Tag Archives: Contracting

Government Purchasing and Contract Vehicles: The Environment for Small Businesses

This post is the second in a series on understanding government contracting and maximizing opportunities to participate in government contracts. The first part of this series can be found here.

The reduction in federal government spending over the past few years has significantly impacted small business bidding activity.

A survey released in 2013 by the American Express OPEN for Government Contracts: Victory in Procurement (VIP) for Small  Business Program (AmEx OPEN) indicates that, on average, it takes a small business that is new to the federal procurement marketplace about two years (24 months) and 4.7 unsuccessful bids before winning that all-important first contract.

The findings of the AmEx OPEN survey confirm the need for companies to be persistent and to commit the appropriate resources to succeed as government contractors. The average success rate in prime contracting (38% overall) are significantly higher among those with more years of contracting experience (53% success rate) compared to  those who have been seeking federal contracts for three years or less (20% success rate). The cost of finding opportunities and competing for contracts has increased by 49% in recent years from an average of $86K in 2009 to an average of $128K in 2010.

However, contracting success rates for small businesses may be growing partially as a result of government support. The Small Business Administration (SBA) established in 1973 a small business goaling program to increase small business participation in federal government contracting. In addition to the small business goaling program, there are other programs that were created to meet the needs of specific groups, such as

  1. Small businesses that are owned and controlled by individuals within certain economic and social categories. In particular, companies that have been admitted to the US Small Business Administration 8(a) Business Development program.
  2. Small businesses that are located in areas considered Historically Underutilized Business Zones” (HUBZones).
  3. Women entrepreneurs.
  4. Service-disabled veteran entrepreneurs.

The government met its small-business spending goal (currently 23 percent) for the first time in 2013. In 2012, the federal agencies nearly met the mark as small businesses reported receipt of $89.8 billion (or 22.25 percent) of the total procurement expenses for the year. There are now some legislative initiatives to raise the target to 25 percent of all federal contracts.

Trends in Government Spending

The latest report by agencies from the Federal Procurement Data System (FPDS) was issued March 15, 2013 shows data for FY2102.  (This year’s report has been delayed by sequestration and unusual budget activity which has yet to be audited.)  The report shows that in almost all cases these federal government departments have met the statutory goals (as shown in the chart below).

small business contracts(click to enlarge)
Source: fpds.gov

The top six U.S. Government agencies listed above make up 90% of all government procurement with the Department of Defense spending the most overall on government procurement, especially in small business contracting. We can therefore predict general small business trends by observing trends in contracting in the Department of Defense. Because growth levels for defense spending are not mandated by legislation like entitlement programs such as Social Security and Medicare, the Congressional Budget Office (CBO) reports defense spending under the category of “discretionary spending.” As can be seen below, historical trends show the first decline in the growth rates of defense spending in a decade for the most recent years FY2012 and FY2013.

Discretionary outlays(click to enlarge)
Source: CBO

CBO projections show that this trend will continue through FY2105, after which there will be positive growth through FY2020. The details are shown in the table below. The areas highlighted in green show the percent change year over year using FY2013 as a base year. The area highlighted in blue uses the same calculations for defense spending only.

projected outlays(click to enlarge)
Source: CBO

What does this mean in dollar contracting values? The following table combines the data from the previous three to show the small business procurement dollars expected to be spent over the next six fiscal years (i.e. through 2020).

small biz procurement projections(click to enlarge)
Source: CBO

Using the top six agencies as before, which represent 90% of all government small business contracting, we see that the range in overall procurement value will likely increase from $66B to $74B by 2020. The most significant change within these projections will be related to the reduction in the size of the military personnel roster. Troop reductions are expected to be reduced by approximately 11% from FY2013 levels mostly by attrition and retirements. The Defense posture of the United States is expected to shift to a fully networked mobile force using beyond line-of-site technology. On a related note, as “e-Government” initiatives become standard policy, cloud infrastructure and cybersecurity related items are expected to experience significantly different growth rates than discretionary spending as a whole. These areas are expected to grow at a rate of 6-10% annually.

Government Purchasing and Contract Vehicles: Why Is It Important to Understand Both

This post is the first in a series on understanding government contracting and maximizing opportunities to participate in government contracts.

Facing the consequences of the financial crisis and a polarized political debate about government spending, government contracting markets have been pressured to spend less and be more productive. As a result, contracting practices are evolving and competition is getting tougher for contractors.

Federal government spending has declined annually since a high of $541 billion in FY2008, to a total of $460 billion in FY2013. In 2012, sequestration, a major policy initiative, made mandatory for all agencies to cut $1.2 trillion over 10 years across all federal agencies. Budget reductions and uncertainties have caused postponements, cancellations or changes in contract requirements and plans across agencies and programs.

Total federal spending on contracts (click image to enlarge)
Source: USASpending.gov

Overall solicitation values and the average solicitation value in 2013 (302.4 billion and $47.8 million, respectively) continued to decline from the most recent high watermark year of 2011 ($376.2 billion and $78.4 million, respectively). At the same time, federal procurement programs are expected to continue to shift toward programs that are smaller in scope and dollar value, making it easier for agencies to gain approval to move forward despite restricted budgets. Even though some industry analysts predict that FY2014 will result in a greater number of “high dollar” (i.e. larger in scope in dollar value) procurement opportunities, the competition for fewer dollars, overall, will increase.

There are many types of government contracts (or “contract vehicles”) under which a company may pursue and close a sale. A contract generally can be categorized by how the government pays for what it purchases, how the government orders what it purchases, and who may participate in the procurement. Understanding how each provides access to the government market is key to forming a strategy and selecting a path forward. It is perhaps more important now than ever for new entrants to the US federal contracting market to identify multiple points of entry to the market and in turn to identify for each entry point the vehicle(s) that will offer a strategic entry advantage.

Trends in Types of Contracts Used

Some overall trends in the way the Government pays for goods and services it buys are notable. Fixed price contracts, which place the maximum amount of risk and responsibility for all cost and profit upon the contractor, remain favored by the government and accounted for 50% of the contracts awarded in 2013.  Fixed price award with economic adjustment has become more common, accounting for 4.77% of all awards during 2013.

Cost plus fixed fee accounted for 15.6% of all contracts in FY2013. It has been the second-most widely used contract vehicle each fiscal year since FY2008, representing 8.9% of all prime contract dollars spent by the government. Cost plus award fee is also commonly used, accounting for 9.4% in FY2013.

Fed Contract Awards by Type of Contract Used

(click image to enlarge)
Source: USASpending.gov

From 2009 through 2012, agency-specific indefinite delivery, indefinite quantity (IDIQ) contract vehicles accounted for an increasingly large portion of federal government spending, taking over some of the market share previously enjoyed by government-wide acquisition contracts (GWAC) and multi-agency contracts (MAC). Many of those agency-specific vehicles are slated for re-competition in 2014. One example of an agency that uses these agency-specific vehicles would be the Army Computer Hardware Enterprise Software and Solutions (CHESS). CHESS is the Army point of contact for GWACs and IDIQs.

At the same time, through the use of GWACs and MACs–rather than agency-specific, single-award IDIQs–agencies can, in theory, increase efficiency and reduce cost, because they only have to issue orders to the company or companies that have been awarded those contracts. GWACs will continue to be used especially to handle multi-agency IT procurements. There are only three agencies designated by the Office of Management Budget to run GWACs—the General Services Administration , the National Aeronautics and Space Administration, and the National Institutes of Health. There are other MACs for other industries.

Government spending trends also reflect the pressure to open federal contract spending up to more competition. As a result, MACs where multiple companies, not one, are selected to perform a contract are also widely used. Those companies will then have to compete to be selected for specific task or delivery orders for one or more agencies. More than 25% of all government contracts in 2012 were MACs and the trend is expected to continue.

GWACs and MACs tend to have a life cycle of 3 to 5 years. Therefore, companies that want to sell to the government goods or services covered by those contracts have to partner or become a subcontractor to GWAC and MAC prime contractors.

Identifying Opportunities to Participate in Government Contracts

In this highly competitive environment, it will become increasingly important to identify multiple ways of enlarging a company’s opportunities to participate in as part of one or more teams that will secure the overall work. Teaming and subcontracting are excellent methods for accessing the U.S. government market and are less costly channels to access end-users.

A company should consider the extent to which its product or services can be marketed via

  • New contract vehicles, either by becoming a prime contractor, by becoming a subcontractor, or by partnering with another company.
  • Firm, fixed-price contracts that offer supply or subcontracting opportunities.
  • Cost-reimbursement and cost-plus-fee contracts that offer supply or subcontracting opportunities.
  • GSA schedules or any other type of GWA contracts.
  • Any multiple award/multiple agency contract held by a company or one of its strategic allies.
  • Any contract held by a company’s strategic ally under which subcontracting is an option.
  • Any program giving preferences  to a defined class of providers, including
          • small businesses.
          • small disadvantaged businesses.
          • women-owned businesses.
          • veteran-owned and service-disabled veteran owned small businesses.
          • businesses located within a geographic area designated as a Historically Underutilized Business Zone (HUBZone).

By considering all the above mentioned options, a company can expand its opportunities and minimize the risks that flow from an “all or nothing” bid approach.