“Participants at a Defense News-hosted roundtable in December said no.
The investment research program, which is run by the Small Business Administration, requires federal agencies set aside a certain percentage of their of research and development funds for outside researchers with small firms.”
“SBIR offers three tiers of R&D funding for new technologies, of $150,000 or less at Phase I, which lasts about six months; up to $1 million at Phase II, or about two years; Phase III funding tests the commerciality of the technology and solicits funding from the private sector.
To Trae Stephens, a partner at the Silicon Valley venture capital firm Founders Fund and the chairman of tech company Anduril Industries, the Pentagon would be better off making a few big bets instead of many smaller investments. He likened it to his experience at a venture capital firm.
“You cannot make money writing $250,000 checks. You cannot build successful companies with tiny bits of revenue. You have to concentrate your investments,” Stephens said. “One recommendation that I’ve been trying to push people on is if you think a company is really good, give them $10 million, give them $20 million.”
Investments in SBIR’s range would be “viewed as a distraction” to an innovative startup, said Steve Bowsher, an executive with venture capital firm In-Q-Tel. Without “recurring funding in the double-digit millions of dollars, it’s not a market.”
Since 2011, the law has allowed participation by some businesses that are majority owned by investment companies. But a Dec. 21 Government Accountability Office report found that in past three fiscal years, fewer than 3 percent of grants went to such companies.
“We’ve eliminated companies with the smartest $80 billion of funding, and instead we’ll work with all of the other companies,” Bowsher said of the government.
Defense Innovation Unit’s director of strategic engagement, Mike Madsen, seemed to agree with Stephens that the Defense Department needs a “strategic fund of that magnitude to make those bets pay off.”
“If we could tell ourselves we have a strategy to create one General Atomics a year, can you imagine?” Stephens replied.
A veteran of the firm Palantir, which has jousted with the Pentagon, left Stephens with the perception the government is afraid to play such a major role.
“We’d run into these blockers where decision-makers kind of detested where someone was getting rich doing business with the government,” Stephens said. “Our best capabilities have come from people who have gotten rich doing business with the government.”
“Service contracting does require skilled management and labor resources capable of performing a scope of work for which the government has identified a need and for which outsourcing to an industry contractor has been selected as the means to fulfill that need. The venue demands strong human resources management, industry teaming and an enhanced business system to price, account and bill on a job cost basis under government service contracts.
Small enterprises in the commercial services market are tempted to immediately begin bidding jobs in federal government contracting, approaching them like commercial efforts. They quickly find there are major differences in the way the government contracts are marketed, proposed, priced and performed. These differences are not “Rocket Science” but it is necessary to learn about them and plan for success.
1. UNDERSTAND THE LENGTHY SALES CYCLE
What immediately becomes apparent to the commercial small business when entering the federal contracting service contracting market is that the sales cycle is a long one and the preliminary steps are often hidden from public view.
Often misunderstood, is that much has occurred in the way of marketing activities by companies in advance of notices formally published by the government on FEDBIZOPPS. By the time the formal, solicitation is published it is too late to market for setting a procurement aside for a small business designation if it has not already been established as such. In addition, formal solicitation publication closes the window on self-marketing by HUB Zone and 8(a) firms for set asides to them individually without competition. In short, businesses have been marketing for the requirement long before it became formally announced at FEDBIZOPPS. For additional details please see:
Even if a company has had exposure to an agency, marketed on a program in advance of its announcement or become a member of an industry team to bid the job, the proposal and award process, to include negotiations and start up, can easily consume 90 to 120 days as a minimum. For major programs the process often exceeds 6 months in duration. Planning must occur for the expense associated with supporting such lengthy marketing efforts before any cash flow results.
2. APPRECIATE APPLICABLE DEFINITIONS, ROLES AND REGULATIONS
Participation in the government contacting market can involve participating as an individual, becoming a subcontractor as a company or seeking a prime contractor role. Those with product research and development support needs can participate in venues like Small Business Innovative Research (SBIR) and Mentor/Protege Programs. A GSA Schedule also provides opportunities for those in finished product sales. Please refer to the following articles for explanations of these roles and program definitions:
If you are relying on FEDBIZOPPS or like sites for new business you will be very disappointed. Pre-solicitation notices do have promise, but you have to get inside an agency to find out who has the funding, the need and the decision-making authority. It is rarely the contracting officer who posts the notice who has these responsibilities.
Pre-solicitations are alerts to industry, attempts to gauge industry interest or a way of “Kicking the Can Down the Road” until funding becomes available. These notices are an indirect way of saying, “Come Visit Me and tell me about your company”, or “Send Me your CAPE”. The full formal notification will come out at a time to be determined by when the agency gets the funding and how much interest there is in the contractor community. A schedule for when the formal bid notice will occur is rarely posted.
4. PROMOTE CAPABILITIES
Develop a capability statement (CAPE) to respond to government postings and mail directly to government agencies and to large corporations doing business with the government.
A capability statement is a necessity as a standalone marketing tool for dealing with government agencies and contractors. It should be short (no more than 2 pages) and hard hitting, containing all the information necessary for a government contracting officer or company buyer to place an order, as well as your registration information at local, state and federal web sites, your NAICS Codes and contact information.
Insert your CAPE in the tab at your web site where you discuss your background information and your government registrations.
See the second, vertical, Box Net “References” cube in the left margin of this site for an example of a good service contractor capabilities statement in the public domain.
5. ACQUIRE PERSONNEL STRATEGICALLY
Start up service contractors face the dual problem of establishing the enterprise with the one-time, non-recurring activities necessary to get the operation underway and at the same time acquire the core management talent and subsequent help as the business grows.
Even established companies who enter government service contracting find they cannot sustain a work force for large scale agency programs until the contracts are in hand to finance them.
A core team is an absolute necessity; it may be small and the business proposals may be few at first. But the core team product must be strategic in terms of high probability marketing to build the company base.
Supplementary help can be acquired by permanent ads at the company web site for generic skill sets, contingent hire agreements with prospective employees and similar techniques that position the resources on deck for business growth.
Small businesses commonly utilize contingent hire agreements to locate promising individuals who can bring projects or contacts with them when they join the firm. They are willing to negotiate a prospective wage and salary arrangement in advance of a proposal submission and commit to an offer of employment with benefits and commission should the program be won. They further offer to reimburse the participant for expenses and business related costs during the proposal period, if pre-approved.
The key to these arrangements is to identify target projects that both you and the candidate can go after, where the candidate is uniquely qualified to
: (1) Help win the job
(2) Contribute heavily to the proposal. Just bringing someone on who has no ability to offer targets usually does not work.
Government contract proposal preparation is time consuming and can be costly. Meeting the agency Request for Proposal (RFP) requirements with a responsive proposal can be well worth the effort if a winning strategy can be formulated.
When considering submitting a proposal to a given government solicitation, conduct a bid/no bid exercise. By going through that process you will begin formulating your win strategy or you will discover that you should not bid this job for lack of such a strategy. The elements of the process are in the form of questions to ask yourself against topics for key consideration at the following link:
Affirmative or non-affirmative answers to the topical questions and ability to fill in the blanks will drive your decision to bid or not bid a solicitation.
7. PREPARE YOUR BUSINESS SYSTEM FOR PRICING, ACCOUNTING AND BILLING
To effectively market a federal government contract a small business must sell on the basis of having a business system as well as technical performance infrastructure ready to run the job when a contract proposal is submitted. This dual requirement is where many small businesses fall short in their federal government contract start up planning.
Parallel thinking is required to plan for government project technical effort against a template of necessary business process infrastructure, driven by introducing Federal Acquisition Regulations (FAR) into the company. Key elements of the necessary business system infrastructure are discussed in the following articles:
8. PROPOSE TO WIN BY MEETING THE PAST PERFORMANCE CHALLENGE
As a small business begins the proposal submission process to federal government agencies or to prime contractors, the past performance challenge is major. By definition a start-up company in government contracting has no direct government agency past performance projects to site in meeting the requirement in requests for proposals (RFP’s) for historical references to similar projects in terms of size, duration and complexity
So how can a new organization or one that is new to government contracting muster a response to the past performance challenge?
The answer lies in historical projects that may be similar in the commercial arena and a high quality proposal that clearly demonstrates an understanding of the requirement at hand, a unique and cost effective project plan and high performing personnel and/or products tailored to the statement of work to offset an interim, light past performance record.
This writing has conveyed insights for planning participation strategically in the small business federal government service contracting market. Consider the lengthy sales cycle and the roles your enterprise can best play in the venue. Conduct thorough market research, promote your capabilities endlessly and make astute bid/no bid decisions.
You must acquire core and supplementary help as business growth permits by using methods to preposition human resources. Prepare dynamic proposals with unique project plans to meet the past performance challenge, then execute your project plans to succeed. ”
DARPA’s prosthetic LUKE arm gets a fist bump at Walter Reed National Military Medical Center in December 2016. (DARPA.mil)
“Entrepreneurs and startup companies wishing to work with the Defense Advanced Research Projects Agency (DARPA) would be well-advised to do a little homework prior.”
DARPA’s senior adviser for commercial strategy, David Henshall, offered this and other tips.”
“The key is — be familiar with the opportunities of national security,” Henshall said. “The first thing is what are the problems we’re trying to solve, and become familiar with that.” He suggested that a bit of good old-fashioned internet sleuthing can go a long way. “Read our website and find out what we’re working on. Find out who’s there. And then find out the program manager that’s interested in the technology space you’re dealing with.”
Once you’ve identified a program manager in your area of expertise, Henshall said, contact that person. Most will be very willing to take a short meeting with an entrepreneur or company working in their subject matter area. But don’t waste that time.
“Make sure you’re not asking him questions that you could have read on the website because your 30 minutes is being used up,” he said. “Do your homework beforehand.”
And lastly, be patient. “People say it’s like dating,” Henshall joked. You won’t walk out of a first meeting with research grant money in hand, so that shouldn’t be the goal. Use the first meeting to get to the second meeting, and so on.
Follow these tips, and partnership with DARPA presents the opportunity to work on some big and interesting research challenges. For example, in September the agency announced that it plans to spend $2 billion on research into so-called “third wave” artificial intelligence capacities over the next few years.
The initiative, called “AI Next,” is concerned with moving AI beyond the mode where it needs lots of high-quality training data in myriad situations to develop an algorithm. The goal is to get the technology to a place where machines adapt to changing situations the way human intelligence does.”
Government contract proposal preparation is time consuming and can be costly. Meeting the agency Request for Proposal (RFP) requirements with a responsive proposal can be well worth the effort if a winning strategy can be formulated. When considering submitting a proposal to a given government solicitation, conduct a bid/no bid exercise. By going through that process you will begin formulating your win strategy or you will discover that you should not bid this job for lack of such a strategy. The elements of the process are discussed below in the form of questions to ask yourself against topics for key consideration. Affirmative or non-affirmative answers to the topical questions and ability to fill in the blanks below will drive your decision to bid or not bid a solicitation.
Do you know this customer? Yes __ No ___
Does this customer know you? Yes___No ___
Do you have any idea of the available funding for which the customer has obtained authorization? Yes___No ____
Specify the marketing contacts which have been made with the customer thus far:
B. Supplies and Services:
Specify the supplies and services to be delivered in the prospective contract:
Line Item (s):
Are supplies and services in the RFP Statement of work a good match for what the company sells? Yes ___No ___
Is the RFP Statement of Work specific enough to identify risks? Yes____No ____
Is the RFP schedule specific enough to determine the delivery requirements? Yes____No____
Can the delivery schedule in the RFP be met? Yes ___No _____
Specify the delivery schedule for the prospective contract:
C. Contract Type/Value/Start/End Date:
Does the proposed contract type (FFP, CP, T&M, etc) suit the nature of the work? Yes___ No ___
Specify the contract type for this program: _______________.
Are there any unusual terms and conditions specified in the government RFP? Yes ____No___
Specify any unusual terms and conditions: ___________________________________________
What is the Rough Order of Magnitude (ROM) value of the prospective contract? $___________.
What is the anticipated start date of the contract? ________.
What is the anticipated end date of the contract? ________.
D. Company Strengths:
Is this prospective contract for effort in which the company has strong skills? Yes____No ____
Specify the strengths the company will utilize in meeting the product specification or statement of work:
E. Company Weaknesses:
Are there any company weaknesses in meeting the product specification or statement of work? Yes ___No ___
Specify any weaknesses for which the company must compensate and manage associated risks:
F. Teaming Arrangements (If any):
Does company plan to team with other companies in the performance of the prospective contract? Yes ___No ___
Identify the other team member companies:
Will your company be a prime or a subcontractor? Prime___Subcontractor ____
Have NDA’s and Teaming Agreements been executed? Yes____No ______
Is this a sole source set-aside procurement to your company? Yes____No____
If this is a competitive procurement, identify the prospective competition and their associated strengths/weaknesses:
H. Win Strategy:
Identify the proposal features and themes which will be utilized in the proposal as discriminators to win this program:
I. Proposal Budget:
Estimate the man hours and dollars for proposal labor, any travel expenses, shipping, packaging, samples and other expenses associated with preparing the proposal. The government does not reimburse the contractor for proposal preparation under the subsequent contract. Proposal expenses must be included in the cost center overhead or G&A and accounted for as marketing expense allocated across the cost center or the company.
Labor Hours __
Labor Dollars $______
Samples (if any) _______
If you can answer “YES” to at least 5 of the questions under paragraphs A through D above, it is likely you should bid this procurement.
If the answers to 7 of the 10 “YES” or “NO” questions under paragraphs A through D above are “NO” it is unlikely you should bid this procurement unless the answer to G is “YES”. Even then, examine your answers and carefully review whether this business is suitable for your company.
If the answer to E is “YES”, it is unlikely you will bid this procurement successfully unless the answer to G is “YES”. Even then, determine how you will overcome the weaknesses you have identified in your company associated with doing this work before you decide to bid it.
Carefully compare the competitive analysis under Item G to the win statagy under H before you make your final decision.
“Across all federal agencies, the government reserves procurements that fall between the micro-purchase threshold and the simplified acquisition threshold for small business contractors.
With the simplified threshold authorized to rise by 150 percent, small businesses will have more and better opportunities to win contracts of greater value.”
“By some metrics, 2017 was a banner year for small business federal contractors. In May 2018, the Small Business Administration announced that, for the first time, the federal government exceeded $100 billion in prime contract awards to small businesses in fiscal year 2017.
Despite reaching this milestone, small business federal contracting still has room for improvement. For example, the SBA’s data also show that the percentage of total federal contracting dollars earned by small businesses declined for the second year in a row, falling to 23.8 percent from a historic high of 25.7 percent for fiscal year 2015.
Given these mixed results, is there a case for near-term optimism for the small business contracting community? Recent changes to federal caps on the use of micro-purchasing and simplified acquisition methods hold the promise of more agile acquisition, benefitting small businesses.
Indicative of the big changes forthcoming is a June 2018 White House Office of Management and Budget memo streamlining small business contractors’ access to federal contracting opportunities.
Memo-18-18, “Implementing Statutory Changes to the Micro-Purchase and the Simplified Acquisition Thresholds for Financial Assistance,” takes steps to accelerate implementation of increases in the thresholds for micro-purchases and of simplified acquisitions, which Congress mandated in the 2017 and 2018 National Defense Authorization Acts.
Conducted mostly using government purchase cards, micro-purchases occupy the lowest-cost, but most commercially open end of the spectrum of federal acquisitions.
Acquisitions that fall under the simplified acquisition threshold yet exceed the micro-purchase threshold are eligible for streamlined, but still competitive bidding-based contracting procedures.
Although the memo did not apply to Defense Department contracts, its raising of the micro-purchase threshold and simplified acquisition threshold — to $10,000 and $250,000, respectively — for nonprofit research federal grant recipients signals similar government-wide increases expected later this year.
The department also has taken steps to streamline small-dollar procurements. It implemented its own smaller micro-purchase threshold increase in 2017. It followed up in April by raising the contract value trigger at which contractors are required to provide cost and pricing data for certification, from $750,000 to $2 million. This change will give contracting officers the discretion to grant awards without having to verify a proposal’s pricing justification.
At the same time, the Defense Department raised the simplified acquisition threshold for defense contracts to $250,000. Following the same pattern, a proposed Defense Acquisition Regulation System rule would grant contracting officers emergency procurement authority with enhanced thresholds to acquire products or services to aid in response to a cyberattack.
These acquisition reforms will likely benefit small business contractors. The most direct impact will come from the increase of the simplified acquisition threshold.
The Federal Procurement Data System indicates, for fiscal year 2017, $434.3 million in contracts valued between $100,000 and $250,000 were awarded to firms other than small businesses. Under the higher simplified threshold, it’s likely most of those dollars will go to small businesses. The increased micro-purchase threshold will also likely boost small business contracting opportunities.
Although small businesses do not have a preferred status for micro-purchases, these transactions allow anyone with a government purchase card significant sourcing discretion, and they do not have to follow typical competitive bidding procedures. In fact, OMB in 2011 instructed senior acquisition and financial officers to increase their use of micro-purchase authority to acquire goods and services from small businesses.
The combined impact of these procurement changes benefits more than just the small business contracting community. For the last few years, “agility” has been the key buzzword in acquisition reform circles, articulating reformers’ preeminent goal of achieving an acquisition system that combines speed with responsiveness to dynamic strategic and technological environments.
By reducing contracting red tape and expanding contracting officers’ discretion over vendor selection, these reforms improve the agility of the acquisition system, which should deliver better capabilities and materiel to warfighters more rapidly. Greater agility comes not simply from facilitating easier procurement from open market commercial platforms or making it easier for contracting officers to give contracts to small innovative tech firms.
Rather, as the Coalition for Government Procurement argues, increases in the two thresholds also allow for greater use of traditional agile contract vehicles, such as multiple-award, indefinite delivery, indefinite quantity contracts that pre-clear rosters of products, services and providers for price competitiveness and compliance with other statutory requirements. Thus, increases in small-dollar procurement opportunities help link acquisition agility to acquisition quality.
Through the threshold reforms, the federal government takes a major step toward an acquisition system that both gives small businesses access to big opportunities and harnesses small business’ innovation.”
“How can they stand out from the crowd to get some of those precious government contract dollars?
Several things come to mind but these five are usually at the top of my list. I have included a reference for each to a previous WT article.”
We all understand that this market is driven by relationships: who you know, who knows you, what they think of you and you of them, and what you might be able to do together or for one another.
In the summer of 2012 I wrote an article on networking, which is a big part of the relationship puzzle. Where you choose to spend your time is critical. You have limited time and there are always many venues where you can network. Picking the venues which yield the best return on investment, where you can meet prospects, customers, partners, media and others, is a key component to help you stand out where it matters. You must be seen. Here is my column.
I have been in numerous meetings where an executive will have goals, sometimes nebulous, sometimes well-defined, but they lack a strategy for reaching the goals. Knowing your goals is important, but without a game plan you will likely go nowhere and you will certainly not stand out. Read more here.
Clearly enunciate what you bring to the table. This can be a combination of things that make you and your company unique, or it can one really strong area of competence.
Combinations can include technical expertise, deep relationships with an agency, SMEs, owning a spot on preferred contracts, set-aside status and more.
The more you can differentiate in terms that appeal to government buyers the more you stand out. Read more.
Since the mid-1990s I have been advising companies to maximize their presence in agencies where they are known before they try to migrate to “greener pastures,” which are often pastures where they are not know. If you are selling in a cabinet level department to one or two divisions, why not expand to other divisions within that department? This is often a saner approach than migrating to another cabinet department or independent agency.
It is much easier to stand out when you are doing more business with your best customer(s).
This is another recent column topic. Social selling is an adjunct to traditional selling, leveraging social networking platforms to start and manage relationships with customers, prospects, partners and others.
Social selling is the process of finding buyers and influencers on a social networking platform (I prefer LinkedIn), getting on their radar and sharing information that will make you and your company stand out from the competition. There are many social selling tactics that you can use, depending on who you are trying to influence.
LinkedIn is pervasive in the government contracting community and by adding valuable insights on social media you will most definitely stand out.
Many inquiries have been received from commercial firms and startups regarding entering the small business federal government contracting market. Topics relevant to the issue have been posted at this site since 2006, but a comparison has not been made between the commercial and government environments to benefit readers. The purpose of this article is to compare small business federal government contracting as opposed to selling commercial products and services. The comparison may be useful for those who are considering melding commercial and federal government business or starting an enterprise involving both venues.
WHAT FEDERAL GOVERNMENT CONTRACTING IS – AND IS NOT
Small business federal government contracting is not rocket science – to succeed you must take what you do well in the commercial market place or what your experience leads you to believe you can plan successfully as a commercial enterprise and then apply it in a slightly different manner from a business perspective to accommodate federal government contracting requirements. Very few companies enter federal government contracting without some commercial experience and success. Very few startups entertain contracting exclusively to the federal government without commercial work to sustain operations while the more lengthy government procurement process is being pursued.
Federal government contracting is controlled by the Federal Acquisition Regulation (FAR). Bid and proposal types are driven by the nature of the supply or service being procured. No one reads the FAR cover to cover – It is a source book for when you need it. The FAR and associated regulations are taught in only a few colleges, such as the Defense Systems Acquisition University at Ft. Belvoir and the George Washington School of Government Contracting. Very few CPA’s are familiar with the US Government FAR Cost Accounting Standards (CAS) and I am not aware of any questions regarding CAS on current CPA exams. In general one must grow to understand these requirements and that usually happens by doing business under them.
BUSINESS DRIVER COMPARISONS
The following are some common driving business factors and a commercial versus federal government comparison for each:
The above are not all the driving factors you should consider when weighing the differences between commercial and government work, but they are some of the most significant. Becoming a government supplier may not result in the highest profit-making product/service line in your enterprise but the venue has the potential to pay the bills and be a major platform for stability and long term growth. It should not be your only endeavor but it could be a major element of your total business plan.
Please see the Table of Contents at “Smalltofeds” and the free downloads of books and materials there for further details.
“Dozens of instances when contractor employees fudged their timesheets, billing the government for time they were not at work or when they engaged in activities either personal in nature or outside the scope of the contract.
38 substantiated cases – loss to the government of more than $2.5 million.
Last week brought news that another Booz Allen Hamilton employee was accused of improperly removing sensitive material from the National Security Agency (NSA). Harold Thomas Martin III was charged with theft of government property and unauthorized removal and retention of classified materials. The government alleges Martin took documents and digital files containing information that, if disclosed, “reasonably could be expected to cause exceptionally grave damage to the national security of the United States.”
It was another black eye for Booz Allen, which was NSA surveillance program whistleblower Edward Snowden’s employer. It was equally embarrassing for the U.S. intelligence community, which pays contractors like Booz Allen billions of dollars each year to help run its global operations and keep a tight lid on our country’s more sensitive secrets.
Just days after the Harold Martin story broke, U.S. intelligence contractors were again in the spotlight. On Sunday, VICE News reporter Jason Leopold posted hundreds of pages of Intelligence Community Inspector General (ICIG) investigative reports. The documents contain the juicy—and occasionally disturbing—details of misconduct investigations conducted by the ICIG, the watchdog office that oversees the federal intelligence agencies. Most of the cases involved employees of Booz Allen and other prominent contractors.
Specifically, the documents contain dozens of instances when contractor employees fudged their timesheets, billing the government for time they were not at work or when they engaged in activities either personal in nature or outside the scope of the contract.
The ICIG also found that some contractor employees, while working on extremely sensitive intelligence programs and operations, risked exposing classified information by using non-secure networks and computers. They did so while working for some of the government’s most trusted private sector partners: Booz Allen and SAIC are among only a handful of private firms that collectively employ nearly all of the intelligence community’s contractor workforce.
The implications of the VICE News revelations are enormous. Not only did the contractor employees rip off taxpayers, they also compromised national security. The ICIG reports bolster POGO’s concern that contractor timesheet fraud is especially rampant among intelligence programs due to a lack of transparency and insufficient contract oversight. However, they also give us a reason to be optimistic: they show that the intelligence watchdog takes its role seriously and doggedly pursues allegations of wrongdoing.”
As the federal fiscal year draws to a close and the new year opens this month, an astute contractor will have examined the funding status of all government contracts for risk.
Limitation of funds and funding exposure must be a vital topic for every government contractor.
THE FUNDING CHALLENGE
Many federal contracts are funded incrementally, usually based on the government fiscal year that runs from 1 October to 30 September. Although the government may negotiate dollar price ceilings for cost plus and time and materials contracts or firm, fixed total price arrangements, the contracts themselves may be incrementally funded, particularly if they extend over two government fiscal years. A contract may contain negotiated prices or a cost ceiling but also specify an incremental funding value.
The contractor is required to inform the government when actual costs incurred plus obligations to suppliers or payroll on a specific contract reach certain thresholds of the current incremental funding specified in the contract (usually 80%). The government is then obligated to further fund the contract.
In the event the contract is not funded further, the contractor has the right to stop work before he exceeds the incremental funding. Some contractors choose to operate on “risk,” continuing to perform on a contract while exceeding the incremental funding in booked cost and obligations. The government is under no obligation to reimburse the contractor for invoiced amounts exceeding incremental funding. Nearing the end of a government fiscal year, a contractor may find delays in funding reaching all the way to congress. This situation must be managed with the government contracting officer. Limitation of Funds and Funding Exposure
STOP WORK ORDER
In the current political climate with a new Presidency at hand, Sequestration still in vogue and new fiscal year appropriations being incrementally approved by Congress, contractors may receive stop work orders from agencies unless their contracts were fully funded in the previous fiscal year. Even then, the government reserves the right to de-obligate funding on contracts, which can effectively bring them to a halt.
Stop work orders are serious matters and require special handling to comply with government direction and manage the associated financial risk.
Upon receipt of a stop work order you have no guarantee of payment for any transaction date-stamped in your accounting system after the date of the stop work order (or the commencement date of a stop work order specified in a Contracting Officer’s Letter).
Applicable charge numbers in the accounting system must be closed until the stop work order is lifted and any effected suppliers and subcontractors must be notified to do the same.
To the degree the government has made progress payments or has any other form of payment invested in a physical product to date it has ownership rights. If that is the case, treat the physical material work-in-process as government owned, store it as such without performing any more effort on it and await further disposition.
To the degree the government has not paid anything on the contract or delivery order they have no ownership rights to the physical product and you are free to complete it and sell it to another customer (commercial or government that has not stopped work). If the government recommences the order, quote a new price and delivery from ground zero.
At the bottom line a stop work is blunt and to the point. Treat it as if you will never hear from this customer again to manage the risk.
To the degree you do hear from the Contracting Officer again and he or she has the funding to recommence work, be prepared to submit a proposal for what it will take to start the effort and a realistic delivery schedule to complete the it, but do not build any retroactive costs incurred during the stop work period into your logic and expect to bill them; they may not come to payment fruition.
Having a limitation of funds and funding exposure process in the company should be a standard part of doing business. A, shrinking, remaining funding level condition on incrementally funded contracts should trigger a risk analysis and government notification process throughout the year. The federal fiscal year-end brings an additional element of risk to the process with the annual budgeting, approval and appropriations process required by law.
“Rather than saving money, the mergers created industrial behemoths with greater leverage over the Pentagon.
With only a handful of major firms to turn to in the procurement of major weapons systems, the Department of Defense’s ability to keep a lid on mushrooming weapons costs has been diminished.
And a company like Lockheed Martin, which has $46 billion in revenues and claims to have a presence in every state in the union, has enormous financial and political clout. This gives Lockheed Martin the ability to prolong programs that serve its corporate interests whether or not they are in the national interest.
Lockheed Martin held its annual media day this week, and CEO Marillyn Hewson assured those attending that the company was financially sound and poised to lead the industry in developing the next generation of military technology, from military lasers to hypersonic weapons. But the bulk of the company’s revenues rely on old-fashioned techniques — buying up other companies, profiting from the sale of big-ticket weapons systems, and pushing foreign sales.
The news of the year was the company’s purchase of Sikorsky from United Technologies, a move that will make Lockheed Martin the primary source of helicopters for the U.S. military. It was the company’s largest acquisition since the 1990s, when Lockheed and Martin Marietta merged, aided by hundreds of millions in taxpayer subsidies to pay for such questionable items as golden parachutes for executives impacted by the merger.
Lockheed Martin wasn’t the only company to grow through merger during that era — Boeing bought McDonnell Douglas, Northrop and Grumman merged, and dozens of other deals were made. At the time, the argument for allowing — and subsidizing — these combinations was that it would reduce overhead and result in better weapons prices for the U.S. government. But as former Pentagon official Lawrence Korb noted at the time, “past history indicates that these mergers end up costing rather than saving the government money.” And so it has been, as Lockheed Martin has racked up multi-billion dollar cost overruns on major programs like the F-35 combat aircraft and the Littoral Combat Ship (LCS).
A case in point is the F-35 program. If it goes forward as planned, Lockheed Martin will end up being the only supplier of fighter aircraft to the U.S. government, leaving the taxpayers in a “take it or leave it” position with regard to the company’s product. A recent analysis by the Project on Government Oversight has catalogued the myriad performance problems with the F-35. Most importantly, even as the Pentagon accelerates spending on F-35s and assures us that the plane is ready for prime time, the Pentagon’s office of independent testing has noted that it won’t even be known whether the aircraft will be sustainable in combat until 2022. Thus far, test aircraft at Edwards Air Force Base have only been able to fly about six sorties per month due to excessive down time for maintenance. The high tech testing simulator that is supposed to assess the F-35s capabilities has itself had serious development problems. And the aircraft coming off the assembly line now have even more problems than the ones that came before.
Given this reality, entrusting the entire future of this segment of the combat aircraft industry to this one company makes no sense. This is particularly true when one considers that, as a 2015 report by the National Security Network has shown, the F-35 is destined to be inferior to the aircraft it is replacing.
Despite all of the above, the Pentagon wants to push forward a 400-plane “block buy” of F-35s that would put billions of dollars in Lockheed Martin’s coffers without providing evidence to suggest that the aircraft being purchased will perform as advertised. Over the next few years, Lockheed Martin will almost certainly put more effort into securing this funding bonanza than it will to creating innovative new products.
Rather than throwing all of its eggs in one basket, the Pentagon should scale back the F-35 program and fill in any gaps in fighter numbers with upgraded versions of current generation F-16s and F-18s. Not only would this save billions of dollars per year, but it would dilute Lockheed Martin’s emerging monopoly over the fighter aircraft market and provide an insurance policy in case the F-35 continues to have debilitating problems that raise questions about its ability to serve as the aircraft of the future for the Air Force, Navy and Marines. Expect Lockheed Martin to fight any movement in this direction tooth and nail. Instead, the company will lobby get even more F-35s funded than the Pentagon is requesting. One of Marillyn Hewson’s proud proclamations at this week’s media day was that fact that Congress appropriated funds for 11 more F-35s last year than the number called for in the president’s original budget request. Expect more of the same this year.
Defense companies thrive when global conflicts drive up military expenditures, and Lockheed Martin is no exception. The company has made increasing its exports a top priority. In her media day speech, Hewson pointed to turbulence in Europe, the Middle East and Asia as good signs for Lockheed’s export prospects. She wasn’t so crass as to point out that war is good for business. Instead, she said that “It’s clearly a complex threat environment our customers are facing, and we want to remain well-positioned to help them address these unprecedented challenges.”
One step in helping its customers cope with “a complex threat environment” has been the expansion of production facilities for the company’s Hellfire missile system, which is used on Predator and Reaper drones as well as on helicopters and fixed-wing aircraft. Lockheed Martin has no expectation that peace will break out and undercut this burgeoning market. As company vice-president Frank St. John put it in an interview with Defense One, “I don’t see events in the world changing dramatically over the next couple of years . . . [T]he conflicts that are requiring the use of our systems are lingering, so anticipate that we’ll be producing at a pretty high level for some period of time.”
The Hellfires are just the tip of the iceberg in terms of Lockheed Martin’s foreign sales. Attack helicopters and combat ships for Saudi Arabia and missile defense systems for European allies are the biggest moneymakers on the horizon.
Pushing costly, untested weapons systems and profiting from foreign conflicts is hardly innovative. If we are going to realign Pentagon spending with the realities of current challenges and rein in dangerous arms transfers to regions of conflict, Lockheed Martin will have to adjust its financial strategies accordingly. Explaining how it will do so would be an excellent topic for one of the company’s future media days.”