The U.S. government is the largest purchaser of goods and services in the world. In 2012, prime federal contracts total $240.7 billion. These are valuable opportunities for American businesses, but while the potential rewards are great, securing a government contract can be a complex, time-consuming endeavor. It is one reason why the federal government has failed to meet its small business contracting goals for more than a decade.

Each year, the U.S. government aims to give 23% of eligible contract dollars to small businesses (contract dollars that flow to small businesses via subcontracts with larger firms are not counted toward the 23% goal). So far in 2012, small businesses have received more than $44 billion in prime contracts (about 19% of the total), according to the U.S. government data site Small Business Dashboard. While the prime contracting goal has not been met in years, many federal agencies do make a focused effort. The Small Business Administration’s (SBA) recently released 2011 agency report cards showed an overall federal B-rating for reaching prime and subcontract goals. The Department of Defense, which holds some two-thirds of all federal procurement dollars, received a B. On the other end of the spectrum, the second-largest government buyer, the Department of Energy, earned an F.

The SBA’s above-average overall agency rating for prime and subcontract goals does not mask the inherent challenges in the contracting system – high bidding costs, regulatory hurdles following the awarding of a contract, and the overall effect on competition.

A Challenging Contract Environment

In 2010, small businesses spent, on average, about $104,000 in time and resources in pursuit of government contracts, according to a 2011 survey by American Express OPEN. For the small businesses that win, the investment can be worth it, as government contracts can be a stable, ongoing source of revenue. Yet, the investment required to compete can be a deterrent.

Testifying on behalf of the Aerospace Industries Association (AIA) before the House Committee on Small Business in 2010, Robert R. Sprole outlined the primary challenges businesses face when seeking government contracts.

Understanding qualification for a contract and obtaining a place on the General Services Administration (GSA) schedule can be confusing and often requires outside help to guide the process, he said. While there are some cost-free resources available from federal agencies, seeking outside support can increase overall costs, giving larger businesses with more resources a competitive advantage over small and mid-sized businesses—an advantage not based on quality and value.

“Small companies often shy away from direct contracting with the government because of these kinds of concerns,” Sprole testified. “More assistance in helping small businesses through this process would enable more competition for both small businesses and the government.”

Penny Pompei, the national executive director for Women Construction Owners & Executives, says that the time and patience it takes to identify and bid on contracts pose a major challenge for entrepreneurs.

“Assuming small business owners have spent time getting all the proper registrations and have at least a rudimentary understanding of federal acquisitions regulations, they have to figure out what agency wants to buy what they have to sell and figure out who within that agency makes the decision to buy it.”

Pompei says that while all of this information is available online, sorting through query returns takes a lot of time, as does finding a way to connect with the contracting officer in charge of a bid.

“Even after they have made that connection,” she says, “it is highly unlikely they will be the successful bidder on the first several bids.”

“After qualifying, a business will likely need to make unique structural changes to satisfy government requirements,” Sprole stated in his testimony. “For example, many government contracts require a cost accounting standard (CAS) compliant accounting system –something not found in commercial companies – even for common, commercial items.”

All prime contractors must follow a 53-part Federal Acquisition Regulation document, supplemented with agency-specific regulations. And unlike the norm in the commercial market, the federal government can unilaterally revise a contract, changing quantities, delivery methods, or even cancelling the contract altogether. A contract might also include extensive audit and surveillance requirements. Businesses can be reimbursed for some costs, but keeping up with changing needs can make delivering a superior product or service more difficult.

The Impact on Competition

Winning a government contract can require having to hire additional employees, which, indeed, is one of the main goals for the government’s small business contracting percentage target. But as Sprole explained to Congress, small businesses that win contracts can quickly grow out of the “small” category, leading them into direct competition with larger companies.

“The current system unintentionally makes it extremely difficult for a small business to grow beyond a certain point,” says Giovanni Coratolo, the U.S. Chamber’s vice president of Small Business Policy. “The most entrepreneurial small businesses reach what is known as the ‘Mid-Tier Squeeze’ once they are no longer classified as small. Many companies are forced to either sell their business or find a way to become small again in order to re-establish their preference.”

Coratolo says that having smaller companies drop out of the bidding process is “in many cases, not in the best interest of the taxpayer,” adding, “We are our own worst enemy by keeping a system that does not foster competition and free enterprise.”

Navigating an Imperfect System

Despite these challenges, businesses can find contracting opportunities suited for their product and service offerings, size, and available resources.  All federal contracts are listed on the Federal Business Opportunities website. For help in the bidding process, companies can seek advice from SBA counselors around the country (often for free) or from other contracting services. Small businesses can also benefit from the GSA’s Mentor-Protégé Program, which pairs larger prime contractor companies with small businesses to foster success in contracts and subcontracts. 

Working with a larger business can result in important experience and revenue without the challenges of working directly with the government. The GSA offers a list of some large contractors that, “by law, are required to establish plans and goals for subcontracting with small business firms.”

Pompei recommends that small firms secure subcontracts with a major prime contractor to establish a track record as a government contractor. This allows a small business to establish a reputation with a government agency, which can be leveraged with other agencies.

“The prime contractor will receive the lion's share of the profits,” she says. “Therefore, the first few government contracts will be loss leaders and can only be looked at as an investment that will hopefully eventually pay good dividends.”

Many agencies are proactively seeking companies that can satisfy their demands for goods and services. For example, the U.S. Air Force, with an annual budget of more than $110 billion, has launched a Small Business Program to identify and attract potential contractors. Using a targeted website, as well as proactive outreach to the private sector, the Air Force is striving to integrate the small business community in the acquisition process, “putting innovation, efficiency, and agility to work in support of the Air Force mission.”

While the challenges are many, businesses of all sizes can find support and success, making the most of a complex and imperfect system.