provide additional monies when the ceiling amount on the contract is reached. At that point in time it is too late and everyone is disappointed.

The above occurrences are collectively known as "Scope Creep" in project management circles.

THE DIFFERENCE BETWEEN BUDGET AND FUNDING - (Limitation of Funds and Funding Exposure)

Many federal contracts are funded incrementally, usually based on the government fiscal year that runs from 1 October to 30 September. Although the government may negotiate dollar price ceilings for cost plus and time and materials contracts or firm, fixed total price arrangements, the contracts themselves may be incrementally funded, particularly if they extend over two government fiscal years.

A contract may contain negotiated prices or a cost ceiling but also specify an incremental funding value. The contractor is required to inform the government when actual costs incurred plus obligations to suppliers or payroll on a specific contract reach certain thresholds of the current incremental funding specified in the contract (usually 80%). The government is then obligated to further fund the contract. In the event the contract is not funded further, the contractor has the right to stop work before he exceeds the incremental funding.

Some contractors choose to operate on "risk," continuing to perform on a contract while exceeding the incremental funding in booked cost and obligations. The government is under no obligation to reimburse the contractor for amounts exceeding incremental funding.

Nearing the end of a government fiscal year, a contractor may find delays in funding reaching all the way to congress. This situation must be managed with the government contracting officer.

If a contract is not funded to continue and the contractor has performed to date in accordance with all required terms, the government retains the right to terminate the contract for the convenience of the government. This requires a special notification to the contractor from the government and usually occurs due to changes in government priorities. The contractor may then bill the government for all costs and obligations to date, plus any direct and indirect extraordinary costs associated with business disruption, termination administration, employee layoff cost and the like. Terminations for convenience are very expensive for the government. Nevertheless, limitation of funds and funding exposure must be carefully monitored by an astute small business.

To properly manage incremental funding, the business system must be capable of accounting monthly for all direct and indirect costs on each contract, plus commitments to suppliers and employees in the form of open purchase orders and unpaid or un-posted payroll.

Your internal release document should specify the current incremental funding if your contract is not fully funded at award. Further revisions to your release documentation should convey receipt of contact amendments from the government that supply additional required funding to the contract as performance proceeds. Requests for increases in incremental funding are required when the actual booked cost plus commitments to suppliers reaches 80% of the current funding on the contact.

In the event the contact is not adequately funded incrementally by the government, a revision to your internal release documentation should specify a stop work order after you have notified your customer that you plan to cease performance on the contract due to lack of sufficient funding. Notification should be provided to suppliers under your contract with a stop work to avoid their incurring additional costs for which you are not receiving funding from the government. Be specific with a stop work date to these suppliers.

IN SUMMARY - KNOW WHERE YOUR ARE AND WHEN TO SAY "NO"

"Scope Creep" can kill a contract, a customer relationship and a past performance record, all of which are important to your business. Stay in front of "The Scope Creep" by communicating positively with your customer to control your baseline, keeping cost, schedule and technical performance integrated and synchronous.

Six rules of Thumb to control "Scope Creep":

1. KNOW - The contract value and its ceiling amount

2. KNOW - The incurred cost to date and commitments

3. KNOW - The scope of work and whether or not your current efforts are supporting it or some other objectives

4. KNOW - The estimated cost at completion based on where you are at today

5. KNOW - Your customer and who among the customer population is prone to direct out of scope effort.

6. KNOW - WHEN TO SAY "NO" to "Scope Creep" and say it officially in writing to the contracting officer specified in your contract.

5 Principal Factors in Forming a Small Business Federal Government Contracting Company

Individuals and groups often ask what conditions drive the right time to form a small business federal government contracting enterprise. 

They may be working in the venue for someone else. Perhaps they have discovered a need in the civil agencies or defense markets they can fill with a product or service being provided in the commercial sector and feel they could expand into the government marketplace.

A contractor moving from project to project in government contracting as an individual often asks, “Are conditions right to form an enterprise?" 

Starting a government contacting company may seem a logical extension of the work one has done previously so the transition appears easy enough.  What must be learned very quickly is the business planning, marketing and competitive analysis aspects of operating an enterprise, as opposed to single person efforts. 

Industry teaming, having others work for us and dealing as a company instead of a person are all challenges. The adjustments in outlook and in the development of a client base as a company progressing to profitability pose challenges.

This article will suggest factors to consider in determining if the time is right for you to form a small business federal government contracting company. 

1. EXPERIENCE

Small business federal government contracting is not rocket science - to succeed one must take what one does well in the commercial marketplace or what experience leads one to believe one 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 or prior professional employment.  Very few start ups entertain initially contracting exclusively to the federal government without commercial work or other employment to sustain operations while the more lengthy government procurement process is being pursued.

Introducing Federal Government Contracting

2. DEFINITION

There is often confusion regarding the definition of the term, “Contractor” in government work. The term is used in a conflicting manner to describe companies, individuals and business relationships. It has different connotations within corporations as opposed to government agencies, and is often confused with terms like “Subcontractor”, “Supplier” or “Vendor”. 
The article linked below defines the term, “Contractor” and discusses the regulatory factors and practical considerations related to use of the term from a small business federal government contracting perspective:

What is a Small Business Federal Government Contractor

3. STRATEGY

Consider carefully a product or service area in which you have experience and talent as well as for which there is a demand.  Make it in a field in which you would enjoy a long term involvement.  Then give your small business company concept the following test:

1. Do you have a product or service niche in mind?

2. Do you believe you have a market for 1 above and the means to reach it?

3. Are you willing to develop a business plan using the tool kit linked below to validate 1 and 2 above before you launch?

How to Write a Business Plan

Business Plan Samples

If the answer to the above questions is “Yes”, take the actions indicated above, observe the results, and make an informed decision on whether or not to proceed.

4. FORMATION

Executing the below process establishes the firm officially on paper and commits the owner(s) to the enterprise:

For the majority of individuals who are starting single person or no more than 2 or 3 person operations, a Limited Liability Company (LLC) registered with the state and with the federal government is recommended.

It will separate personal assets from company assets and protect them. When product or services sales begin generating revenue an LLC has many tax advantages.  It can be registered as Sub Chapter 'S' for tax purposes and revenue and the expenses can be passed through to personal tax returns, paying no taxes as a company. The double taxation issue prevalent with many of the other types of incorporation is avoided with a Sub chapter “S” LLC. An LLC assists in limits your personal liability for debt and court judgments that may not fall in your favor.

Representing the business as a company allows pursuing financing as an enterprise. You can think of a creative name for your LLC and you can complete the articles of incorporation necessary to bring your enterprise into existence. The term, "LLC" must conclude the name of your company if you decide to form such an organization.

Free instructions for registering in your state and federally with the IRS are available at the Box Net "References" cube in the right margin of this site. You will receive tax and employer identification numbers by registering your business.

A very common mistake is not generating and executing an operating agreement among the founders if there is more than one person involved in forming the company. An operating agreement, is a separate document, not controlled or required by the state or the federal government, but very important to your company.

It should be a simple,  straightforward document  you and the prospective partner(s) can draft  yourselves addressing such  matters as % of ownership, how revenue will  be distributed and other  general matters, as well as who can commit the  company in the form of  credit cards, employment offers and who signs  checks on the company  account and other administrative matters. Buying out a partner should also be covered as well as adding new members if the need arises down the road.

I have seen many enterprises fail or go through terrifically hard times   due to lack of an operating agreement. The parties should sign it after a review by a lawyer. It should then be notarized and made an official   part of the company file. You can download a generic operating agreement at the Box Net "References" cube in the right margin of this site.

It is for an LLC but you could modify it for other types of corporations.  You can feel free to borrow from the sample or supplement it as you see fit. It is fairly comprehensive in order to cover most business situations and there may be elements of the example you feel are not necessary.

5. TEAMING

You will not be able to go it alone.

Evolving niches and industry teaming leading to larger projects as part of multiple company efforts is a necessity in forming a small government contracting business, particularly in the services venue.

Synergism is paramount in teaming with any size company, whether in a lead or subcontracting role. There should be technical, management and market segment similarities between you and any company with whom you are considering teaming. Your prospective team member ideally will not be a direct competitor; rather a business in a related field with whom you share a mutual need for each other’s contributions in pursuing   large-scale projects.

Relationships must be developed with primes and other small businesses that can help you, team with you and keep you in mind as they search for success. That takes time, patience and open-minded, out of the box thinking. It also takes more than a   Non-Disclosure Agreement (NDA), a teaming agreement (TA) and a proposal   to succeed. It takes dynamic marketing and communication with strong   partners and hard, innovative work. Nice buzz words you say - but it is the truth and you have to find what that truth means to you.

Small Business Government Contract Teaming

SUMMARY

Carefully consider the 5 factors noted above when evaluating the formation of a small business government contracting company. For additional details on any of the factors, please see the free book in the BOX at the right margin of this site.  

What Is A Small Business Federal Government Contractor?

There is often confusion regarding the definition of the term, “Contractor” in government work. The term is used in a conflicting manner to describe companies, individuals and business relationships. It has different connotations within corporations as opposed to government agencies, and is often confused with terms like “Subcontractor”, “Supplier” or “Vendor”.

This article defines the term, “Contractor” and discusses the regulatory factors and practical considerations related to use of the term from a small business federal government contracting perspective. 

DEFINITIONS

 1. Contractor (As Used In Corporations)
The term “Contractor” in corporations often refers to an individual, performing work for a company while not on the payroll as an employee, having no taxes, benefits or deductions taken from their pay and not covered by any form of insurance. The company issues a purchase order to the individual at an hourly rate and submits a Form 1099 to the US government reporting what the contractor is paid for services. The contractor must self-insure during the contract period and pay taxes on the money earned at the end of the tax year.

The use of individuals as contractors in large government contracting corporations has been limited due to class action law suits brought by contracting individuals who maintained they were utilized as employees without the associated benefits. As a result, in many companies the existing contractor work force was either offered permanent positions or released. Since that time, the use of contractors by large government prime contractors has been principally in specialty roles.

Corporations may also utilize the term “Contractors” when referring to companies in the manner defined by Definition 2, below. It is common for large prime contractors to use the term to describe themselves, their competition or co-equal teaming partners in joint ventures. When this 2nd definition is used it refers to a company, duly registered with the state and the federal government.

2. Contractor (As Used In Government Agencies)
The term “Contractors” in government parlance refers to businesses, not individuals. To become a contractor to a government agency, you must therefore form your own business. Government agencies do not engage individual “Contractors” as defined in 1, above. If they want individuals to perform services they put them on the agency payroll. If they want to acquire specialized outside services they contract with companies. 

3. Subcontractor

A “Subcontractor" is a company that takes on a flow-down of liability from a prime contractor to complete a major portion of a large scale job for the prime contractor's customer. The subcontractor is obligated to the prime contractually in an identical fashion as the prime is obligated to the government agency. The prime contractor issues a subcontract with a statement of work and flow down terms and conditions from the prime contract to the subcontractor. In many instances the government requires review and approval of major subcontractor selections and holds the prime contractor accountable contractually at the prime contract level for the subcontractor(s) efforts.

4. Supplier (or Vendor)
The term, “Supplier” connotes basically commercial relationships with companies that supply off the shelf parts and materials or simple, generic services. The General Services Administration (GSA) and other federal agencies also use the term to describe companies in negotiating supply schedules or in buying items under the commercial sections in the Federal Acquisition Regulation (FAR), such as FAR Part 12. Supplier contracts generally emphasize, price, delivery and matters such as warranty and do not involve -complex terms and conditions or the flow down of liability from the ordering firm prime contract.

REGULATORY FACTORS

The Federal Acquisition Regulation (FAR) clauses governing small business state that a company undertaking a small business set-aside prime contract must be capable of performing 51% of the work scope under the terms of that contract and may not subcontract (as in 3, above) any more than 49% of the effort. These FAR clauses do not limit 1099 contractors (as in 1, above).

Many small enterprises use independent contractors on call to fulfill the manpower requirements of their contracts and specify these personnel in their proposals as qualified individuals. When these clients grow in long term contracts they make such personnel permanent party if the contractors are willing. Often contingent hire agreements are used for that purpose while proposing major programs. You can download a generic agreement from the "References" Box Net cube in the right margin of this site.

Contractors (as in 1 above) may be used to the extent they are necessary to win, but bear in mind the government prefers to see permanent party, since that implies stability (the government is conditioned to the perception that individuals , as contractors come and go).

Small business should propose work scope under set aside programs in teaming agreements so that the prime (small business) is performing at least 60% of the effort with employees or contractors to avoid the appearance of a front by a larger company (even though the statutory requirement is 51%).


In many cases it is preferable for a start-up small business to become a subcontractor, rather than a prime, building past performance associated with government contracting and developing beneficial teaming relationships with experienced government contracting firms.

SUMMARY
It is possible for a small business to perform, in tandem, one or more of the "Contractor" roles discussed in this article. Sometimes multiple roles are established with the same corporation or agency. Please use the search box at this site to view articles for information related to this topic.

It is vital to understand the "Contractor" role definition for each contractual commitment to insure suitable risk analysis, a good past performance record, conflict of interest avoidance and a solid reputation in the industry.

Job Cost Accounting Basics For Small Business Government Service Contractors

Small enterprises in the start-up service contracting business to the federal government often experience DCAA audit difficulties, suspended billings or negative marks on pricing proposals for not having addressed job cost accounting and business system issues involving Federal Acquisition Regulation (FAR) Cost Accounting Standards (CAS) requirements.  This article will address the basics of resolving those issues in a service contracting start-up environment.

"Small to Feds" has addressed the requirements of CAS and the associated business system design requirements previously in the following articles that are suggested for review as refreshers:

Establishing FAR and CAS Compliant Business

A Business System Framework

DCAA Audits and Small Business Job Cost Accounting

Provisional Indirect Rates

DEFINE YOUR COMPANY APPROACH AND ITS COMPLIANCE WITH GOVERNMENT REQUIREMENTS 

Please view the below matters in the context of your business system design at the cost element and job description level:

You must consider the job cost accounting implications of the government contract environment; i.e how do the individual labor charges every day on time cards for the company employees and management get booked to the correct accounts or expense pools and do they or do they not become part of the labor distribution directly to contracts or indirectly though overhead and G&A applications at month end (in effect is the government billed for the cost?).

In most small start-ups the best way to handle this is to write job descriptions for every position, including the owners and executives as well as other employees. Each job description is declared chargeable as direct only, indirect only or in rare exceptions, both direct and indirect chargeable.

Job descriptions are also declared salaried or hourly, exempt and non-exempt under the Fair Labor Standards Act,  which drives eligibility for time and one half for overtime.  All company personnel are furnished copies of job descriptions and informed of their direct or indirect, salaried or hourly status as a function of their employment offers. (You should generate retroactive offer letters for everyone in the company, have all personnel accept them in writing and put the letters and the job descriptions in the company personnel files for audit purposes)

Job descriptions are assigned to labor cost element codes in the job cost system (as opposed to other codes for materials, subcontract, travel and other direct costs that may require separate cost element codes to distinguish them for accounting purposes.

A direct charge job description will always have a contract charge number every day for every hour of work (typically technical performers) This usually drives the employee eligibility for overtime pay for hours in excess of 40. A company policy should be established early for this matter. Most companies pay straight time for hours in excess of 40 for salaried direct charge personnel.  Exceptions are hourly non-exempt personnel who must be paid time and one half under the law.

An indirect job description performer will charge every day on a time card to an overhead or G&A account and the associated labor cost will become part of expenses that are distributed at month end to all contracts, based on the direct labor dollar content of each contract for the accounting period (typically secretaries, administration personnel and the like charge to overhead and the owners and executives charge to G&A (unless an executive is working exclusively in an individual overhead cost center - that person would then charge the overhead charge number for that cost center or directly to a project if performing project-direct effort).

Exceptions to the above would be where a direct charge employee has no contract home and his labor must be charged somewhere. In that instance he would charge to a company overhead account or G&A account outside the overhead pool and his or her labor would not become part of the allocation to contracts, effectively making it come out of the company bottom line (profit). This situation normally drives layoffs or finding the person a contract home to charge.

Labor donated to the company as a form of loan must also be charged in the exceptions manner discussed above (loan labor liability account) and may not be charged or recovered via a contract bill to the government directly or as part of an overhead allocation. DCCA really goes looking for this type of thing.

Where an executive normally charging to an overhead or G&A pool, is a key person on a contract or performing direct effort on a contract for parts of his or her day, that person would charge the contract charge numbers for those efforts and the overhead or G&A accounts for company business of an indirect nature.

CHECKLIST
The above rules of the game (disclosure practices in DCAA parlance) normally force several business system tangibles.  It is suggested that you generate the following as a minimum in your startup preparations for demonstration during a proposal or fact finding audit:

1. Time Cards with a time card policy requiring they be filled out daily and turned in and approved by a supervisor weekly, then booked into the accounting system weekly.

2. Expense Reports bearing charge numbers for accounting as direct or indirect expenses.

3. Written Purchase orders to suppliers bearing charge numbers for accounting as direct or indirect purchases

4. Labor Job Descriptions - specially ear marked in the manner discussed above.

5. Cost element assignments for accounting purposes for 1-4, above.

6. Charge numbers for 1-4 above. A charge number is the combination of an employee number, supplier number, expense report number and a cost element, charged to a unique direct charge contract number, an overhead pool expense account or a G&A expense account.

7. Consider hiring a payroll service company  to support salaries and regular paychecks plus tax and withholding for EVERYONE IN THE COMPANY.

8. A monthly closing where direct costs are burdened with indirect costs and billings are generated to customers creating accounts receivable for that which can be billed and liabilities for that which cannot.

9. Revenue accounting upon receipt of a payment from a customer directly to the contract against which a bill was generated with offsetting receivable reductions at the contract level.

10. The discipline and attention to set up 1-9 and demonstrate its operation to a DCAA auditor.

Every successful small business in federal government service contracting has gone through the above; some proactively and others when they have had difficulties with a DCAA audit during a proposal or cannot get paid when they are under contact. The choice is yours.  It is not rocket science, it is different and it is a serious matter and must have your attention.

Maintaining an Ethical Company Image In Small Business Federal Government Contracting

In the age of modern communications, lighting fast news, social media and exposure to world events, an ethical company image is vital.  

This article recommends several key actions in the small business contracting venue that you can take to favorably maintain your company ethics image.  

SERIOUSLY AVOID ORGANIZATION CONFLICT OF INTEREST (OCI)

OCI can lay waste to the best planned marketing strategies. Careful screening of new hires, procurement types and the business environment is necessary to preclude wasted time, expense and legal implications in the event such conflicts occur.  

OCI clauses in solicitations and contracts require that companies certify their organizations and personnel as not having a procurement integrity issue with regard to a pending contract award or disclose what may be deemed an issue and provide mitigating factors to still be considered.  For more on this matter please see the following article:

Organization Conflict of Intererst

UNDERSTAND DEFECTIVE PRICING (DP)

A reputation for defective pricing leads to accusations of waste fraud and abuse in government contracting.  DP is mostly about what a contractor knew regarding company prices at the time a bid was submitted and what the contractor did not disclose in the supporting data regarding the likely cost outcome of the contract. 

Actions taken by the government and litigation resulting from defective pricing become part of the contractor past performance record and must be disclosed during competition for other programs. Read more about defective pricing at:

Defective Pricing - A Short Course

USE PROTESTS SPARINGLY

There are occasions when protests are warranted.  However, in recent years they have become a culture within federal contracting and a costly disruption to procurement.  

Reduce the likelihood of a protest being filed against your winning proposal effort at award by carefully scrutinizing conflict of interest, ethics and small business qualification credentials. Do not maintain you are what you are not. You will be audited and discovered. 

Do not develop a reputation within the contracting community for filing protests.  It may work against you indirectly during source selection and directly in terms of companies not wishing to team with you. No one likes a sore loser. 

COMPLY WITH NON-DISCLOSURE AND TEAMING COMMITMENTS

Companies seek industry partners who know the rules and who keep their commitments.

In addition to technical, management and product synergism, astute and valuable teaming partners respect and understand your intellectual property rights. They expect the same knowledge and respect from you. 

Negotiate thorough and well understood non-disclosure agreements and teaming arrangements.   Perform in accordance with your obligations; your reputation for doing so will follow your small business.  

For more on this factor please see the below links:

Small Business Teaming

Practical Intellectual Property Management

CONDUCT EFFECTIVE CUSTOMER RELATIONS AND SURVEYS

Stay attuned to your customer's perception of your business.  Insure your top management visits and stays in contact with your most important customers, accompanied by your project managers and marketing personnel. 

Process a survey to your key clients requesting feedback and constructive suggestions.  Review your past performance data base information regularly and take corrective action where you have been rated low or received negative marks.  Demonstrate improvement and broadcast the achievement to the functional heads of the agencies you serve.  Please see the below articles for more details in this vital area:

Your Past Performance Record

PRACTICE CORPORATE SOCIAL RESPONSIBILITY (CSR)

Your management and employees are your emissaries to the public.  Convey your behavioral expectations and, to the extent you can budget for them, encourage  participation in community charitable events to increase company visibility.

If you can technically support social services organizations, do so and seek contracts where your technical expertise may be brought to bear on their challenges. You company will be recognized for it. 

CONTROL PRESS RELEASES AND SOCIAL NETWORKING

Establish policies and focal point control for review and approval of announcements on the Internet of a public relations nature.  Never release a press announcement regarding a contract award until you have signed the deal. 

Insure employees in the social networking, marketing/sales and customer relations venue understand the line between regular communications in their jobs and making an enterprise business commitment or formal announcement.  Errors in this area are hard to retrieve. 

CONDUCT ETHICS TRAINING

Company ethics go beyond decrees to personnel regarding professional conduct and honest business practices.  Business ethics must be tailored to the company service or product venue, relationships with clients, industry partners and suppliers. 

Training in company ethics is vital. It is a form of communication. It is not an academic pursuit, although elements of it may include learning new information. Still, it is not schooling in the sense of personal improvement as much as it is communication of company policy and expectations on the topics discussed here and others like them.

The best organizations make sure everyone from the chairman of the board to the janitor understands that training is a privilege, a right and a requirement and that it will be conducted as a matter of record for everyone.

Some training will be global, such as policy, corporate ethics and human relations. Other training will be specialized, such as changes in law, company policy or technology implications by functional areas.

Training must be sophisticated, interactive, and responsive to changing times and contain feedback mechanisms to gauge effectiveness.

SUMMARY

A small business ethics image is different than a product or service "Brand Identity". The latter focuses on that which the customer receives from you in the way of products and/or services. 

A company ethics image is how the organization is viewed in general from a public perception as positive or negative.  That view is held by customers, your industry partners or prospective partners, regulators and the average citizen. 

If carefully sculpted your public ethics image can be a vital element in business success; if neglected it can pose a high risk to your enterprise.