When selling into the federal government, the particularities of the budget cycle—the timing of the fiscal years, use it or lose it, the likelihood of a continuing resolution for at least the first quarter of the federal fiscal year—obviously have a profound effect on your business. This article looks at the implications of the annual appropriations cycle and what you should do to minimize any negative impact on your company.
The fundamental concept is that federal agencies must document how each dollar spent maps back to spending authority granted by Congress in an appropriation. As annual "must pass legislation" the 12 appropriations bills to fund the government agencies attract political amendments and controversy such that Congress seldom passes all these bills by October 1. In absence of an appropriation, Congress passes stop-gap spending authority in a law called a continuing resolution (CR).
The problem with CR authority is that it is extremely short-term, usually about six weeks. Purchases during this time are to be made as needed to maintain operations at normal tempo. New starts are prohibited unless specifically funded in the CR. A deal you were hoping to close at the end of the prior fiscal has little chance of occurring under a CR unless the spending authority for it can be based on some prior appropriation that granted multi-year spending authority. Always make sure you know the spending authority for each of the sales you are forecasting and when it expires.
If your company happens to hold a number of annually renewable contracts with a federal agency—whether for a service such as annual maintenance or term software subscriptions—work each year to co-term such arrangements so they renew in the springtime when agencies generally have their full annual budget authority. Structure these arrangements consistent with the special provisions in fiscal law that allow 12-month agreements to cross fiscal years. .
The realities of the "fourth-quarter rush"
What may spring to most people's minds when thinking about the federal fiscal cycle is the last quarter procurement ramp-up that runs from July through September, known hyperbolically as "the fourth-quarter rush." Agencies faced with the looming end of their annual appropriation authority work feverishly to obligate the funds contractually before they return to the Treasury..
Companies that wait to start selling until the fourth quarter will find that a goodly percentage of the money spent at the time will already have been spoken for because contracting shops ask program managers to submit their end of year purchase requests in the June and July timeframe to ensure that the contracting is process is finished before September 30. Smaller purchases may be considered if requested by early August, but requests made after that are gap-fillers.
A majority of fourth-quarter funds are obligated through pre-existing contract vehicles rather than through full and open start-from-scratch competitions, simply because of the lead time the latter kind of procurement necessitates. Agencies also rediscover small businesses during the latter half of the fiscal year because competition standards for socioeconomically favored firms are less stringent.
These legal dynamics create an annual rhythm reflecting a synthesis of fiscal law entwined with procurement law. Thus, the first quarter is more about plotting a two to three year business plan as high-level officials have time to talk about their long-term plans. Then second quarter is about getting more focused on what has a chance of closing this year. Third quarter is about making sure our customers are doing what they need to do to submit complete, and perfect, purchase requests to their contracting shop, and fourth quarter is the time when the harvest comes in. Base your pipeline and forecasting methodology on these downbeats and you'll find yourself also forecasting more accurately the business occurring in between. Remember, agencies are supposed to do all they can to maintain an even spending tempo in spite of all the fiscal and procurement hoops and hurdles.
Fiscal law requires agencies to spend annual money for legitimate needs arising in that year. This means that buying a bunch of stuff in September to burn money about to expire must map back to a need that sprouted up earlier in the year. Think "re-supply" from the prior year rather than "stocking up" for the coming year.
Severable vs. nonseverable services
Knowing all this, you might rightly ask how certain service contracts are able to cross fiscal years without running afoul of fiscal law? This depends on the legal nuances of whether the service is severable or nonseverable.
A severable service realizes the value of the contract incrementally, maybe on a daily basis. Help desk support is one example. The value of the service doesn't depend on a single outcome, but is realized each time a help ticket is resolved.
Nonseverable services depend on a single, discrete outcome—for instance, a research project. There's no incremental value to a day's worth of experiments, only in a fully concluded study. Agencies are allowed to fully fund nonseverable service contracts with current fiscal year appropriations, even when their outcome will occur in future fiscal years.
All agencies except NASA are allowed to fund severable service contracts with current fiscal year funds for a period of up to 12 months, even if that 12-month period crosses the federal fiscal year. This is the basis for the recommendation to co-term annually renewable agreements in the spring when agencies not likely to be constrained by the short-term limits of a CR.
Federal fiscal years and the budgets that underpin them are artificial creations, unlike, say, the seasons of an actual year. But the timing of the federal fiscal year can be no less important to your business than the arrival of summer is to a beachside ice cream shop.
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.