Government Contracts: Could your business be ready for them?
Few of the startups I have spoken to during my career ever think about bidding for government contracts. Some founders view government contracts as time-consuming and boring. Others prefer not to try, simply because they think the bidding process is tedious and full of red tape. However, ignoring the government as a customer can be a costly strategic mistake.
The government can be a great client, if you know how to navigate the process. It has mandates and a mission to assist small businesses. This can give you – the startup founder – a serious advantage over larger competitors.
Some startups have been able to grow – and grow quickly – by bidding on government contracts strategically.
Government agencies can be great clients
Government agencies can be very good clients. They have substantial budgets and buy almost every imaginable business product or service in the market. More importantly, government agencies make purchases during good economic times and during recessions. This reliability can give you a cushion during bad times.
Also, most government agencies make an effort to help small businesses win bids. This support can make them ideal customers for a startup seeking traction.
But there are some disadvantages
The most important challenge of government work is that many contracts provide low profit margins – especially if you sell products or services for which there is a lot of competition (e.g., selling office supplies). The government likes to buy things at rock-bottom prices.
In some cases, profit margins may be so low that bidding for a contract does not make much business sense. Some contracts may also attract a lot of competition, which affects your profit margins even further. Finding bid solicitations where you will make a decent profit can be challenging in some industries.
Lastly, the process may be simple but it’s not easy. Government solicitation documents can be long, detailed, and outright tedious. Managing the process takes time away from other efforts. In most cases, you need to hire a full-time resource to manage this effort, or you need to work with a consultant.
Ultimately, as an entrepreneur, you have to balance the advantages and disadvantages and decide if bidding for government work is right for you.
How to find government contracts
The process of securing government contracts varies based on whether you are looking for federal, state, county, or city contracts. The federal contracting process is well organized and centralized.
However, states are not centralized. Each state has its own contracting process. And within a state, counties and cities have their own processes. This can be overwhelming and it’s best to focus on one level of government, and expand as needed.
Fortunately, finding government contracts is actually fairly simple. Your company must first register though the System for Award Management (SAM). Then you can look for opportunities at the FedBizOpps website. By the way, you can browse for opportunities without first registering, but you can’t bid.
Although FedBiz Opps is simple to use, it can take a day or two to get used to how it works. Remember, this system was built to work for all government agencies – which buy thousands of different products and services. Don’t be surprised if your first few searches are duds.
One simple way to start is to look for opportunities using your NAICS code. Usually, it’s best to start with a narrow search and expand from there.
Use set-asides to your advantage
As previously mentioned, the government tries very hard to help small businesses. As part of its efforts, set-asides are designed to level the playing field and help you win.
Some set-asides include section 8(a), women-owned business, HUB zone, service disable veterans, among others. These programs help different types of businesses. The bottom line: Set-asides exist to give you an advantage over larger businesses. Be sure to use them if you qualify for any of them.
Bid only if you can deliver
Never bid on a contract that you are not capable of fulfilling. Many new government contractors make this mistake. It will have negative consequences. Therefore, you have to line up your business financing, suppliers, employees, and all resources needed to deliver. Do all of this before you make the bid.
In my experience, failing to plan kills most of the contracting opportunities that startups pursue. Every so often, I get calls from panicked government contractors who need “urgent financing” to fulfill a contract. They usually call when they are a few days away from defaulting. Once the situation reaches that point, though, there is little anyone can do to help. The point is to plan and avoid the situation altogether.
Government contracts can sometimes be very large and exceed the financial capabilities of a startup. The startup bids on a large contract only to realize that they will need funding to fulfill it. This situation can be turned around if you address it early enough. The solution, obviously, is to get financing.
There are a few possible ways to finance government contracts (here are some). Common solutions include small business loans, factoring, purchase order financing, and asset based lending. Determining which solution is best for you depends on your situation, the type of opportunity, and the size of the contract.