Government Contracts for Small Business: How Your Small Business Can Win Them
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A government contract is the golden ticket for small businesses looking for stability, consistent work and reliable revenue. The federal government is one of the largest spenders in the world, doling out billions of dollars for the various products and services it needs.
About a quarter of all federal contracting dollars must go to small businesses, which means you may have a shot at scoring one. But it’s important that you first familiarize yourself with the process and the eligibility requirements for applying, bidding and winning these coveted contracts and subcontracts. Read more about it below.
What is a government contract for small business?
A government contract is a legally-binding agreement between a business entity and a government agency. Each year, government agencies shell out billions of dollars to contract goods and services from businesses. The federal government aims to award 23% of these contracts to small businesses, so why not position your business to get in on the action?
There are two kinds of set-aside government contracts: competitive set-asides and sole-source set-asides.
Competitive set-asides are created when the government carves out contracts exclusively for small businesses when at least two can perform the work or offer the products needed. This is typically common for contracts under $150,000. Some set-asides are only open to small businesses who participate in contracting assistance programs administered by the Small Business Administration, while others are open to any small business.
Sole-source set-aside contracts can be issued without a competitive bidding process, which generally occurs when a single business can fulfill the requirements of a contract. Some set-asides are designated for businesses in specific socio-economic categories, comprised of women-owned small businesses, small disadvantaged businesses (also known as 8(a) Business Development), service-disabled veteran-owned small business and small businesses in a HUBZone (historically underutilized business zones). You can bid on these set-asides by participating in the SBA’s contracting assistance program. You must meet eligibility requirements and certify your business’ socio-economic status before you can bid on a set-aside contract.
The 23% goal for small businesses is divvied up in the following way:
- 5% for women-owned small businesses
- 5% for small disadvantaged businesses (also known as 8(a) Business Development)
- 3% for service-disabled veteran-owned small business
- 3% for small businesses in a HUBZone (historically underutilized business zones)
- 7% to other small businesses
In 2017, the federal government spent $507.9 billion. Here are the five largest spenders, according to USAspending.gov, which tracks government spending through the contracts it awards.
- Department of Defense: $329 billion
- Department of Energy: $27 billion
- Department of Veterans Affairs: $26.25 billion
- Department of Health and Human Services: $24.5 billion
- Department of Homeland Security: $16.77 billion
These contracts are used to purchase items that each agency and its sub-agencies need from office supplies to airplanes, along with services such as research and development.
“Government agencies don’t make or produce anything,” said Brooks Merritt, a procurement specialist and interim program manager at the Monterey Bay Procurement Technical Assistance Center (PTAC) in Northern California. “What they need and have is purchased from private companies.”
Contracting with small businesses also helps the government gain access to new ideas and provide opportunities to disadvantaged socioeconomic groups. Agencies like PTAC, which aim to help small businesses win contracts with federal, state and local government agencies including the SBA are great resources for entrepreneurs to consider. There are about 100 PTACs nationwide that help small businesses navigate the contracting process.
How to get government contracts for small business?
Federal agencies must publicly list any contract opportunities, which could include smaller jobs on larger contracts or an entire contract reserved for small businesses, Merritt said. The government issues solicitations such as requests for proposals (RFPs), invitations for bids (IFBs) or requests for quotes (RFQs) for the goods and services they need, he explained.
Interested businesses submit proposals, bids or quotes as required in response to the solicitations. The government awards contracts to either the lowest bidder or the bidder that represents the best value to the agency, depending on the parameters set by the government, Merritt said.
Small businesses must be tenacious if they want to be considered for a government contract, Merritt said. “It’s a difficult process but it can very rewarding once the contracts start flowing in to a company,” he said, adding that contracts are generally awarded to established businesses that have relevant experience, adequate financials to perform and a good standing in the business community.
Want a shot at a government contract? The opportunities are relatively easy to find. Contract opportunities for the federal government are posted at FBO.gov. State, county and local agencies have their own portals for contracting opportunities.
Requirements for government grants
In addition to tenacity, securing these contracts requires experience, financing and the ability to meet the qualifications and other factors enumerated in the solicitation. Businesses interested in bidding on government contracts and grants also must receive proper registrations and ID numbers from a couple of databases.
You will have to register and receive a Dun & Bradstreet (D&B) number (also known as D-U-N-S Number) here. A DUNS number is a unique nine-digit identification that each physical location of your business must have. You need the following on hand when registering for your DUNS number:
- Legal name
- Headquarters name and address for your business
- Doing Business As (DBA) or other name by which your business is commonly recognized
- Physical address, city, state, and ZIP Code
- Mailing address (if different from headquarters and/or physical address)
- Telephone number
- Contact name and title
- Number of employees at your physical location
- Whether you’re a home-based business
Your products and services also need to be matched to a North American Industry Classification System (NAICS) code, which classifies your business based on the products or service it provides. Your business could also have multiple NAICS codes if it sells multiple products and services. View the NAICS code list at the U.S. Census Bureau to find your code.
To participate in federal contracting, a business must register with the System for Award Management (SAM) at Sam.gov and receive a CAGE (Commercial and Government Entity) code. Government agencies use SAM to find contractors. States and most county and local government agencies also require registration.
Merritt also noted that the SBA has a number of set-aside programs that give qualified businesses an advantage in the contracting process. Learn more about the SBA’s set-aside programs here.
Your business also must meet the SBA’s size standards for a small business if you want to obtain a government contract. Size standards define the largest size a business can be to participate in government contracting programs designated for small businesses. The SBA recognizes that size standards vary by industry and are usually based on the number of employees or the annual receipts.
The SBA assigns a size standard with each NAICS code. Most manufacturing companies with 500 employees or less, and most non-manufacturing businesses with average annual receipts under $7.5 million, will qualify as a small business.
Here are a few common terms that could ensure your business is classified as small.
- Affiliates: You must include the employees or receipts of all affiliated businesses when determining the size of your business. You are considered affiliated with another business if you own 50% or more in that business or if you own a considerably larger share than other owners.
- Annual receipts: This is the total or gross income plus the cost of goods sold. You can typically find this on a business federal tax returns. The SBA considers the average annual receipts from the last three years. If you haven’t been in business for that long, then multiply your average weekly revenue by 52 to calculate your average annual receipts.
- Employee calculation: This is the average number of employees for each pay period in the most recent 12 months. You must count all employees, including part-time and temporary workers. If your business has been in operation for less than a year, then calculate the average number of employees for each pay period that the business has been in operation.
Whether seeking an SBA loan or any other government contract aimed at small businesses, ensuring your firm qualifies as small is one requirement that should be confirmed first. You can determine whether your business qualifies as small by using the size standards tool or by checking the SBA’s table of small business size standards. Your business’s annual receipts and number of employees must be included when calculating the size of your business.
Here are additional standards your business must also meet in order to receive government contracts:
- Be a for-profit business of any legal structure
- Be independently owned and operated
- Not be nationally dominant in its field
- Be physically located and operated in the U.S. or its territories
Small businesses must comply with all laws and regulations in order to participate in the government contracting process. The Federal Acquisition Regulation oversees the federal governments purchasing process. Regulations covering government contracting programs for small businesses are listed in 13 CFR 125 and address many topics including definitions that are important to the SBA’s government contracting programs, the prime contractor’s limitations on subcontracting and the types of subcontracting assistance available to small businesses.
Finding government contracts
There are a number of ways you can find a well-matched government contract. Though the government uses the SBA’s Dynamic Small Business Search (DSBS) database to find small business contractors, you can use it to identify other small businesses to work with on contracts together. The information you used to register your business in SAM is used to populate DSBS.
You can visit FedBizOpps.gov, which advertises all federal business contracts over $25,000. Securing a contract with the U.S. General Services Administration (GSA) – the government agency that connects government buyers with contractors – is great step if you’re interested in selling to the government.
You can also search the SBA’s SubNet database which posts large contractors looking for small businesses to serve as subcontractors. The SBA maintains a directory of federal government prime contractors with subcontracting plans as does the GSA and the Defense Department.
Other good sources are the Federal Procurement Data System (FPDS), which shows all contract awards, and USAspending.gov, which can help you identify opportunities at a specific agency. Small businesses can contact these contract awardees and explore subcontracting or prime contracting opportunities, Merritt said.
There are many types of contracts available ranging from fixed-price to cost plus fixed fee, time and materials. All federal purchases valued at up to $150,000 are set-aside for small businesses. “That means the ‘big dogs’ can’t compete for contracts valued at $150,000 or less,” Merritt said.
Small business owners must possess the requisite skills, knowledge and experience to bid on contracts along with tenacity, business experience and qualifications and past performance for a particular opportunity, he said.
How to manage a government contract
Merritt explained that once awarded a contract, the contractor is required to perform to and provide the deliverables detailed in the contracts statement of work (SOW) or performance work statement (PWS). Depending on the terms and conditions spelled out in a contract, reviews, reporting and audits will be required. Businesses are required to perform a minimum level of work under a set-aside government contract to help prevent ineligible businesses from using other businesses to get government work.
There are other features of a government contract that businesses should consider:
Specifications: You must deliver the product or service as described in the government contract. If you don’t fulfill the contract to its exact specifications, the contract may be terminated.
Inspection and testing: You may be required to have your products or service inspected or tested to make sure they meet the contract requirements. If your product doesn’t pass inspection, the government won’t accept your work.
Changes to the contract: The government may change the specifications or other terms of the contract “within the general scope of the contract.” If changes are made, your business must meet the new requirements. If the changes to the contract are significant, then you have the right to adjust the price and delivery schedule to meet the new requirements.
Terminations: If you fail to meet the requirements of the contract, the government can cancel for default. You are still entitled to receive payment for any product or service you already provided. You may have to pay for the products or services that the government must get elsewhere because you failed to provide them. The reasons for terminating a contract for default include:
- You don’t deliver within the contract deadline.
- You don’t make progress and risk the contract’s performance.
- You don’t follow any provisions laid out in the contract.
Payments: Your contract outlines which agency is responsible for payment and should contain invoicing instructions. Follow these instructions closely to ensure you receive your payment in a timely manner. You may receive one lump-sum payment after delivery of product or services for smaller projects, while you may be paid in installments for larger ones.
Other government resources for small business owners
Performing a Google Internet search is an easy way for small businesses to learn about government contracting. The SBA website is another good way to learn about these opportunities.