Subcontracting: A Two-Party System

While our GovernmentVAR 100 is dominated by huge players--Lockheed Martin, Northrop Grumman, BearingPoint and other billion-dollar-plus integrators--the revenue range runs the gamut from megasized ($10 billion) to relatively pint-sized ($44 million). The list tallies some $85 billion in sales and revenue, accounting for nearly 80 percent of all federal and SLED IT spending for fiscal year 2006.

Some argue that the wealth of the GovernmentVAR 100 is built on the influence of large integrators and the strength of smaller subcontractors--a brains-and-brawn relationship. According to the 2006 GovernmentVAR State of the Government Market survey, 63 percent of government channel companies will act as both prime contractors and subcontractors.

Subcontracting is the trickle-down economics engine of the government channel. Large integrators grab the multiyear, multibillion-dollar deals, and then fulfill their commitments with smaller partners that have the staff, expertise and local contact to get the job done.

Here's the problem for the little guys: The extended sales cycles of government contracts and the slow pay of their prime contractors put extreme stress on the subcontracting ecosystem. Many federal contracts take a year or more to execute. Small solution providers are not only working furiously on their own pitches but also trying to make deals with larger partners for a slice of the big pie. Then they wait until the contract is signed and the work gets parsed out. Even after services are rendered, many subcontractors must wait for their primes to make payment. One subcontractor at XChange Government Integrator told us he has been waiting for 18 months to get paid by a prime contractor.

The responsibility for maintaining the health of the subcontracting ecosystem doesn't fall exclusively on the primes' shoulders. Prime contractors will write "slow pay" clauses into their teaming agreements, mostly to protect their cash flow when the government doesn't pay them on time. Subcontractors need to exercise due diligence when looking at partnerships, understand the work order and payment processes, and negotiate the best terms for their business.

The health of the public-sector channel--and of the GovernmentVAR 100--depends on prime and subcontractors understanding that they are dependent on one another. The large integrators must pay their subcontractors on time and, by default, their primes. And subs need to ensure they are not blindly entering into teaming agreements. Ultimately, fiscal cooperation will work to everyone's benefit.