Life As A Federal Small Business Or Subcontractor, And Growing Pains


The belief that the federal government should leverage the agility and innovation potential of small business by protecting them from large business competition dates back to the Great Depression. In the decades since, it's become enshrined in policy that small businesses should have "maximum practicable opportunities" to compete for prime contracts and subcontract awards. Translating that into practice for your particular industry is no mean feat -- and growing your business within the realities of the federal market is its own challenge.

The government operates under a mandate to award 23 percent of all federal prime contract dollars to small businesses, with subpercentages dedicated to particular socioeconomic groups, such as service-disabled veteran owners of small businesses. The ins and outs of establishing your company based on one or more of the socio-economic subcategories of small business are outside the scope of a single article like this. For a more in-depth look at the particulars, it would be best to review the book from which this commentary is excerpted. Details are at the end of this article.

Agencies also have small business subcontracting goals, which collectively hover around 35 percent of subcontract dollars that flow through the large business primes. If you follow this path, be prepared. Life as a small business subcontractor to many large companies can be surprisingly difficult.

Sooner or later, small businesses learn the hard way that pre-award teaming arrangements evaporate after contract award. A small business doesn't have a legally enforceable relationship with a prime contractor until the prime and sub execute a subcontract against the recently awarded contract. Once a prime has been awarded a contract, lowering subcontracting costs puts extra profit directly into its hands. Anticipate attempts to substitute pre-award team members' products for cheaper post-award alternatives.

With service companies, what happens more often is a decision by the large prime to perform work in-house that was planned for subcontracting under the teaming arrangement. Even if a large prime used your qualifications and past performance to gain a service contract, it's under no obligation to use your services during execution of subsequent task orders unless it explicitly promised so in its proposal to the government.

This is not to dissuade small business owners from subcontracting; after all, large businesses must meet their subcontracting goals, and many companies have had friction-free experiences. But be smart. Many newcomer small businesses tend to believe that the only way to gain federal business is to work under large primes, and so go directly to them with proposals in the expectation that a good idea will be rewarded with a subcontract. That outcome is not impossible, but it's hardly guaranteed as subcontracting goals are a matter of negotiation contract-by-contract.

If you have a great solution, most people advise generating interest first within the government itself. A subcontract with a prime, or a possibly a direct prime contract, won't occur until a program manager is convinced of your solution's importance. If your offering is unique, and you're a small business, the deck is stacked in your favor.

Another catch to being a small company in the federal market -- especially for service companies -- is the realization after a couple years that they have no particular identity. After a period of helter-skelter growth, you might have a jumble of disconnected qualifications and staff that make your company less than the sum of its parts. Your growth may slow because you're not strongly associated with an in-demand expertise. Accumulating overhead costs force you to increase prices, slowing growth further. At a certain point, you'll find things falling apart due to a lack of center.

What you need is a strategy to become more valuable over time. When you're starting out, generating cash is the understandable first priority. For a services company, the need to place people wherever you can to pay the rent must be balanced with a plan for performing more valuable work you want your company associated with.

The small business policy is based on the idea that small business can do things large businesses can't. If you can bring new value to the table quicker than the lumbering prime, your chances of surviving are immeasurably improved. But if all you're selling is the fact of your smallness, you're just another small firm in a field full of them. 

It's not that the system is slanted against small business; unfortunately, many federal regulations came into existence because of attempts by cynical small business owners to manipulate the system in response to agency focus on meeting goals rather than exploiting the real value small business can deliver.

If your intention is to do good work and provide a needed product or service, you'll be able to spend the bulk of your energy doing so. Take what you can from small business incentives, but don't become dependent on them. Grow smartly. Cultivate government customers directly -- and prepare for the day when you're no longer small.

The preceding information was adapted and digested from the book "The Inside Guide to the Federal IT Market," published by Management Concepts Press. For more information, visit www.insideguidetofederalit.com/.

Steve Charles is co-founder and executive vice president of immixGroup, which helps technology companies do business with the government. He is a frequent speaker and lecturer on technology and the federal procurement process. He can be reached at Steve_Charles@immixGroup.com.