Landing a Government Contract Winning a contract with your state or federal government is tough--but it can be done. Learn from these entrepreneurs and Uncle Sam could become your biggest client.

For Liz Lasater, founder of Red Arrow Consulting, a supply-chain management and logistics company in Issaquah, Washington, the federal government is in some ways her ideal customer. Her small firm probably wouldn't survive without contracts from government agencies, she says, and as the defense budget rises, Uncle Sam offers a seemingly inexhaustible supply of new deals. If Lasater, 42, performs well, government agencies will be more loyal, less demanding clients than their private-sector counterparts. "Government can deliver enormous volume," Lasater says. "Almost no one in the private sector [can] match it."

At the same time, the government is Lasater's most difficult client. "You have to have a lot of capital to wait out the process of getting approved to fill a contract," Lasater says. "Then you have to figure out which contracts you can really compete for, and which are already reserved for large companies." She sighs. "It can be very frustrating."

Lasater's problems wouldn't shock most small businesses trying to win federal contracts. Despite promises over the past five years by government agencies to make the contracting process more accessible and more transparent to small businesses, recent reports show that only limited progress has been made. To many small businesses, accessing contracts still doesn't seem worth the effort and cost required to play the game. And in the wake of Hurricane Katrina, which devastated many small companies along the Gulf Coast, small-business advocates argue that few reconstruction opportunities have gone to entrepreneurs. Still, as Lasater knows, entrepreneurs willing to brave a contracting system that seems tilted in the big boys' favor can prosper.

The World's Most Powerful Customer
The size of U.S. government contracting is staggering: In 2004, the federal contracting marketplace was nearly $300 billion--and growing. Following the national trend toward outsourcing business functions, the Bush administration has prodded the government to outsource more work. The rising defense budget, the creation of the massive new Department of Homeland Security, the extensive rebuilding in the Gulf Coast, and the reconstruction efforts in Afghanistan and Iraq also add to contracting opportunities.

For decades, entrepreneurs were often shut out of these marketplaces. Government agencies favored large contractors, many of which were led by executives who had previously worked in government. In recent years, however, congresspeople and small-business advocates have forced the federal government to focus more on small companies. In 2000, Congress passed the Equity in Contracting for Women Act, which increased the number of federal contracts set aside for women-owned companies. Congress had already created broader set-asides under which small companies are supposed to receive 23 percent of all federal contracts. (This is not a huge number, considering companies with less than 100 employees account for more than 95 percent of U.S. businesses.)

The government also took on contract "bundling," where government agencies consolidate several individual contracts into one larger, more complex deal. Bundled contracts are ideal for giant companies that can provide a range of services. In 2002, President Bush vowed, "Whenever possible, we are going to insist that we break down large federal contracts so small-business owners have a fair shot." Backing the president, SBA head Hector Barreto added that "the consequences of bundling are serious"--a 2000 report by the SBA's advocacy office suggested that, for every 100 bundled contracts, small companies lost out on 106 individual contracts they might otherwise have received.

Yet the truth is, the contracting door has only opened a crack. The high cost and complicated red tape of obtaining certification dissuades small companies. Meanwhile, federal agencies often prefer companies with extensive contracting experience. And many of today's consolidated contracts are longer term than in the past, or they're automatically renewed, so large companies that win them are locked in for years.

"This is directly related to the decline in the size of the [government's] acquisition work force," says Paul Murphy, president of Eagle Eye Publishers Inc., which researches contracting trends. With fewer government procurement specialists due to federal cuts, says Murphy, overworked contracting officers prefer to hand out bundled mega-deals to big corporations rather than sift through hundreds of small-business proposals.

In fact, Murphy believes the number of bundled contracts is now reaching record levels. Eagle Eye's research suggests that between 1992 and 2001, the number of bundled contracts rose by 19 percent. Though more recent numbers seem rosier (according to Murphy, an official estimate puts bundled contract expenditures at less than 1 percent of total procurement in 2004), many believe inaccurate measures of bundling are masking the true gravity of the problem. Indeed, a May 2005 report from the SBA's Office of Inspector General estimates that, between 2001 and 2004, a minimum of $384 million was potentially lost to eligible small businesses due to bundling.

Noncompetitive bidding also remains common. According to a report by research organization The Center for Public Integrity, 40 percent of Pentagon contracts awarded between 1998 and 2003 were given without taking bids from numerous potential competitors--a lack of competition that favors entrenched defense firms. This sometimes happens because large corporations take advantage of loopholes, such as rules allowing them to buy small firms and inherit those firms' small-business set-asides.

Many small-business advocates say the set-aside rules themselves are problematic. "One of the most obvious flaws in the current size-standards methodology is the arbitrary nature of size measures," says Nydia VelÁzquez, ranking Democrat on the House of Representatives' Committee on Small Business. An SBA study released in December 2004 suggests that, in one year, some $2 billion in federal contracts targeted for small businesses actually went to corporate giants. Similarly, The Center for Public Integrity's report reveals that, between 1998 and 2003, the Pentagon gave over $47 billion in small-business set-asides to large companies. And a recent study by Eagle Eye found that 39 of the leading contractors listed as small businesses were actually large companies.

"There is just no prosecution of anyone who gets federal contracts in this way," says Lloyd Chapman of the American Small Business League, an advocacy group that fights to expand access to contracts.

The SBA says it recognizes the problem. There are concerns about the size standards used to judge whether companies should qualify as small businesses, admits Gary Jackson, an SBA assistant administrator responsible for size standards. Jackson says the SBA has held a range of meetings across the country with entrepreneurs to solicit feedback about appropriate size standards for small-business contracts. The SBA, he says, is using this public feedback to craft workable new size standards, though he's still not sure when those will be released.

On a micro level, all these barriers add to entrepreneurs' costs and frustration. "When we survey our membership, the vast majority want to get federal contracts, yet 80 percent say they wouldn't try" because they think the system is still rigged, says Barbara Kasoff, co-founder and president of Women Impacting Public Policy, a nonprofit, bipartisan public-policy advocacy organization. "They just don't have the energy to go through the complex maze [of contracting]."

Alan Castillo understands the feeling. "When you're researching contracting, you may start to get the details of it and see the risk is too high," says Castillo, 37, founder and president of Phoenix-based Castillo Technologies, a provider of IT services to public-sector and business clients.

"So many things stack up against [the] little guy," agrees Abe Abraham, founder and president of CMI Management Inc., an Alexandria, Virginia, company that provides maintenance and operations support for private-sector and government clients. Abraham found that, even after he got approved as a potential government contractor, he was constantly aced out by larger firms.

Landing a Government Contract

Despite the obstacles, some savvy small companies have played the contracting game well. After his initial frustration, Abraham eventually won contracts by hiring a full-time proposal writer. "You [need to] get the capital to have people focused on contracting full time," says Abraham.

Similarly, Cecelia McCloy, 51, president and CEO of Integrated Science Solutions Inc., a 55-person Walnut Creek, California-based science and engineering company, has been so successful, she now does about 95 percent of her business with federal government-related entities. Today, the company, which was founded in 1999, boasts over $7 million in 2005 revenue.

McCloy follows a specific formula. She avoids contracts with international components, which can require high security costs. And she rarely attempts to get a main, or "prime," contract, instead accepting smaller subcontracts given out by big companies with prime deals-companies that can also teach her more about contracting.

Most important, McCloy doesn't bid on contracts when she knows she doesn't have a shot at winning them. "You need to investigate--look at who the incumbent contractors are," she says. McCloy either speaks with federal procurement officers or accesses the federal database of contracts maintained by the General Services Administration, an agency that oversees procurement.

Judith Nelson, director of government contracts at EZGSA, a Bethesda, Maryland, consulting company focused on small-business contracting, says smart entrepreneurs also get a GSA schedule--a contract that paves the way for government agencies to do business with you. Normally, small companies identify what type of GSA schedule they should get--there are different schedules for different types of companies--and submit an offer to get one. The GSA evaluates the companies, but it often takes four to eight months to do so. "Getting a GSA schedule takes so long, there's a huge backlog of people trying to get [one]," says Castillo. (When Entrepreneur called to inquire about the lengthy waiting period, the GSA took several months to respond, then failed to make any officials available to speak.)

Successful contractors also focus their energies on federal agencies known to welcome entrepreneurs. "It comes down to people, and the people at the Department of Homeland Security are active in trying to ensure small business plays a role," says Murphy of Eagle Eye. Entrepreneurs also praise the Air Force, the EPA and NASA for their outreach efforts to small businesses.

Other entrepreneurs team up with peers to create larger consortiums that can compete with big corporations to claim a prime contract. Trade groups and contracting events can facilitate this collaboration. The U.S. Women's Chamber of Commerce, for example, holds an annual Women's Federal Contracting Summit, and the National Women's Business Center has launched the Procurement Institute, a contracting academy that teaches small companies how to anticipate government contracting cycles.

While many more changes are still necessary for small companies to compete, the SBA is attempting to move things in the right direction. It has launched Business Matchmaking, a kind of speed-dating program for small contractors: Small-business owners and government officials meet in a large room, pair up at tables, and then rotate from table to table every 15 minutes at the ring of a bell. This gives businesses a chance to offer their proposals to several procurement officers at once. The SBA says it is also more closely monitoring its database of small contractors to weed out oversize corporations.

The SBA's new size standards, too, could mean a brighter future for small contractors, though some entrepreneurs worry the standards will set the bar too high, allowing relatively large firms with tens of millions in revenue to qualify. Abraham also points out that a provision forcing companies to renew their size status every year could add red tape and confusion to the process. They're valid worries, indeed, but at least entrepreneurs now have some changes to look forward to--and some hope that they'll one day get their fair share of contracts from Uncle Sam.

The Subcontracting Path
Entrepreneurs don't have to rely on the prime, or initial, contracts handed out by government agencies to be successful. In fact, given how tough it is for small companies to obtain primes, entrepreneurs new to contracting should have smaller aspirations.

For Cecelia McCloy of Integrated Science Solutions, a Walnut Creek, California science and engineering company, subcontracting--obtaining smaller contracts handed out by a prime contractor--has been vital to her success. "[Getting prime contracts] is very expensive," says McCloy. "You can easily spend $25,000 to $45,000 to win that prime contract, so we have a substantial analysis process to identify whether we want to be prime."

Subcontracts can often be obtained more easily because there is less competition with large companies to get subcontracts. By building relationships with key procurement officials at many of the main defense contractors, McCloy has been able to get better access to subcontracts.

Still, cautions Judith Nelson, director of government contracts at EZGSA, a Bethesda, Maryland, consulting company focused on small-business contracting, "you may want a big-business mentor, but you have to be careful." Nelson fears that some larger firms may hire small companies because they are required to do so to fulfill contracting set-asides, but may have little interest in mentoring entrepreneurs on contracting.

Ultimately, says Abe Abraham, founder of CMI Management Inc., an Alexandria, Virginia, maintenance and operations support company, if you're a subcontractor, you are still not in control of your own destiny. "You can take a subcontract, but your strategy should be organized around trying to get a prime," he says. "Then, you're not at the mercy of the big guys."

Getting Started
Begin your search for a government contract with these helpful government resources.

• Minority Business Development Agency (www.mbda.gov):The MBDA runs centers that provide advice to minority small businesses, and it also offers a website that helps minority entrepreneurs match up with federal contracts.
• Federal Business Opportunities (www.fedbizopps.gov):This is the official site for listing procurement opportunities $25,000 and over. You can search and find opportunities "solicited by the entire Federal contracting community."
• Central Contractor Registration (www.ccr.gov):The CCR database has enfolded Pro-Net's functions into the mix, providing a one-stop shop for entrepreneurs to enter their company information in register of companies that could compete for contracts.
• General Services Administration (www.gsa.gov):This is another portal designed to bring together government customers and potential contractors. Check their "Contractors and Vendors" section for assistance and information the federal contracting process.
• Federal Supply Service (www.fss.gsa.gov):The Federal Supply Service is part of the General Services Administration, and provides federal customers with supply, service and procurement options. The Enterprise Governmentwide Acquisition Contract Center (GWAC) area on this site helps businesses understand how to get a GWAC.
• SBA Subcontracting directory (www.sba.gov/GC/indexcontacts.sbsd.html):This is a portal that lists subcontracting opportunities. The information is gleaned from subcontracting plans that large businesses submit to the government for $500,000-plus contracts $500,000 ($1 million for construction contracts).
• Federal Acquisition Regulations (www.arnet.gov/far):This site provides a comprehensive overviews of the laws and statutes about contracting.
• Procurement Technical Assistance Centers (www.dla.mil/db/procurem.htm):This program, offered by the Department of Defense, offers assistance for entrepreneurs in marketing to the government. This site lists the locations of these centers by state.

This article was originally published as "For the People" in the February 2006 issue of Entrepreneur magazine.