By: Coleman Jackson, Attorney & Certified Public Accountant
March 06, 2021
NOTE: This is merely and overview of government procurement contracts and just scratch the surface of this complex and intricate area of contract law. This area of law is also known as Public Contract Law.
General Concepts: Each year, the U.S. federal government and its various agencies procure more than $300 billion of everything in more than 4,000 categories, ranging from airplanes to zippers. For many products and services, the U.S. government is the biggest buyer on the planet.
In 2020, the federal government spent more than $6.5 trillion, that is, spending exceeded collections by about $3.3 trillion resulting in a deficit. If broken out in terms of minutes, it would mean that the government spent more than $9 million every minute. However, a more accurate realization is that Covid-19 impacted the 2020 budget; also, budgets and government spending is spread out throughout the year, and high spending periods will fluctuate between agencies and will be impacted by health factors and other unknowns. Typically speaking, one of the biggest spending periods is in the months of August and September, as government agencies that have extra funds available (through the allocation from Congress) need to spend the money or risk losing it. Any money not spent goes back to the U.S. Treasury. Note: The 2020 fiscal year ended on September 30, 2020, and the new fiscal year started on October 1, 2020.
Another important thing to consider is that the federal government is not just one buyer. It is a collection of tens of thousands of buyers that purchase everything from nuts and bolts, and paperclips, to aircraft carriers.
With so many needs – from the simple, to the complex, to the classified – government buyers will order things in bulk or small, one-offs. Other times buyers will say they know they need certain products or services, but they do not know how much, how often, or when their next order will come. This creates a unique feature within government contracting that is not present in the private sector resulting in the use of different contract types or contract vehicles to accomplish the governments requirement needs.
Contract vehicles are ways in which a government agency or department can buy what it needs. They all have different rules. Government agencies are often looking for contract vehicles that will get them what they need, as quickly as possible and at the best cost point as possible. One of the most commonly known to businesses is the General Services Administration (GSA) Schedule. The GSA Schedule is a listing of products and services with pricing. Government buyers use the GSA to buy a wide variety of things, and businesses work hard to get on the GSA Schedule to make sure their products and services are readily available at the fingertips of government buyers.
U.S. government is also an attractive customer for a few other reasons:
- The government makes its needs publicly known through such media as the Commerce Business Daily, a publication listing numerous public contracting opportunities. (You can find this publication at many large public libraries.) This is quite different from most markets, wheresuppliers have to thoroughly research to identify the purchasers needs.
- Government sales are conducted in an open environment where there are many rules to ensure that the process is fair.
- The government frequently buys in very large volumes and overlong periods of time. That kind of customer can provide a solid foundation for growing your company.
- Laws set aside all or part of many contracts for women-owned businesses, small businesses, minority-owned businesses, and other firms the government identifies as disadvantaged historically and that the government desires to equalize, support and include in the economic growth of the country.
Having the U.S. government as a customer can give a business a stamp of approval. If you can meet the government’s standards for quality, price and service, odds are good you can meet other customers’ requirements as well.
But there are downsides to selling to the government. It can be hard to find the proper purchasing agent among the thousands employed by various branches and agencies of the federal government. In addition, the rules and paperwork are daunting. The good news is that there are many sources of help. The SBA’s website is one good place to start looking for help selling to the government. Agencies like the U.S. Postal Service, the Department of Interior and the Army, as well as many others, send out solicitations to businesses that are on their mailing lists. To find out how to get on the lists, contact the agency you’re interested in.
And don’t restrict yourself to selling to the federal government. State and local governmental entities, including cities, counties, school districts and others, actually purchase more goods and services than the federal government. There are more of them and they are smaller, but these government customers can provide alternative tracks to growth that are just as viable as the opportunities in Washington, DC.
You can sidestep many of the hassles of winning a government contract if you subcontract with the main or prime contractor. Prime contractors, ranging from large defense contractors to companies that may be smaller than yours, do most of the work to land the government job. Then they may hire you to fulfill all or part of it. Find prime contractors by perusing many of the same resources you would to sell directly to the government. Many government contracts require small disadvantaged businesses based on race, gender, disabilities, veteran set-asides.
Definition: Agreements that outline business transactions between companies and government entities. Government contracting is the process where businesses provide products or services to federal, state, and local governmental agencies and entities.
An Overview of Government Contract Law:
The government of the United States buys more products and services than any other entity worldwide. The United States Department of Defense (DOD) makes up a large portion of the country’s purchases.
There are three main differences between government purchases and those of the private consumer:
- Government contracts are highly regulated to ensure the most competition, guarantee proper use of government funds, and promote a healthy economy.
- Government contracts include clauses, like the “changes” or “default” clauses, that allow the government to enact special rights within the contract like being able to change the terms of the contract or even end it.
- Government contracts follow the procedures laid out in the Contract Disputes Act should there be any claims or legal action, because the government is a sovereign entity.
The Competition in Contracting Act and Federal Acquisition Streamlining Act are both important laws that regulate government contracts.
The Federal Acquisition Regulation (FAR) controls acquisitions made by the United States Executive Branch, and it is outlined in title 48 of chapter one in the Code of Federal Regulations parts 1 through 53.
Agencies like the DOD, NASA, and the General Services Administration (GSA) can create supplements to the Federal Acquisition Regulation. Those three specific agencies actually amended the FAR in pursuant to the Administrative Procedure Act.
The United States Government can only be contract-bound by an authorized contracting officer (or CO) who has been issued a warrant by the executive agency. These contract warrants (or certificates of appointment) can be held to a specific amount or allowed an unlimited amount of money.
A contract officer is authorized to grant, manage, or terminate a government contract. CO’s play a pivoted and major role in government procurement law.
The Contract Disputes Act (CAS)govern legal issues regarding government procurement contract issues and disputes which must first be submitted to a contract officer for resolution.
Once the contract officer makes a decision regarding the legal claim, the complaining entity represented in the contract can appeal the decision with the United States Court of Federal Claims (CFC) or a board of contract appeals. Note there must be privity of contract in government contract disputes. Typically, subcontractors cannot file a complaint under CAS.
The claim can then move on to be appealed before the Court of Appeals of the United States for the Federal Circuit, and even eventually to the Supreme Court.
Any company that sells its products or services to other business entities or nonprofits could probably also sell to the government.
The United States Government can make a great customer or client because of the following:
- Government needs are easy to see through publications like Commerce Business Daily.
- Rules and regulations ensure fair trading practices.
- Government purchases are usually large and long term, providing a reliable income for the business.
- As I mentioned before, contracts are set aside for businesses owned by minorities and women, as well as small businesses.
- Government business will give your company a good reputation as it means that your products or services meet high standards.
An Overview of Some Difficulties of Government Contracting:
Conducting business with the government can also be very difficult as it can be tough to find the right channels for marketing your company with so many employees throughout different branches. They also require certain standards in terms of bookkeeping, record keeping, cost accounting and overall compliance cost accounting standards and government accounting principles.
Moreover, government contracts are typically subject to review and exacting audit compliance procedures and examination.
Bottom line is government contracts are subject to detailed paperwork where government contractors must comply withdetailed regulations from the bid process through completion of the contract. Invoices for payment must often be certified under the penalty of perjury. These requirements can also be a bit overwhelming as a business owner new to the government procurement procedures. Thankfully, there are lots of options for assistance.
If you’re interested in working with a particular federal government agency, like the Postal Service or the DOD, you can contact that particular agency and get your business on their mailing list.
The federal government isn’t the only option, state agencies and local entities, like school districts, also make great customers.
Smaller, non-federal agencies have more opportunities for trading and, even though they are smaller, they can offer just as much potential for growing your company as working with the federal government would.
Overview of Some Benefits of Government Contracting
Government contracts are a tremendous financial opportunity for small businesses.
The U.S. government is the largest customer in the world. It buys all types of products and services — in both large and small quantities — and it’s required by law to consider buying from small businesses.
The government wants to buy from small businesses for several reasons, including:
- To ensure that large businesses don’t “muscle out” small businesses
- To gain access to the new ideas that small businesses provide
- To support small businesses as engines of economic development and job creation
- To offer opportunities to disadvantaged socio-economic groups
How it all works:
The process of requesting proposals, evaluating bids, and awarding contracts should take place on a level playing field. The government should consider a bid from any qualified business.
Set-aside and sole-source contracts:
Federal agencies must publicly list their contract opportunities. Some of these contracts are set aside exclusively for small businesses and historically disadvantaged businesses based on race, gender, disabilities or other factors.
In some cases, these so-called set-aside contracts might consist of certain types of tasks on larger contracts. In others, entire contracts may be reserved for small businesses or historically disadvantaged businesses. When a contract is set-aside for one specific small business, it’s called a sole-source contract.
The Small Business Administration (SBA’s) role in Government Contracting:
The SBA works with federal agencies in order to award approximately 23 percent of prime government contract dollars to eligible small businesses. It also offers counseling and help to small business contractors.
The United States Government is the single largest procurer of goods and services in the world, and the Department of Defense (DOD) accounts for the lion’s share of federal acquisitions. Three major characteristics distinguish Government acquisitions from private sector contracts. First, Government contracts are subject to a myriad of statutes, regulations, and policies which encourage competition to the maximum extent practicable, ensure proper spending of taxpayer money, and advance socioeconomic goals. Second, Government contracts contain mandatory clauses which afford the Government special contractual rights, including the right to unilaterally change contract terms and conditions or terminate the contract. The most important clauses are the “Scope Clause, “Changes” clause, the “Termination for Convenience” clause, and the “Default” clause. Third, due to the Government’s special status as a sovereign entity, claims and litigation follow the unique procedures of the Contract Disputes Act. It is critical that Contractors; especially small businesses who are new in government procurement, to be fully knowledgeable of how the “Payment” clause works because long delays in payment could cause budgetary difficulties and performance issues to the naïve.
Government contracts are subject to several statutes, including the Competition in Contracting Act and the Federal Acquisition Streamlining Act. In addition to statutes, there are a multitude of regulations which govern acquisitions by executive branch agencies. Foremost among these is the Federal Acquisition Regulation (FAR), which is codified in Parts 1 through 53 of Title 48, Chapter 1 of the Code of Federal Regulations. Executive branch agencies may issue their own regulatory supplements to the FAR, such as the Defense Federal Acquisition Regulation Supplement (DFARS). The FAR is amended pursuant to the Administrative Procedure Act, with proposed changes issued jointly by the DOD, the General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA), in coordination with the FAR Council.
Only Contracting Officers have the authority to contractually bind the United States Government. This authority is vested in the executive agency, which then delegates this authority by issuing a certificate of appointment or “warrant.” The warrant provides signature authority up to a specified amount of money, or it can be an unlimited warrant. Contracting Officers have the authority to award, administer, and terminate Government contracts.
Overview of Government Contract Dispute Resolution”
Government contract claims are subject to the Contract Disputes Act, which requires the claim to be presented first to the Contracting Officer (“CO”). After the Contracting Officer’s Final Decision or deemed denial, the claim may be appealed to either the United States Court of Federal Claims (CFC) or to the appropriate Board of Contract Appeals. The forum to file the law suit challenging the CO’s decision is chosen by the contractor. Note that the contractor does not have file suit within the administrative process; but the Board Judges are government procurement experts who deal exclusively with government procurement contract disputes; whereas, the Judges on the Court of Federal Claims may not have government procurement experience and may handle all kinds of complaints filed against the federal government. Resolution of federal procurement disputes by the Board process could likely be quicker as well. Numerous issues are involved in the contractor’s decision of which forum to choose to litigate their CAS claim. Whether CAS litigation occur in the Court of Federal Claims or in one of the Boards of Appeal, after trial on the merits in either venue, the tribunal decision may be appealed to the United States Court of Appeals for the Federal Circuit, and finally to the Supreme Court. It is very important to note that the Court of Federal Claims has the exclusive authority to hear bid protests, which are challenges to an award, proposed award, or terms of a solicitation of a federal contract. The Boards do not have any authority to hear bid protest or any other none-CAS matters.
What are Some of the Different Types of Government Procurement Contracts?
Government contracts generally fall under a few different categories, each of which involves different requirements and varying risk to the contractor. Understanding the type of government contract, you’re competing for can help give you a better sense of what to expect, the risk involved and how to put together and negotiate a more compelling and competitive proposal. To give a brief overview, we’ve laid out the top four most common types of government procurement contracts and what they entail below:
1. Fixed-Price Contracts
Fixed-price contracts are just that — they ask contractors to submit a bid to complete a project under a predetermined price (and often within the bounds of a target price). They are not subject to any type of adjustment unless certain provisions (such as changes in the contract, pricing, or defective pricing) are included in the original agreement. Contract price can sometimes be renegotiated through different contract clauses (depending on the variety of fixed-price contract in question), but these bids will be low-risk if the government and contractor carefully communicate on a reasonable price. The risk inherent to fixed-price contracts will increase if deliverables, standards and other measures are unclear or if the contractor must execute custom development with a yet-to-be completed solution. All federal agencies use fixed-price contracts and they’re the most common type of contract requested at a state and local level.
In Fixed-Price contracts, the contractor is paid a set fee for their goods or services, regardless of incurred costs. Accurately planning and forecasting your expenditure (in terms of time, available personnel, expertise and capital) is absolutely vital to ensuring that you see a positive return on your investment once you’ve won a bid. While some degree of risk may be present, these contracts provide great profit opportunities for successful contracts that are well executed. These contracts can also be dangerous for the naïve or businesses who are new or unfamiliar with government procurement contract procedures, policies, regulations and so forth. Silent clauses and provisions could be applicable to the contract.
2. Cost-Reimbursement and Cost-Plus Contracts
These types of contracts allow a contractor to seek reimbursement for incurred costs up to a prescribed allowance. Usually, costs will be estimated upfront to establish a ceiling that a contractor cannot exceed without first gaining approval. As long as incurred costs do not exceed the stipulated maximum, then a contractor can seek reimbursement for any justified expenses as they fulfill the contract.
This kind of contracts are typically used when there are uncertainties or contingencies involved in a proposal that cannot be estimated upfront with complete accuracy. Examples of agencies that use these types of government contracts include the Federal Transit Administration, National Weather Services and US Department of Defense.
Cost-plus contracts are often more concerned with the final quality of a project rather than cost (an example of this type of project would be ones executed in support of United States space and satellite programs). Because there is less built-in incentive to be efficient, these types of contracts usually require closer oversight to ensure maximum efficiency and thrift. The contract itself can be supplemented with additional award or incentive fees to help encourage efficiency, but designing and implementing these programs also requires additional contract administration. While these contracts are often lower risk than Fixed-Price contracts, the profit margins may also be lower and bidding requires that you offer competitive pricing (i.e. low rates) in order to win. Contractors must be very careful when bidding on cost-reimbursement and cost-plus contracts because the potential to bid too low can be damaging. This is particularly a danger that the naïve or unsophisticated small business could face.
3. Time-and-Materials Contracts (T&M)
Time-and-materials contracts are a cross between fixed-price and cost-reimbursement contracts and often require the government to shoulder more risk than the contractor (making them a less popular option for government agencies). Like cost-reimbursement and cost-plus contracts, T&M contracts are only used when it’s not possible to nail down an accurate cost or timeline estimate for a project at the time when a proposal is submitted. The government is basically paying for your services by the hour, including your fees and profit, so competitive pricing is key to winning and net profits are often (but not always) lower.
4. Indefinite Delivery/Indefinite Quantity (IDIQ) Contracts
IDIQ contracts are often used to supplement or amend fixed-price or cost-reimbursement contracts in order to provide flexibility with regard to specific supplies, services or aspects of a project required by the government. In contrast to other contract types, IDIQs allow the government contracting agency to “down select” multiple entities that will compete for future break-out contracts (often called “task orders”) under the umbrella of the main contract. This results in the contracting agency receiving bids from the pool of awardees for each follow-up task order, which theoretically provides them with the best possible value, flexibility and service. It also streamlines the process for issuing, awarding and executing task orders in the event of a national emergency.
The umbrella, or main contract, usually runs for a period of five to ten years, during which time the individual task orders are announced on an as-needed basis. Typical response times required for down selected entities range from a few days to a month or more, depending on the urgency of the requirement. In extreme cases, the government can ask for a response on the very same day a task order is issued. These responses are purely pricing requests for vendor equipment to aid first responders in a natural or man-made disaster, such as supplying temporary lighting and generators.
IDIQs often specify that a contractor supply a minimum quantity of suppliers and services and agree to a fixed timeline and maximum price ceiling for the contract tasks. They also ask contractors to identify a few different consultants and suppliers that they might leverage for a task and submit these names as part of the initial bid. This can help the government streamline the contracting process by limiting their decision process to a few pre-approved options for each task.
Awards are given out in base year period intervals for each task order (usually 1 to 5 years) and are eligible for renewal after the base period concludes. At the time of renewal, each task order can be “re-competed” for by the incumbent contractor and those previously down selected under the umbrella contract. For contract renewals, responding to specific task orders is not required.
This has been a general overview of government procurement procedures, practices and legal principles. This is a complicated area of law and this brief presentation does not attempt to cover the breath of this legal area in any respect. Public Contract Law
This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.
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