FAQs for small businesses

What you need to know about doing business with federal agencies

Q: Why does the government buy products and services differently from large private-sector organizations?

A: The federal government is one of the largest organizations on Earth, buying about $400 billion worth of goods and services annually. It’s not responsible for shareholders; instead, it’s accountable to 300 million U.S. citizens. Private-sector companies have a board of directors to set policy; the government has Congress. The private sector spends its own money; the government spends our money. Civil servants can go to prison if they expend funds without prior congressional approval.
The stakes are different in government.

Q: What is the FAR?

A: Federal contracting is governed by a thick book of regulations called the Federal Acquisition Regulation, a document so complex that entire law firms make their living from it. The FAR, in nit-picking detail, ensures that monopoly and corruption don’t take the place of transparency and fairness in federal procurement, while adding a few interesting twists. For example, the FAR discourages the government from specifying a preferred brand name in its solicitations.

“The biggest single impediment seems to be buy-in from the contracting officers.”
Larry Allen, Coalition for Government Procurement

The FAR is the Ur Ziggurat for federal contracting, and it governs all federal agencies. Many have created additional agency-specific addendums. For example, the Defense Department also follows the Defense Federal Acquisition Regulation Supplement.

Q: Does the government demand unique requirements from
contractors?


A: Yes. The FAR requires contractors to follow many provisions that are not found in the private sector.

For example, the federal government cannot buy manufactured items, such as computer hardware, made in countries that don’t have a Government Procurement Agreement with the United States.
Countries that lack a GPA include China, Taiwan, Malaysia and other typically low-cost manufacturing countries. Goods must originate from factories located in approved countries, which include Singapore and Mexico.

“It’s possible that we might get a GPA with
China in the next couple of years,” said Steve Charles, founder and executive vice president of immixGroup, a federal market consulting practice based in McLean, Va.

Companies with federal contracts also expose themselves to a considerable amount of scrutiny. Government auditors can check their internal books to see what prices and discounts they offer other customers. They can also inspect companies’ ledgers to see how much they pay their employees.

“You better know what you’re doing before you accept a government contract,” said Chip Mather, senior vice president of Acquisition Solutions, a consulting firm based in Arlington, Va.

Q: What incentives exist for the government to do business with small or minority-owned businesses?

A: Congress has specified that the total dollar value of small-business contracts governmentwide should add up to 23 percent of the value of prime-contracting dollars each year. The 23 percent goal, which is part of the Small Business Reauthorization Act of 1997, does not apply equally to every agency. Some agencies have goals to contract more than 23 percent, some less.

Cabinet departments with notably high
small-business contracting goals in fiscal 2007 include the Agriculture Department at 49 percent, the Commerce Department at 49 percent, the Housing and Urban Development Department at 45 percent and the Interior Department at
56 percent.

Q: How does the government define small businesses?

A: The Small Business Administration’s Office of Size Standards officially decides what’s small and what’s not.

SBA uses in-house economists who employ a variety of government-collected databases to make official size determinations on an industry- by-industry basis. The North American Industry Classification System is SBA’s official guide. Within NAICS — which the United States, Canada and Mexico developed in the 1990s — broad sections of the private sector are grouped by subsector. For example, telecommunications is Subsector 517.

Industries within a subsector receive a more specific NAICS number, or code. Satellite telecom, for example, is NAICS code 517410.
Small-business definitions are a function of annual revenue or total employees. Internet service providers (NAICS code 518111) can make as much as $23 million in annual revenue and still be small. Telecom resellers (NAICS code 517310) are not defined by revenue but by number of employees — in this case, as many as 1,500. SBA recently proposed changing the way it counts employees from an annual average to a three-year average.

The agency adjusts size standards about every two to three years to compensate for inflation, said Arthur Collins, director of government contracting at SBA. Larger, more in-depth revisions of the standards occur as needed, but the agency intends to make the process more methodical in the next few years.

“We’re moving to a time when we are doing things on a systematic basis,” Collins said.

Q: What is the IFF?

A: Companies on the GSA schedule must pay a quarterly fee called the Industrial Funding Fee (IFF), which is worth 0.75 percent of each quarter’s schedule transactions. It is the company’s duty to ensure that GSA receives the correct amount. GSA uses the IFF to cover the administrative costs of the multiple-award schedule (MAS) program. In fiscal 2006, GSA collected $276 million in schedule fees, according to the agency’s annual performance report.

The IFF is “essentially sales tax for the government,” said Larry Allen, executive vice president of the Washington-based Coalition for Government Procurement.

In 2004, GSA lowered the IFF from 1 percent to 0.75 percent because it was collecting a surplus.

Q: What is a GWAC?

A: GWAC stands for governmentwide acquisition contract — an indefinite-delivery, indefinite-
quantity (IDIQ) contract. GWACs are agency-run buying programs solely for information technology products and services. Any agency can apply to operate a GWAC and become a governmentwide middleman for IT products and services. The Office of Management and Budget is the designating GWAC authority. GWACs took off when Congress passed the Clinger-Cohen Act of 1996 to create more innovation than possible under a monopolistic acquisition system.

Here is an example of the GWAC process: After getting permission from OMB, agencies craft a GWAC request for proposals for some unmet IT requirements. Agencies evaluate responses based on pricing and the companies’ ability to perform tasks within the GWAC’s scope. Agencies make a source-selection award to multiple companies.

Because a GWAC is an IDIQ contract, an award doesn’t necessarily guarantee a company a dime’s worth of business. Instead, companies have essentially agreed to become a prize horse within a GWAC stable. GWACs often guarantee companies a minimum amount of business, but the dollar value of that minimum might not even be enough to cover the costs of putting together a contract bid.
After source selection, usually no additional companies are accepted onto the GWAC. Agencies can then buy products and services through a GWAC by working directly with the executive agency or with GSA, which will charge an additional fee.

A contract with a GWAC business is called a task order. Before issuing a GWAC task order, agencies must still go through an evaluation procedure called the fair opportunity process, which is designed to give all GWAC-listed companies an opportunity for task-order business. Rigging a statement of work and aggregating or splitting up orders to favor one contractor over another is a no-no.
GWACs have a specific life span, and agencies must limit the amount of collective business that is conducted on them, though OMB can expand both limits.

Q: What is a MAC?

A: MAC stands for multi-agency contract. It is an older type of governmentwide acquisition
tool than GWACs, but MACs, too, are IDIQ contracts. One agency placing a MAC order with another must affirm that each order is in the best interest of the government and that the goods cannot be obtained elsewhere as conveniently or economically.

Agencies often create MACs for internal use. However, in a government in which annual department budgets can exceed the gross domestic product of many third-world nations, MACs are tremendous business opportunities. For example, the Homeland Security Department’s Enterprise Acquisition Gateway for Leading Edge Solutions procurement, better known as EAGLE, could be worth about $45 billion over seven years. The procurement is complete in the sense that the solicitation period for companies is over.

MACs haven’t declined in popularity, Charles said. “There’s been so much criticism about GSA and how it’s run things that to shoot the MACs would be shooting at everything,” he said, adding that such contracts will likely receive more scrutiny in the near future.

Q: What is the IT Schedule 70?

A: GSA organizes its MAS program around broad commercial categories and denotes each category with a number. Schedules are catalogs of GSA-approved businesses. Each category is generically called a schedule. Schedule 70 is for IT products and services.

There are more than 50 active schedules, though their numeric designations do not run in order. Within Schedule 70, there are 12 numbered subcategories of products, known as Special Item Numbers (SINs). For example, SIN 132-34 is for software maintenance.
State and local agencies also have permission from Congress to use Schedule 70. In fiscal 2006, government agencies purchased $17.25 billion worth of products and services through Schedule 70 — slightly more than in fiscal 2006, when they bought $16.88 billion.

Q: What is most-favored customer pricing?

A: Companies applying to be listed on a GSA schedule must identify the best discounts or the most-favored customer prices they offer other customers. The most-favored customer price is the basis for a company’s listed GSA schedule price.

GSA schedule examiners often go to great lengths to ensure they get most-favored customer prices by demanding a company’s invoices, internal memos, pricing justifications and additional information. Satisfying every information request from a scheduler examiner can take months and require a great deal of patience. Some applicants complain that the process is invasive or unrealistic — most-favored price under what conditions? Especially in IT, different customers’ tolerance for risk can result in widely different prices.

Although business officials grumble about the most-favored customer clause, a 2005 Government Accountability Office review found that nearly 60 percent of the schedule contracts it examined lacked documentation to clearly establish that companies were offering their most-favored customer price.

GSA has been under pressure to demonstrate that it actively enforces the pricing clause. In 2006, software giant Oracle paid a $98.5 million fine to settle allegations that federal schedule buyers overpaid for PeopleSoft products from 1997 through 2005. And Sun Microsystems has been fighting with the government over allegations that the company overcharged agencies on its schedule contracts.

Q: Is getting a schedule worth the effort?

A: A growing business with a good track record will probably find it worthwhile, but a schedule contract isn’t like winning the lottery. The most-favored customer clause requires the federal division of a company to know all the discounts other parts of their company are giving customers. That, in turn, requires internal controls and a reporting infrastructure. Delivering the 0.75 percent transaction fee to GSA on a quarterly basis also requires a robust accounting system.

The government can also send auditors to examine your bookkeeping methods. The chances of getting audited are small but real. Companies should expect regular visits from a federal industrial operations analyst, who will check your federal invoice system and your sale or discount offerings.

Companies are also responsible for complying with the Trade Agreement Act of 1979, which prohibits the government from buying products manufactured in countries lacking a Government Procurement Agreement.

Q: How long will it take to get a GSA schedule contract?

A: Getting onto Schedule 70 will take about four to eight months, Allen said. GSA officials say they’re aware the process can be overly time-
consuming. In June 2006, on the fourth day of her tenure, GSA Administrator Lurita Doan pledged to reduce the evaluation time GSA requires for a basic schedule listing to 30 days.

GSA has since launched the MAS Express Program for some of the products and services allowable under five schedules: Schedule 70, Schedule 67 (photographic equipment), Schedule 78 (trophies and signs), Schedule 58 I (professional audio/video, telecommunications and security solutions) and Schedule 81B (shipping, packaging, and packing supplies).

But “most IT companies don’t find themselves good candidates for the MAS Express program as it currently exists,” Allen said.

Also, the program’s 30-day countdown
doesn’t start ticking until after GSA examiners have already gone through a company’s application once.

Q: Can I do it all electronically, from start to finish?

A: No. GSA does accept schedule applications via an electronic submission tool called eOffer. But companies must have something called an Access Certificate for Electronic Services before they can use eOffer. Private-sector providers with government contracts grant the certificates; getting one requires companies to send a notarized contract to an ACES provider, which will send a security code response via the postal
system.

Even then, an electronic submission might not fit your needs. Some companies say eOffer isn’t flexible and has a clumsy user interface.
“It’s a TurboTax approach to getting a contract,” Charles said.
In early 2006, GSA kept the system off-line for weeks after an applicant stumbled across some security flaws in the site’s design.
GSA schedule examiners are also not overly fond of eOffer. “The biggest single impediment seems to be buy-in from the contracting officers,” Allen said.

Q: Once I’m on a GSA schedule, how do I generate business?

A: You can start by looking for opportunities on the Federal Business Opportunities Web site, where the government posts opportunities worth more than $25,000.

Schedule 70 holders should also get to know the fairly tight-knit federal IT community. Ask program officials about their needs, stay current on new trends and read the trade press.

But don’t try to be everything to everybody. Find your niche and exploit it.

“The stupidest thing that companies can do — and almost all of them do this — is say, ‘We’re a systems integrator!’” said Mark Amtower, founder and senior partner at Amtower and Co, a consulting firm based in Highland, Md. “Reinforce a particular area of expertise and go after those chunks of business.… Don’t tell me you do
everything.”

Q: Should I spend time buttering up contracting officers?

A: Contracting officials are generally happy to answer intelligent questions about government needs. “People ignore contracting officers at their peril, because they’re part of the decision-making process,” Allen said.

But there’s a distinction between building relationships and being a pest. One consulting firm has advised prospective contractors to show up unannounced at federal offices with free popcorn for contracting officers. Most procurement experts reject such advice.
“If you want to really start developing a relationship, don’t provide them popcorn, provide them some technical information,” Amtower said. “Develop some white papers.”

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