What is Government Contracting: A Complete Overview

Government contracting is like a breath of fresh air for businesses looking to expand their revenue streams and reduce reliance on commercial clients. The government is known for its thorough due diligence before awarding government contracts, meaning that bagging these deals boosts businesses’ credibility.

Here, you will uncover the basics of government contracting and how to become a federal contractor.

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Key Players in Government Contracting

Federal agencies, prime contractors, and subcontractors are the key players in government contracting (GovCon). Knowing their roles can help businesses get a foothold and thrive in the GovCon industry.

Government agencies

Government agencies are the starting point of government contracting. They publish detailed solicitations to sustain the gaps in their operations in the form of formal requests for proposals (RFPs) or invitations for bids (IFBs).

These solicitations contain specifications, terms and conditions, evaluation criteria, and submission guidelines to ensure that the goods and services procured under the contract meet the highest quality and efficiency.

In fiscal year 2023, the U.S. federal government awarded $765 billion in contract awards, marking a 9.5% increase over 2022. Some of the biggest federal agencies in terms of contract awards include

The Department of Veterans Affairs: $61 billion
The Department of Energy: $44 billion
Health and Human Services: $33 billion
The Department of Homeland Security: $24 billion
General Services Administration: $23 billion

Prime Contractors

Prime contractors directly engage with government agencies to fulfill their contract requirements. They offer a diverse array of government contracting services, encompassing aerospace, defense, construction, IT, healthcare, and pharmaceutical services. In fiscal year 2022, $705 billion was awarded in government contracts, with the top 200 federal contractors accounting for 65.3%.

A major advantage of prime contractors is their direct relationship with government agencies. This relationship can lead to future long-term contracts and substantial revenue streams. For instance, Amazon Web Services has garnered over a decade of experience providing the U.S. government with cloud-based IT solutions.

Subcontractors

Subcontractors offer specialized services such as IT support, engineering, construction services, and manufacturing to prime contractors. Their government contracting expertise helps prime contractors fulfill complex and diverse contract requirements to save on costs.

One major advantage for subcontractors is their access to government contracting opportunities without directly engaging in often complex and competitive bidding processes. This way, they can focus on their core competencies and expand their business through partnerships with prime contractors at the same time.

For instance, the prime contractor, BAE Systems, collaborates with subcontractors, such as America Scaffold for ship containment systems and Vallen Distribution for vending machine parts. On the other hand, Leidos partners with the subcontractor, Vision Technologies, for the AEGIS contract.

Types of Government Contracts

Government contracts are categorized into different requirements based on the type of products and services. Here are the most common types of government contracts awarded by federal agencies.

Fixed-price contracts

A fixed-price contract means the value of the deal doesn’t change, no matter how much time or resources the contractor uses. They’re used when the conditions allow for clear costs and deliverables, giving the government and contractors a stable pricing structure.

Subtypes of fixed-price contracts:

Firm fixed-price contracts
Fixed-price incentive contracts
Firm fixed-price level-of-effort contracts
Fixed-ceiling-price contracts with price redetermination
Fixed-price contracts with economic price adjustment

Here are examples of when fixed-price contracts are used.

Commercially available products and services
Construction projects with clear scopes and minimal expected changes
Projects with a repeated process where costs are expected to remain relatively stable
Construction of infrastructure projects like bridges, roads, or tunnels
Development of commercial establishments such as shopping centers, office buildings, or warehouses
Acquisition of vehicles or office supplies for a specific price

The Department of Defense usually awards these contracts to procure weapons. To help keep costs under control, the DoD sometimes offers bonuses to contractors for sticking to the budget and schedule—a form of a fixed-price-incentive (FPI) contract.

Moreover, to account for unexpected inflation-related cost increases, the Defense Department may adjust prices, called economic price adjustments, in new solicitations.

Cost-reimbursement contracts

A cost-reimbursement contract is an agreement where the government pays a contractor for all allowable expenses up to a certain limit plus an additional amount for profit. These government contracts are used when uncertainties in the project make it difficult to estimate costs accurately.

Different types of cost-reimbursement contracts:

Cost-plus-fixed-fee (CPFF)
Cost-plus-incentive-fee (CPIF)
Cost-plus-award-fee (CPAF)
Cost plus percentage of cost (CPPC)

These contracts are often used for research and development work, especially with nonprofit organizations. For example, NASA and the NIH use these contracts to reimburse universities for costs related to research sponsored by grants.

Time and materials contracts

Time and materials (T&M) contracts are agreements where the government pays contractors based on the time spent and the cost of materials used in the project. They are used when the project size cannot be accurately estimated at the start of the contract or when project requirements are expected to change during the duration of the contract.

Time and materials contracts are common in all levels of federal, state, and local government purchasing of supplies or services based on direct labor hours and material costs. T&M contracts are suitable for services or products with uncertain scopes and requirements, such as construction, product development, consulting, software development, and marketing.

Examples of time and materials contracts:

Health and Human Services’ emergency nursing services
FBI’s gunsmith services
Federal Transit Administration’s paratransit services

Indefinite delivery/indefinite-quantity (IDIQ) contracts

Indefinite-delivery/indefinite-quantity (IDIQ) contracts are flexible agreements used by the U.S. government to purchase goods and services when the exact quantities or deliveries are uncertain at the start of the contract. These contracts are commonly used for service contracts, architect-engineering services, on-call services, and construction and repair services.

Three main types of IDIQ contracts:

Definite-quantity contracts
Requirements contracts
Indefinite-quantity contracts

IDIQ contracts are used to streamline acquisitions, primarily in IT and service contracts. An example of an IDIQ contract is the Alliant 3 contract, which provides federal agencies with comprehensive IT solutions as a part of the General Services Administration’s efforts.

What are set-aside contracts for small businesses?

Set-aside contracts ensure a fair share of government contracting dollars go to small businesses. These contracts solve the challenges that small businesses due to their limited resources and visibility compared to larger companies.

Here are the specific allocations based on the small businesses’ socioeconomic status.

8(a) Business Development: 5% of federal contracting dollars go to small disadvantaged businesses.
HUBZone: 3% is reserved for HUBZone-certified small businesses.
Women-owned small businesses: At least 5%
Service-disabled veteran-owned: At least 3%

In fiscal year 2022, the federal government awarded $162.9 billion in contracts to small businesses, representing 26.5% of all federal contract dollars. It is a significant increase from the previous fiscal year.

Two types of set-aside contracts:

Competitive set-asides are for contracts under $150,000, where at least two small businesses can do the work.
Sole-source set-asides are issued without competitive bidding when only one business can fulfill the requirements.

Government-wide acquisition contracts (GWACs) and agency-specific contracts are examples of set-aside contracts for small businesses. For instance, the GSA’s 8(a) STARS III GWAC for innovative IT services is secured from 8(a) small disadvantaged businesses.

What are contract modifications?

Contract modifications are changes to an existing contract’s terms, conditions, or scope. Modifications are often necessary when technology, funding, or requirements change or when contract complexities lead to misinterpretations after the contract is finalized.

Contract modifications are especially common in large-scale and long-term deals where initial plans may need to be adjusted over time.

Two main types of contract modifications.

Unilateral modifications

Unilateral modifications are proposed by either the contractor or the government but are signed by the contracting officer only. These modifications are used for administrative changes, issuing change orders, or termination notices.

Changes made under these modifications do not materially affect the existing terms of the contract.

Bilateral modifications

Bilateral modifications are proposed and signed by both the contractor and the contracting officer. These modifications include requests for confirmation of a constructive change, equitable adjustments, modifications based on acquisition changes, and value-engineering proposals.

Changes under these modifications materially affect the terms of the contract.

Federal agencies under the Department of Defense frequently engage in contract modifications because defense-related projects, such as weapons systems development and IT services, often encounter changes in advancements and shifts in strategic priorities.

For example, the National Geospatial-Intelligence Agency (NGA) may need to modify contracts to incorporate new technologies and adjust project scopes based on current intelligence needs.

How does government contracting work?

How government contracting works — Photo by chaylek/ Shutterstock

Here are the usual steps contractors must go through in government contracting.

Identifying contract opportunities

SAM.gov, or The System Award Management, is an official, free-to-use government website consolidating federal procurement systems into one new system. It is a database for entities seeking federal contracts or grants. The General Services Administration (GSA) operates SAM.gov as a public portal for procurement and award-related functions.

Users can use SAM. gov to:

Register the business with the U.S. government: Businesses, non-profits, and organizations can register on the website to become eligible for bidding and receiving federal contracts and grants.
Update or renew entity registration: Registered entities must maintain an active status by keeping their information updated and renewing their registration annually.
Check the status of entity registration: It is crucial for ensuring compliance and checking the contractor’s eligibility for federal contracts and grants.
Search for entity registration and exclusion records: SAM allows users to view the registration details of other entities, including any exclusions that may prevent them from doing business with the federal government. Exclusions are often the result of suspension or debarment due to non-compliance.

Understanding and responding to solicitations

A contract solicitation is a request for bids, proposals, qualifications, offers, and other responses coming from a government agency or a purchasing entity. It is done to solicit bids on the capabilities that can help them meet contract requirements.

Different types of contract solicitations:

Request for Information (RFI): Government agencies use RFIs to gather information about the offerings of various suppliers. It is not a commitment to purchase but rather used as a measure to determine the available solutions.
Request for Proposal (RFP): An RFP is a formal document that outlines the government’s requirements and asks for detailed proposals from potential suppliers. It is used when the agency’s needs are complex and may require customized solutions.
Request for Quote (RFQ): An RFQ is typically used for well-defined product or commercial purchases, usually under $250,000.

The solicitation can describe its requirements through one of these documents:

Statement of Work (SOW): The government uses SOW when it knows exactly what it wants and how it needs to be done. In line with this, the contractor’s offer should clearly state it can deliver the work on time and exactly as expected.
Performance Work Statement (PWS): The government uses PWS when it knows the specific outcomes it needs and how it can measure them but leaves it up to the contractors to achieve them. In this case, the offer should clearly explain the activities to perform and how to meet or exceed the desired outcomes.
Statement of Objectives (SOO): The federal government uses SOO to extend various solutions so it can meet its objectives. In this solicitation, contractors must develop a proposed PWS (i.e., solutions), performance metrics, a measurement plan, and a quality assurance plan in their offer.

The bidding process

The bidding process ensures transparency, competition, and fairness when selecting vendors. It involves soliciting bids or proposals through requests like RFPs or RFQs.

The submissions for bids are evaluated based on predefined criteria and awarded to the most suitable bidder. It prevents bias and corruption, giving all businesses a fair chance to win government contracts.

Awarding of contracts

When the government awards contracts worth over $4.5 million, it must announce it by 5 p.m. Washington, DC time on the same day. This announcement is made on official government websites like Defense.gov and SAM.gov. Local announcements may also be made and published online through government contracting news sources for larger contracts.

Agencies must allow at least 45 days for bids or proposals after publishing the solicitation notice to announce the successful bidders. Unsuccessful bidders can request a debriefing within five days of the award to understand why they were not selected.