Time to read: 14 min
Why Contracts Are Important
Government customers and partners expect you to understand basic contracting. Your business may have a customer who wishes to buy your product or service, but the sale cannot go through unless there is an existing contract. Your customer may be intimidated by the contracting process and may simply hand the sale over to their contracting people, which can add months to your sales cycle. If you understand the government’s contracting options:
- you can bring solutions to your customer and to the contracting process to simplify your sale
- you can get closer to the right contracts and become your customer’s preferred vendor
Government Contracting First Principles
Government contracts are subject to significant oversight because the government is using taxpayer money. Since the government often buys unique items, like defense systems, this can lead to fraud. Here are the key practices observed in government contracting:
- Everyone should have the opportunity to compete for federal dollars – public announcements and open competition are preferred.
- Goods and services sold commercially are presumed to meet quality standards, while pricing is assumed to be reasonable due to free-market competition.
The Award Process
Subjective decisions when awarding are avoided whenever possible, as those can bring unwanted challenges. The easiest decision process is to award a contract based on the lowest price point. The second most objective option is to lay out extremely decisive criteria for each evaluation.
Proposals are long and can require multiple hours of work to ensure that all the RFP elements are met. At the same time, however, the government also wants to reduce the time it spends on reading through long proposals. As a result, the award process favors repeated contracting of known vendors, since the government already has invested in vetting them.
The government uses a pre-vetting process to reduce risk when working with new vendors. The goal is to pre-screen the quality and maturity of the company and the technical abilities of its employees. Here are common questions the government asks during the pre-vetting process:
- What prices does a vendor have listed on its price sheet?
- What is the company’s administrative maturity?
- Does the vendor understand government contract accounting?
- Is the vendor’s HR department government-compliant?
- Is its workplace cyber safety government-compliant?
Pre-vetting allows the government to fast-track the review process. Companies usually make the above information publicly available. BPAs, IDIQs, and GSA schedules are all basic concepts of robust pre-vetting on the federal scale.
2. Commercial Traction as a Pre-Vetting Requirement
Commercial traction is an indicator of vetting. This assumes that successful companies with excellent track records must provide good-quality products or service; otherwise, they would not have customers.
Being on an IDIQ will open your company up to a flowing stream of contract opportunities you would otherwise not be able to access. Government contracting businesses need to aim to be on an IDIQ because they realistically cannot afford to be without an access point to their customers.
Different Contracting Approaches
Because of the time and effort associated with acquisitions, the government has created a variety of creative ways to lessen their burden. The two basic techniques employed are:
- A shorter process for small contracts (GPC & SAP)
- The pre-vetting of multiple vendors to expedite future transactions (IDIQ approach)
Sadly, this leaves the classic RFP, which is the most accessible form of contracting, to the traditional full bidding process.
Approach 1: MicroTransactions, aka Government Purchase Card Acquisitions (GPC)
Trusted government officers can get a government credit card that they can use to make small purchases. Micro-transactions look a lot like commercial corporate card purchases. Transactions are limited to purchases under $10,000. They are completed quickly, with minimal research and documentation required.
The buying process is similar to searching the web for an item or shopping at a retail store, and is based on reasonable prices. The only guideline is to check out a variety of vendors. There is no debrief or protest for these purchases. GPCs are a great way to build a relationship with a government customer.
Typically, GPC purchases are for commercial items. The government tends to trust that any product that commercial customers buy must be high-quality. Additionally, there is minimal concern over the vendor's administrative compliance, since these are low-dollar, typically low-duration purchases.
GPC assumes that posted commercial prices are reasonable, since they have been validated by the open market. Reasonable judgment is expected on the part of the buyer, who must evaluate the availability of comparable options.
These opportunities are almost never announced publicly, making them difficult for vendors to secure. For example, if a government buyer doesn’t know that your business has the required capability, then s/he will not know how to reach out to you. This is important, because relationships and marketing are critical to vendor success in government contracting.
Approach 2: Simplified Acquisitions Process (SAP)
This structure requires more process and oversight than GPC contracts, but less than full RFPs.
SAP is a referred process for small purchases. The max purchase amount is variable and is only available for purchases from small businesses. The limits are:
- $150K max for bespoke items
- up to $7M for commercially available items
The contracting process here is minimal, but there is still a need for buying agents to attain purchasing approvals for larger amounts. Thanks to limited market research and the proposal process, this is much faster than RFP-based contracting.
There is less oversight and assurance of quality when buying specialty products or services under the $150K limit. However, there is a reliance on market forces to drive quality on the larger purchases of up to $7M.
Maintaining government relationships and marketing efforts is critical to vendor success. These opportunities are also almost never announced publicly. Government buyers must know that you have a capability to fulfill these opportunities before they will reach out to you.
Approach 3: RFP-Based
An RFP is the type of contracting most people think of. RFPs are a public process and involve full acquisition with public competition and multiple responses. The RFP process does not have a spending cap, and is geared toward government-specific items. RFPs can result in a bidder winning an award or an IDIQ.
The process of applying for an RFP includes market research, submitting an RFP, proposal review, selection, protest, and debrief. Typically, RFPs are very slow due to the process and time required to review and award. RFPs are very reliant on competition to keep costs low.
There are no commercial drivers present, making competition necessary for each contract to drive quality up and keep cost down. These awards can come with a significant regulatory burden, and those requirements are detailed in the RFP
RFPs are published publicly and accessible to all vendors. However, the evaluation criteria may require significant past performance records and regulatory infrastructure that small businesses cannot provide. RFPs also tend to yield more competition.
Approach 4: IDIQ-Based
This is a two-step acquisition process. The first step is to scope out a master services agreement (MSA), then identify the evaluation and compliance that awards made under the MSA would require. The second step is to complete tasks under the IDIQ that only those who are part of the MSA can bid on.
IDIQs are very popular because the pre-vetting makes subsequent contracting much faster. Each member of the MSA specializes in their specific area, reducing the margin for error. Each IDIQ has a specific scope – agencies are encouraged to use IDIQs. IDIQ purchases tend to be smaller.
The process of applying for an IDIQ includes market research among IDIQ holders, releasing the RFP to holders, the proposal review, selection, protest, and debrief. Creating an IDIQ is cumbersome, but allows for the quick awarding of tasks. Awards are highly flexible within the scope of an IDIQ. Less competition can hurt cost, but IDIQs often have so many holders that competition can still be quite high.
IDIQs generally, however, involve less competition and give vendors access to more opportunities. However, innovation can be stunted because everyone on the IDIQ is a govcon insider. Identifying the right IDIQs for your business can be difficult, and getting on them can be extremely beneficial.
MSAs allow for the government to purchase quickly without friction because vendors are pre-vetted. Single-award IDIQs or single-award BAAs occur when only one company is registered on the contract. This means that the company has secured work and will be preferred by government customers, since there is no competition.
Single-award IDIQs also create a monopoly issue and can result in lower-quality products. How can the government know if it is receiving the best products?
Pros and Cons of IDIQs
The government will likely forget about a single-award IDIQ as multiple contracts exist for the same products and services. If one IDIQ is used more frequently, the government customer will forget about the less-used ones. Companies can spend a lot of time and effort on winning a seat, but the government may never buy anything from them. IDIQs generally have a five-year period of performance before expiring. The need for the products/services may persist, however, as is the case for things like system administrative support or fleet vehicle maintenance.
Some IDIQs are always open to companies that want to apply for a spot. This is called an “on-ramp,” and occurs when new vendors are added to the MSA list.
- Some competitors apply for spots on IDIQs with no intention of completing work for the government customer, but rather with the intention of being bought by other companies for their IDIQ position.
GSA schedules are always open, and you can apply to be on them any time
- Look out for predatory service providers that may reach out to new businesses claiming to help them get on a GSA schedule.
- Many government customers don’t like GSA schedules or do not buy through them.
- You do not need to be on a GSA schedule to sell to the government.
How Everything Fits Together
The government buys about half a trillion dollars in goods and services a year through a patchwork of these four basic contract types. Understanding how they work together and how the government decides which one to use can be really challenging. To help you understand how the system works, we’ll use the analogy of the U.S. transportation system.
The first transportation mode is rail. It has huge potential and is very cheap for travelers to use. A couple of companies operate the rail system, making options available but limited. When you send a package via train, you are trusting another company to manage its journey. This is easy for you, since someone else is handling everything. However, there are a few potential pitfalls:
- Each rail line only goes to a set number of places.
- You need to know which rail line goes to the destination you have in mind.
- You have no control over timing and are subject to the train’s schedule.
The second major mode is the interstate highway system. It is super-flexible and you can go anywhere. You need to plan your trip in advance and drive yourself. There are a lot of other drivers on the road, causing possible delays. Taking the highway is less efficient than the railway, especially for repeat trips and bulky items. There are also many police patrolling the roads.
The third option is driving, but using the local roads that support towns. There is a huge amount of traffic, but each trip is so small that this doesn’t matter. There aren’t any large trucks blocking the road. There is less policing than on interstate highways. You can make stops along the way at various towns, but you need to be an insider to know where to go.
The fourth option is post and parcel services. They offer senders total flexibility and are easy to use, but are only suitable for small packages. Given the options, the choice you would make depends entirely on what you are sending. The size, cost, and urgency of the package determines its mode of transportation. This is exactly how different vehicles operate in the government contracting system.