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.

Vital Tips for Project Management in Small Business Federal Government Contracting

Effective small business project management focuses the resources on a plan for contract execution, the schedule, budget and customer requirements baseline and the status of a given effort among other concurrent projects to give visibility into problem solving and management trade offs.

If you are a small enterprise selling off-the-shelf commercial items under FAR Part 12 or marketing commercial products on a GSA schedule, you may be initially challenged by the government contracting venue. With persistence you will establish selling relationships through agencies and prime contractors. Your project management challenge is minimal.

A service contractor faces a far greater challenge in understanding the nature of government contact project management and succeeding at it
.
PLANNING IS KEY

Strategic thinking must be applied to structuring a government service contract project management capability in your company. It must involve long term planning and designing a business system as well as establishing rates and factors to bid new work and control it while interfacing with the customer.

A Framework For Small Business Federal Government Contracting Business Systrems

When one plans in detail to define the product or the service one reduces performance risk

The project management challenge is not to launch significant and costly resources before the specification for the product is sufficiently defined, obviating the need for costly revisions or abandonment, yet knowing when the product definition and plan are suitable for release.
Good project management starts early.

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 customer must come to an understanding regarding the scope of effort to be performed. That understanding is conveyed in the Statement of Work (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 customer furnished material or facilities required and when it will be made available to the contractor.

If your customer does not provide the above, offer 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.

PROJECT MANAGEMENT RULES OF THUMB

A secondary and related challenge is managing the baseline for the product or service to avoid scope creep, superfluous bells and whistles and other diversions that risk the basic completion objectives. 

Set a baseline for what can and cannot be achieved for the resources and time that have been committed to the job and present to the client.  Use it as a bench mark for discussion to establish a plan going forward. Then control it using sound baseline management. 

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

Use the below rules of Thumb to control "Scope Creep":

KNOW - The contract value and its ceiling amount

KNOW - The incurred cost to date and commitments

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

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

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

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

For baseline management and earned value techniques in achieving the above, please see the articles linked below:

Baseline Management In Small Business Contracting

Earned Value Management Systems

CAREFULLY SELECT YOUR PROJECT MANAGER(S) OR PERFORM THE ROLE YOURSELF

The following are the more esoteric project manager attributes necessary in the government contracting industry:

DEVELOPING the ability to cross organizational lines and make disparate groups or functional organizations work together with only a power of persuasion and a contract.

EVOLVING the art of directing resources without having them as direct reports while keeping home departments and functional bosses happy at the same time.

MANAGING to convince the executives in the company that specific project (s) are the most important in the firm.

LIVING with the prospect that if the project is late, fails or otherwise disappoints the powers that be, replacing the project manager will be the designated corrective action.


GROWING to crave the satisfaction that comes from succeeding at the above challenges and you would not have any other job because no other pursuit makes your day go as fast, grows you skills as sharp and totally occupies your intellect.

Managing Risk And Recovery In Federal Government Contract Terminations

On occasion the government finds it necessary to terminate contractual arrangements with contractors. FAR Sub-part 49.5 governs such actions. There are  two common forms of contract termination that you should know about and how to manage them.

GENERAL CONSIDERATIONS

Certain conditions are usually present when contact termination is on the horizon. These factors range from product and services obsolescence to developments that change the direction and amount of agency funding. They may also include customer relations difficulties or changes in the mission of an agency.

It is best to manage the risks associated with terminations by viewing them in the light of funding and performance liability. We have previously discussed limitation of funds and funding exposure in the following articles:

Limitation of Funds and Funding Exposure

Contract Baseline Management

If it is generally known, for instance, that if the government is having funding challenges in terms of justifying the next phase of a program, your company should carefully monitor incurred costs and commitments so they do not exceed the existing funding on the contract.

Moreover, if performance on a particular contract has been sub-par, deliveries have been late and corrective action has not remedied the situation, the reality of a termination for default should be assessed from a liability perspective; particularly concerning costs the government may bill the contractor for inconvenience. Receipt of "Show Cause" notices or "Cure Letters" are signs the government is positioning a justification for contract termination.

Terminations for default are particularly harmful to a contractor's past performance rating on federal government contracts:

Contract Past Performance Record

The remainder of this article will focus on each of the two major types of terminations and how to manage each.

TERMINATION FOR CONVENIENCE

This form of termination arises from standard clause(s) in your government contract that give the government the right to unilaterally terminate the contract at any time with or without giving any reason. The contractor is generally entitled to a negotiated settlement for an equitable recovery of costs and losses incurred. Please see the following link for applicable clauses:

Subpart 49.5 Termination Clauses

A termination for convenience is the least risky form of termination to the contractor. Although receiving a notice that your contract is being terminated for convenience is never good news, it does offer the opportunity to recover costs you have incurred and those you estimate will impact your business due to the termination.


Actions necessary:

1. First, insure your costs to date, plus commitments have not exceeded the funding level of the contract. If they have, consider asking for a funds amendment to your contact to cover the overrun. It may not be granted by the government. Next, immediately notify departments internal to the company with regard to the termination and inform them that their charge numbers for the program have been closed. Close all charge numbers. 

2. Notify all suppliers and subcontractors with respect to the contract termination, direct that they cease work, discontinue deliveries and submit to you a termination proposal containing itemization and costs associated with terminating their order or contract. You will negotiate with your supply chain and include their costs in your termination settlement proposal to the government.

3. Open a contract termination charge number for selected use by those who are associated with the termination to charge related time and expenses for ceasing work, inventorying material, supporting a termination proposal, dealing with suppliers, handling special requests or other direct efforts to cease work. It makes no difference whether the individuals are direct or indirect in their normal time keeping. This special accounting charge number will be utilized to record the cost to your firm for terminating the contract and proposing a settlement to the government. 

4. Complete your contract termination settlement proposal and submit it to the agency contracting officer to meet the date specified by the agency for same.

Termination Contract Settlement Proposal

5. When the contract termination settlement proposal has been negotiated and formalized with an amendment to closeout the contract in accordance with the following government approved practices:

Government Contract Closeout

TERMINATION FOR DEFAULT

A termination for default rises from standard clause(s) in your contract that give the government the right to unilaterally terminate the contractor if the contractor fails to perform according to the specified terms. The contractor is generally not entitled to any payment for the unfinished part of the contract and, instead, may be liable for (1) repayment of monies advanced, (2) liquidated and other damages and (3) excess cost incurred by the government in completing the contact under a new contractor. Please see the following link for applicable clauses:

Subpart 49.5 Termination Clauses

The Government contracting officer will terminate a contract for default when he or she determines that the contractor has failed to adequately perform in accordance with the contract. The Default clause applicable to fixed-price contracts limits the Government's liability for unaccepted work, subjects the contractor to actual (or liquidated) damages, and may subject the contractor for the excess cost of re-procurement. Moreover, the default becomes part of the contractor's past performance record which will harm the contractor's ability to compete on future contracts. Because the Government is not liable for work not accepted, the termination for default has a greater adverse consequence on supply contracts than service and construction contracts.

The government may terminate all or part of a contract for anything that was done that was not in the interest of the government, including:

• Attempted fraud

• Failure to meet quality requirements

• Failure to deliver the supplies or perform the services within the time specified in the contract

• Failure to make progress and that failure endangers performance of the contract

• Failure to perform any other provisions of the contract.

Cure Notice

Before terminating a contract for default because of your failure to make progress or to perform, the contracting officer will usually give you a written notice, called a "cure notice." That notice allows you at least 10 days to cure any defects. Unless the failure to perform is cured within the 10 days, the contracting officer may issue a notice of termination for default.

Show-Cause Notice 

If there is not sufficient time for a cure, the contracting officer will usually send a show-cause notice. That notice directs you to show why your contract should not be terminated for default. It ensures that you understand your predicament, and your answer can be used in evaluating whether circumstances justify default action.

If a contractor succeeds in appealing the termination for default, the default is usually converted into one for the convenience of the Government.

Actions Necessary:

1. When a termination for default is at hand, contact a law firm that specializes in government contract terminations and proceed within the guidance offered by them in pursuing any part of the termination that could be converted to a termination for convenience or other form of relief with respect to conditions over which you may not have had control or for which you may be entitled to a request for equitable adjustment or contact claim.

2.  You should also proceed in accordance with paragraphs 1 through 3 of the Terminations for Convenience section above to limit your internal and supplier liability as well as isolate costs associated with the termination for a potential settlement or claim.  

When the contract has been amended by termination for default, close out the contract in accordance with the following government approved practices:

Government Contract Closeout

SUMMARY

Contract terminations should be avoided if at all possible. They are expensive on the part of both the government and the contractor. The negative aspects of a termination for default, in particular, can last for years in government contractor past performance data bases.

Work Authorization Is Key To Contract Management Process

The execution of a contract (signing by both parties) is a key benchmark in government contracting. It triggers several events such as the start of the period of performance and the delivery schedule time period. Execution begins a billing period start date, and contractual obligations by the government and the contractor.

Establish an internal document to your company that contains the pertinent data for the contract and assigns it a unique contract identifier in your business system. This is necessary for billing and cost collection purposes as well as government audits. 

Astute government contractors do not allow effort to proceed or cost to be incurred on a particular contract until such a document is generated, signed, approved and distributed by a company official assigned the duty of releasing the contract for performance. 

Such documents are commonly called "Work Authorizations", "Release Orders" "Production Release Orders" or a similar term to benchmark the new business and begin performance, accounting, and time and materials accumulation on the contract. 

Any cost or supplier commitments prior to a signed contract are considered pre-contract costs by the government under FAR and require special authorization by the PCO under the contract. They cannot be billed until the contract is signed. Incurring pre-contract costs without authorization is high risk for the contractor. 

Any work or supplier commitments outside the scope of the current contract documentation are also high risk without a negotiated contract amendment adding the scope of work to the contract or government authorization for the use of designated management reserve.

Sarbanes Oxley regulations and other recent government laws regarding corporate responsibility have made control of work authorization and record keeping important factors. Keep in mind that a small business past performance record begins when a contract is signed.  This record is maintained by the government and is updated as deliveries and performance occur. 

You should begin your internal project management record on each contract by attaching all the necessary information for your performing organizations and support functions to begin doing their jobs. 

A copy of the contract should accompany the internal release to key functions in your enterprise. The master should be filed in your central files. Some companies perform work authorization electronically. The government is moving in the direction of electronic record keeping as well.

Managing Government Contract Limitation of Funds and Funding Exposure

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

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.

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 or more 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.

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 unposted 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 the event the contract is terminated for convenience, a new revision to your internal release document should set up a special project and identifying number for accumulating costs specifically associated with the termination. These costs will be billed separately to the government under a termination contract modification and should be carefully recorded. Both direct costs and indirect costs at all levels of the company may be charged direct to a contract termination for convenience. You can expect your suppliers to bill for cost to date and termination cost as well. You will pass on those costs to the government in your proposal for termination for convenience of the government. The government will assume ownership of all inventory and work in process on terminated cost type contracts. Termination proposals, audits, negotiations and contract closeout can be lengthy and complicated proceedings.