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Government Contracting – An Overview and Key Considerations for Businesses

Conducting business with the federal government can be a highly enticing and profitable path for many businesses. It can also be very overwhelming given the complexities of government contracting rules. No one person knows all there is to know about government contracts. It is simply too wide and deep an area to expect otherwise. Starting with the right upfront knowledge and assistance when needed is the best way to set your company up for success in this complicated area.

Parties Involved in Government Contracts

Federal contracting involves a wide array of agencies and individuals. Fundamentally, the FARS (Federal Acquisition Regulations) detail all of the rules regarding government procurement in the United States, including many contracts issued by the US military, NASA, Department of Energy, and many other domestic and international agencies. DFARS (Defense Federal Acquisition Regulations) come into play for contracts pertaining to defense contracting. In both scenarios, a contracting officer initiates a purchase of a product or service. In contracts involving the Department of Defense, NASA, and several other federal, state and international agencies, the contract will be transferred to the Defense Contract Management Agency (DCMA) who will actively manage it moving forward and be the recipient of required reports from the company providing the product or service. It is important to understand that both the initial contracting officer and subsequent contracting officers want contracts to be successful. They know the government entered into the contract for a reason and seek to support its success. They will appear demanding at times but for the most part are only trying to ensure compliance and a successful outcome for all parties.

Essentially, there are two basic ways of being awarded a government contract. A business can work directly with the government to become a prime contractor and bear the entire responsibility of the contract. Alternatively, they can instead provide products or services indirectly as a subcontractor working through a prime contractor. Subcontracting is an easier initial step because the burden of becoming an approved vendor is lower and all the FARS do not usually apply to subcontractors.

Businesses can also win government contracts a third way, by being listed on GSA (General Services Administration) schedules. Pursuing the GSA route is not something that companies should typically undertake on their own. Companies seeking a GSA designation should work through a GSA Schedule Holder who, for a fee, will essentially serve as the company’s salesperson to the government. Note: Be very careful when initially publishing pricing on the GSA schedule as it is difficult to change later on.

Government Contract Cost Principle and Procedures

The US federal government requires contractors to follow Generally Accepted Accounting Principles (GAAP), costs to be reasonable, allocable, recorded, and allowable, and for certain contractors, based on contract value, to follow a specified set of financial standards and rules called CAS (Cost Accounting Standards). Here again, defense contractors typically must follow additional rules. Thankfully, small businesses and entities with smaller government contracts may be exempt from CAS until they reach higher contract values or related milestones. There can also be a graduated approach where contractors are only required to meet a portion of the 19 standards that make up CAS. Agencies awarding contracts commonly carry out pre-award accounting system audits to assess the contracting company’s ability to comply with the respective requirements. These audits involve an evaluation of policies, procedures, and accounting system capabilities. This is not an attempt to find fault or problems, but rather to uncover issues that the contractor should address to ensure no delays in payment.

Striving for simplicity is helpful in the early stages of government contracting. For example, this may entail initially seeking fixed-fee contracts or time and materials at an agreed rate instead of taking a cost-plus approach. Cost-plus contracts introduce a range of variables related to segregating direct and indirect costs, accounting for and equitably allocating indirect costs as well as understanding and accounting for allowable and unallowable costs. With companies involved in large-scale government contracts, it is not uncommon to find 50 or more cost categories that are outlined in a costing hierarchy as well as criteria that manage allowable and unallowable costs. Allowable and unallowable costs can be an area of argument and disallowed costs can lead to substantial changes in projected profitability for a company.

It is also important to understand the impact of other federal assistance, such as a Payroll Protection Plan (PPP) loans, on government contracts. Per the FARS, government contractors are to pay the government for any credits received by the contractor to the extent the amounts are allocable to the costs for which the contractor has been reimbursed.

Government Contracting Knowledge and Communication is a new and still growing consolidation of government websites where individuals can learn about and run contract data reports, explore contract opportunities, and learn about wage determinations. Everything the government puts out for bid and proposal can be found there. It also provides a path for businesses to register or update their company as a prerequisite for offering products or services. Companies can use the information in these resources to gain a sense of what types and how many opportunities are available to them as well as what criteria they may need to have in place before they will be considered.

When issues or concerns do arise in the execution of contracts, it is critical for organizations to communicate openly and honestly with their government contracting counterparts. For example:

  • A company discovered their indirect rates were calculated from insufficient accounting data and that they didn’t have the ability to calculate them properly. The company’s financial leader contacted their contracting officer and explained that a cost-plus contract would be very difficult to carry out while the company upgraded its system, processes, policies, and procedures. The contracting officer offered to change the contract to a fixed-fee contract and went a step further to simplify the coverage of ancillary costs.
  • A company found that they would not be able to accurately submit an Indirect Rate Proposal. They contacted their contracting officer at DCMA to ask for a three-month extension and to outline the steps they were taking. The contracting officer granted them a six-month extension and offered further support as they moved forward.

The important takeaway here is that successful contracts and positive business relationships are what the government is looking to achieve, both for themselves and those that they do business with. Use the wide array of available government contracting resources and seek out advice and assistance from government contracting counterparts any time it is needed.

Pursuing Government Contracting with Care and Confidence

We’ve only scratched the surface here when it comes to the variables that enter into pursuing, winning, and delivering on government contracts. The process and range of requirements can be very intimidating. With the right research, assistance, and graduated steps, a move into government contracting work can be a very lucrative avenue for a company.


Need assistance navigating the government contracting process for your business? Request a free consultation from a vcfo expert who can help.