The federal government is the biggest consumer of services and foods globally, spending more than $500 billion on contracts annually. It is an exciting opportunity for businesses to increase their revenue, but many federal agencies require prime contractors (main contractors) to follow specific guidelines. Here’s everything you need to know about subcontracting or working as a prime government contractor.
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What is prime and sub-government contracting?
Prime contractors are either single or multiple companies (for multi-award contracts) selected by the government to accomplish the tasks demanded. They contract directly with their client, which is the federal government.
Federal contracting should be an easy process. Simply pick the lowest bidder. In practice, however, it’s much more complicated than that. In fact, for many large government contracts (especially those with more than one vendor), several factors that must be considered before making a choice, including:
1. Cost – this is important but can’t be used as the sole basis for selection because cost alone does not guarantee quality or even performance.
2. Past performance – Companies that have done well on previous contracts will receive more consideration than those who haven’t been successful in the past.
3. Ability to meet requirements – In some cases (such as with military federal contracts), there may be specific requirements to be met or exceeded by all bidders if they want to compete for work on future projects.
Prime contractors usually have years of experience in executing complicated projects that federal agencies contracted with them. Most of them are experts and are more knowledgeable than some leaders of the agencies. Some of them also run programs that the government program manager usually handles. This makes them an essential part of federal sales strategies to be taken into account.
However, despite their expertise with most of the most complex solutions, large corporations often awarded prime contracts may not accommodate everything that the government asks of them. This is when subcontractors come in.
Subcontractors are smaller and more specialized companies that work with prime contractors to be a part of contract bidding. Subcontracting is an integral part of government contracting because it helps small businesses gain experience and connect with larger companies.
Small businesses can also use subcontracting to expand their business and increase profits by offering new services to their clients. For example, the main contractor might need help designing software for its projects. The main contractor then hires coders or programmers specializing in computer programming and development, leading to more contracts with clients who need similar services in future projects.
What are the differences between prime and sub-government contractors?
Prime contractors are usually large companies responsible for managing a contract. They can be private companies, such as Lockheed Martin and Boeing.
Subcontractors are firms that work directly with prime contractors to deliver specific tasks on a contract. For example, if Lockheed Martin is the main contractor for an aircraft project, it may hire Northrop Grumman to build parts for the plane. At the same time, it’s General Electric’s responsibility to provide engines.
There are other several differences between the two:
Rights
Prime contractors and subcontractors classify as mere contractors. This means they are not entitled to receive benefits such as insurance and health care from the agency or individuals they are working for. They may be hired on all government levels (e.g., local, state, or federal). Employers may also require reporting, training, and specific business and project sizes. Lastly, both contractors must look after their permits, licensing, and insurance.
Roles
The main contractor is a company that the government has awarded a contract for a specific project. It is responsible for managing all aspects of the project from start to finish and usually hires subcontractors to perform specific tasks involved with completing the project, including monitoring the project’s expenses, cash flow, and schedule.
A subcontractor is hired and partners with the main contractor to perform specific tasks to complete an entire government project. These tasks may include building new buildings or repairing existing ones, providing technical support such as IT or engineering services, supplying materials such as office furniture or medical supplies, and others, depending on the nature of the business.
Pay
The salary of both contractors depends on the project role, specialization, and industry. The main contractor and its subcontractor should negotiate the terms of payment before starting the project, which are written in the contract. The employer pays the prime contractor, and the prime contractor pays its subcontractor.
Prime contractors do most of the work for the project, while the subcontractor only works for a part of it. This means that the main contractor earns more money than the subcontractor. The salary of the subcontractor depends on the demand and schedules.
How can a small business become a subcontractor?
As defined by the Federal Acquisition Regulation (FAR), a subcontractor is an individual who furnishes materials, supplies, equipment, and other services to a prime contractor under the subcontract they have agreed upon.
Many enterprises can be a small business subcontractor, including construction companies, accounting firms, and landscaping services. Here are the ways to become one:
1. Register with System Award Management (SAM)
This is one of the initial things a small business owner should do if they want to do business with the government. The government won’t accept any companies not included in the SAM directory. SAM has its SAM Directory blog to give you enough information throughout the application process.
2. Gather research
There are many online sources to find if the suitable agency you are interested in has a directory of subcontracting opportunities. Usually, the Department of Defense has a guide exclusive for small businesses.
3. Networking events
You can become a subcontractor through outreach events if you’re a small business. These are events hosted by the government or private companies that allow businesses to present their ideas and services to the government or private sector.
You can find an outreach event by searching for it on GSA’s website. The website lists upcoming events open to small businesses and other organizations. You can also sign up for the latest email updates from GSA about forthcoming opportunities.
4. Assess if your business is eligible for set-asides
To qualify for set-asides, a business must be at least 51% owned by a veteran, woman, or a minority. Aside from that, your business should meet the following:
- Should adhere to small business size standards
- Must be at least 51% controlled, owned, and managed by one or more people who qualify for the Small Business Administration requirements for being economically and socially disadvantaged
- Entity’s employees should have moral character
- Should demonstrate their potential for success
4. Complete the necessary documentation
Subcontracting is an excellent way to begin working with the government. It can be a great strategy to get your foot in the door, gain experience, and make lasting connections. However, it’s not as easy as simply contacting the right person in your area of expertise.
A liability insurance paperwork and a business license from your state or municipality allow you to legally operate within your state and city and protect you from liability if something goes wrong while working on a project.
Next, you have to create a capability statement highlighting your company’s information, services, and plans to meet the government’s needs.
How to work with the government as a prime contractor?
It’s common to think that the federal government’s prime contractors are large businesses, which is true for large-scale projects. Several prime contracts are obtainable for a small business. You can also offer your services and partner with other organizations to create a prime contractor party.
First is to assess your business if you plan to start with government contracting. The government wishes to work with established corporations with reliable performance in their services, such as construction.
If you think your business is qualified, you should start preparing for it since it usually takes years to win a contract. Also, ensure your contracting goals are attainable and aligned with your business.
Once you are determined, here are the steps you should first follow:
1. Obtain a DUNS number for your location
2. Determine where service is suitable in the NAICS code
3. Confirm if your business meets the size standard before applying under the Small Business Administration programs
4. Register with SAM to make your company visible to federal agencies
5. Familiarize yourself with the FAR
The federal government will assess your competence in running a business. This means you are expected to possess different business systems such as:
- Accounting system
- Estimating system
- Purchasing
- Earned value management
- Property management
- Material management
After finalizing which line of work you want to do business with the government, you must specify which type. For example, if you’re going to do construction, you have to be particular with what you want to build or supply, whether it’s for residential construction or designing and building.
Look for details
Another thing to do is determine in what field your company stands out. Does your company excel in technical assistance? Adept at providing new solutions to problems? Employing subcontractors is another important role of being a prime contractor.
Several prime contracts would necessitate loads of work to be assigned to subs. Developing teamwork and good relationships with them can also be beneficial. Lastly, the more business partners you have, the better your chances of winning federal contracts.
Execute your plan
When it’s time to start bidding, you can visit websites such as the GSA Schedules, SBA, FedBizOps, and more. Here, you can search for requests for federal contracts and proposals open for bidding.
Keep in mind to focus on what is aligned with your business’s strengths and services. Always keep track of your progress and look for ways to improve your system and the quality of submissions.
If you think you aren’t prepared to be a prime contractor, you can start as a subcontractor to experienced prime contractors. There are many opportunities available here:
- SBA’s Directory of Federal Government Contractors with a Subcontracting Plan
- Subcontracting Network database
- GSA’s Subcontracting Directory for Small Businesses
You can increase your success in your next attempt to pursue government contracting opportunities through your expertise, sound records, competitive pricing, innovation, and knowledge in contracting.
Advantages and disadvantages of being a prime and subcontractor
There are advantages and disadvantages to being prime and subcontractors on federal contracting projects. Let’s take a look at some.
Prime contractor
Advantages
1. Set your work schedule – set the time and day you want to work. You’ll have to usually align your schedule with your client’s available time. However, you can negotiate if it doesn’t fit your timetable.
2. Decide your pricing – A good advantage is setting rates for how much they want to get paid for specific tasks. It can also determine their gross revenue if they decide to hire subcontractors.
3. Focus more on managing than physical labor – They usually send the most laborious tasks to subcontractors to allot more time to marketing and management. It’s appealing for most professionals to oversee projects rather than do them by themselves.
4. Choose your clients – They can select which clients to work with. So, if their past customers were great working with in the past, they can choose to partner with them again.
5. Choose your subcontractors – Aside from choosing clients, they can also pick the subcontractors they want to hire. This gives them the advantage of selecting the most reasonable rates and reliable companies.
Disadvantages
1. More accountability – They are responsible for the entire project and not just its component. They have to deal with every problem that arises and will also be held liable for any delays due to various factors such as the weather and delayed delivery of supplies.
2. Must look for potential clients – They are in charge of finding new clients for their services. This means they should seek a new contract while maintaining the current ones. If they fail to do this, they will go out of business and may not grow and survive.
3. Needs diverse skills – They are responsible for all facets of the project, including budget planning, marketing, delegating tasks, and managing payroll. In addition, they must manage and ensure their subcontractors meet their contractual obligations.
Subcontractor
Advantages
1. Stable work -If they can build good relationships and provide quality work, their prime contractors may continue dealing with them, opening more job opportunities for them.
2. Little responsibility – They are only responsible for specific portions instead of the entire outcome of the project. This means they have lesser responsibilities and can focus more on the core business activities instead of looking after other things.
3. Freedom – They only work for temporary contractors for temporary projects. Also, their only concern is to provide services at agreed-upon rates and according to specifications.
4. Fewer negotiations – They don’t have to negotiate with rates and other clients or follow up with payments. Their only concern is the customer contract provided by their main contractor.
Disadvantages
1. Centered on physical labor – They are often required to do physical work such as laying bricks or digging ditches, which could take a long period to finish.
2. Lack of control – They have less control over the project than their main contractor. This means they cannot choose who they want to work with but can only accept or decline it. They also don’t decide on the best ways to complete a task within timeframes and budget constraints.
3. Less employer support – They are independent of their main contractor, so they don’t receive employer-sponsored benefits such as health benefits, paid vacations, and retirement plans, as well as their taxes. Also, they only receive payments after finishing the job and not on a monthly basis.