Government Procurement Basics

By Patrick D. Kennedy and Maeve E. Cannon

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Just how large is the world of government procurement? Reliable estimates from various sources show that federal, state, and local governments combined spend $600 to $800 billion annually, with the largest portion of that amount generated at the state level (nearly $300 billion). What size company receives the lion’s share of contract awards? Not General Electric, IBM, Microsoft, or other large companies. In fiscal year 2001, the federal government wrote 11.4 million contracts for goods and services, 95% with values ranging from $2,500 to $100,000. According to the U.S. Chamber of Commerce, those 10.8 million federal contracts were awarded to small- and medium-sized business vendors with fewer than 500 employees. Despite this deep pool of potential work, less than 5% of all U.S. companies do business with government agencies.

Why Do Business with the Government?

Few companies view government contracts as financial windfalls. Because contracts are awarded on a competitive basis, profit margins are typically narrow and specifications are usually demanding. On the other hand, the benefits of government work can include:

• Reliable revenue. Government clients don’t move away, file for bankruptcy protection, or pose collections problems.
• Overhead coverage. Many businesses use government work to cover operating expenses, allowing them to be more selective with other, higher-margin contracts in the commercial sector.
• Marketplace credibility. Offsetting the low margins is the high degree of credibility companies achieve by winning government contracts. In terms of marketplace confidence, there is no better form of advertising.

A number of misconceptions exist regarding the risks of government work. One concern is the fear of costly documentation and reporting requirements, and the potential for significantly higher levels of government scrutiny of financial information. Fears that the government will conduct unusual or frequent audits, or will have any voice in management of the business, however, are unfounded.

Because taxpayer dollars are being spent, the government can impose audit and surveillance requirements under the terms of a contract. Extensive and stringent requirements are usually imposed, however, only on higher-priced contracts. In fact, governments often exempt contracts under a certain dollar limit from some of the documentation and reporting requirements, and the trend is toward raising those dollar cutoffs.

Rating a Company’s Worthiness as a Contractor

Not every company is an appropriate candidate for government contracts. Regardless of the type or size of assignment, companies with the potential to win government awards must possess a number of cultural and operational characteristics, including:

• High motivation level. Half-hearted attempts to win a government contract are unlikely to succeed. Given the complexity of the process, the competition involved, and the patience required, companies that do not have a total commitment to win—supported by senior management—should not compete.
• Financial stability. Potential vendors must be financially capable of performing a contract prior to receiving the award. If cash flow problems or other significant financial weaknesses exist, winning a government award is more likely to put a company out of business than it is to save it. To ensure financial stability, some government procurements may require financial statements, or even the posting of surety bonds.
• Operational efficiency. In some cases, potential vendors must conform with the specified standards of a Request for Proposal (RFP) regarding quality assurance, such as compliance with ISO industry standards. Additionally, a company must maintain good records and have the ability to locate information quickly.
• Computer sophistication. Government vendors must have up-to-date computer capabilities, as well as the sophistication to conduct e-commerce with ease, including the necessary safeguards against internal and external cyber-crime.
• Financial discipline. Aspiring vendors must be adept at dealing with industry specifications and standards, and must have a thorough knowledge of competitive pricing. But most important, they must possess the organizational fortitude required to accurately calculate the costs involved in meeting contract specifications and anticipated profit margins.

Contract Application Process

There are many factors that can influence the awarding of government contracts. It is not simply a matter of submitting the lowest bid. Selling to government agencies requires the same principles and strategies as selling similar products or services to commercial buyers. Both are looking for an assurance that they will receive quality goods and services, a reasonable price, and on-time delivery.

For some government agencies, the registration process requires an extensive background questionnaire about the business, its owners, and its finances. A background check, including the criminal and taxpaying history of the company and its principals, may be conducted before a vendor is permitted to compete for a government contract.

Most agencies at all levels of government require prospective suppliers to register before they are allowed to participate in contract bidding. This process solicits basic information that will be used to determine and validate a vendor’s qualifications, and for that reason registration information must be concise and accurate. Very often, registration must be renewed annually, and companies should ensure that information is kept up to date.

Prior to submitting any contract proposal, companies are always well served to conduct the upfront research necessary to understand a government agency’s most important requirements, which are not always readily apparent in an RFP. Although price is not always the most important requirement, companies should review published budgets, and consult with reliable sources to understand acceptable price ranges for the contract.

Another important aspect of planning involves determining the real decision-makers, which can sometimes be difficult, especially for companies going through the procurement process for the first time. In some cases, the agency that specifies or funds a contract may not be the agency that actually makes the procurement decision. Occasionally, procurements are conducted jointly by several agencies. Or they can involve elected officials of different political affiliations, which might influence the selection process.

Experienced contract award winners ask many questions, and invest whatever time is necessary to understand the decision-making protocol. While knowing the key players and being respected by them is beneficial, government practices are designed to ensure that governments get the best value in terms of quality and price, not overly influenced by personal relationships. In fact, very strict conflict of interest rules are often in place that bar certain actions and communications for government employees, vendors, and potential vendors. Before any contact with a government procurement agency, potential suppliers should ascertain with whom and in what manner they may have questions addressed or receive additional information (contact information and guidance will usually be in an RFP).

Potential vendors are always well advised to look for any possible advantages. Government procurement policies are often structured to provide some competitive edge to businesses owned by women, underrepresented minority groups, and even small or local vendors. Businesses that fit into any special categories like these will find it worthwhile to research and take advantage of any special opportunities.

In general, successful government contractors view procurement as a full-time business development discipline. They keep abreast of political issues and government requirements, and seek relationships with opinion leaders and officials who can provide them with insights that might allow them to gain a competitive advantage. (This is not to be confused with the “pay-to-play” practices currently under scrutiny in many states, including New Jersey.) It is a simple, time-tested principle of business development that people like to do business with people whom they know and trust.

There are several ways to keep abreast of potential government contracts. In addition to registering for qualification lists and solicitation mailing lists, companies should monitor agency bid boards and regularly check appropriate electronic bulletin boards. Some of the most sophisticated government contractors create their own opportunities by submitting unsolicited proposals based on a proprietary or innovative concept of likely interest to a particular agency.

The completeness and quality of a company’s proposal is a primary consideration. In fact, government procurement officials make no secret of the fact that a potential vendor’s ability to follow a proposal’s instructions is considered to be the most telling indication of that company’s ability to adhere to contract specifications. Ironically, going beyond an RFP’s requirements in hopes of gaining competitive advantage can often backfire. And regardless of quality, proposals submitted beyond the posted deadline are usually not considered.

Government procurement officials will rarely make exceptions for vendors that make what might be viewed as simple errors in the application process. These can range from obvious arithmetic mistakes to submitting an incorrect number of required copies to missing signatures or pieces of information. Some proposals never reach their destination on time as a result of insufficient postage, and others are discarded because the supplier failed to use the requested method of delivery. Therefore, before submitting a proposal a company should allow sufficient time for several sets of eyes to review every aspect of it, similar to the level of scrutiny applied to a regulatory or legal filing.

Seeking Recourse for a Failed Proposal

With more businesses bidding on public contracts, there has been a corresponding rise in the number of challenges to contract awards, as well as increased public awareness of the government procurement process. At many purchasing agencies, contract awards are based on a “price and other factors considered” standard, which provides extraordinary authority and autonomy rarely seen in other sectors of the government. Because this discretionary decision-making platform generates controversy, most government agencies have established processes that allow bidders to protest a defective bid or the award of a contract to another bidder, and to disagree with the contracting agency on an issue that arises after a contract has been awarded.

Generally, a vendor has the right to formal notice that its bid was bypassed for a higher bid or that its proposal was materially defective, and has the right (usually for a specific period of time) to protest the award and request an informal conference regarding the rejection. At this stage, if a vendor rejection has been based purely on material defects in the proposal (such as missing information or signatures), the agency is likely to dispose of the protest and issue a final decision. If a protest involves issues regarding the successful vendor’s proposal or their ability to perform the contract, however, it will likely require additional fact finding, and may result in a formal hearing.

Protest hearings may take a variety of forms, and government agencies are granted considerable discretion regarding the ground rules and formalities. Some hearings allow protestors and successful vendors to present their case and offer rebuttals directly to the agency director in an open, informal setting. In other hearings, the agency might engage lawyers or other third parties to act as hearing officers, consider only written comments, and not allow direct or cross-examination.

Following the protest hearing process, if the agency still stands by its award decision, an unsuccessful vendor remains entitled to pursue recourse in a court of law or by other means, such as alternative dispute resolution. These efforts can be worthwhile if there is sufficient legitimate evidence for further appeal, and if the contract’s anticipated profit margin can adequately absorb the legal costs involved in challenging the award. In addition, vendors that challenge awards must weigh the inherent risks of establishing an adversarial relationship with a government agency that will continue to exercise discretionary authority in awarding future contracts.

Accounting and the Procurement Process

Many government contract proposals fail largely as a result of faulty cost estimates or unrealistic financial projections that have been prepared by nonfinancial personnel more concerned with winning the contract than with the accuracy of the proposal’s calculations, or with the long-term financial impact the assignment will have on the company’s balance sheet.

Companies seeking government contracts should make certain that cost estimates and financial projections have been prepared or reviewed by financial experts when establishing internal protocols for proper adherence to agency submission requirements. Companies that win government contracts must also ensure that their cost and financial accounting records adequately address the requirements of the contract. Perhaps most important, strategic guidance on the economic merits of specific contracts should be sought from finance experts as well as marketing and operational personnel.

Many states and municipalities award professional services contracts to individuals that are negotiated rather than awarded through the traditional bidding process. The benefits of these assignments as government consultants are identical to those achieved by other types of businesses in terms of reliable revenue and marketplace credibility.