Government Contracts

Federal, state, and local governments purchase more than a trillion dollars in goods and services each year, making government a huge potential market for many firms. But this market has special rules and requirements that companies must learn.

Government purchases of small commodity items are much like private purchases, but even here there are special hurdles. And major or complex deals present very tough hurdles for newcomers. Yet the sheer scale and steadiness of government purchases have prompted many firms – ambitious start-ups as well as global giants – to learn to take hurdles in profitable stride.

For example, Art Hobba helped his small company win a $30 million contract in California. The entire process took three years. Just to qualify for bidding, Hobba’s firm had to open up five separate state offices at about $250,000 apiece. State contracting officials visited all these new sites. “They wanted to make sure we were who we said we were,” Hobba remembers. “It was almost like an audit. It cost us more than a million dollars just to play.”

Then came preparation of a 25,000-page proposal in response to the Request for Proposals (RFP), and another seven months for the government to make a decision. It was not an easy time for Hobba, who had urged the bid. “If we had not gotten it, I probably would have gotten the boot. At the time, our CEO did not believe it would ever close. But it was the largest deal we ever did; it added value and was sustainable.”

Big gains can come from big commitments if they are wisely made. “The biggest challenge to entering this market is to avoid underestimating how different selling to the government is versus business-to-business selling,” advises Keith Eades, chief executive officer of Sales Performance International (SPI). “It is not a market to be afraid of, but to know about. It is tough to break into, and you have to get in on the front end of the buying cycle.”

Getting Approved

Hobba, now CEO of Principle Based Enterprises, agrees: “You can’t just go in and sell to the government. You must be approved, fill out many boxes, and get on their list.”

Before the sales cycle even starts, there is usually a preliminary step: getting your firm listed on an agency’s list of approved vendors. Many federal agencies can only buy from vendors approved by the General Services Administration (GSA). State and local governments differ widely in their use of formal vendor lists. Larger states, such as California and New York, have very formal listing requirements. Agencies in smaller states or at local levels may not.

This step can be time-consuming for neophytes. Agencies build lists well ahead of purchases, so it may take six months or a year to get listed for a particular opportunity. But once on one list, a firm can more easily and quickly become a vendor for other agencies that make similar purchases, and government offices use each other’s lists as whole or partial substitutes for their own approvals. “If you get in with California like we did, there are shortcuts for working with other states,” says Hobba.

Approval requirements differ by product. Common terms include “financial strengths” and “length of time in business.”

“[Agencies] want to make sure you can perform, that you are who you say you are, and that they can prevent fraud,” Eades notes. The government generally, but not always, requires its purchases to be made on the best terms a firm offers its commercial customers.

Help from a consultant or partnering with another firm familiar with this approval step may be necessary, at least at first. And “states will help you fill out their forms; they want competition,” says Hobba. “But you have to find the right person.”

There can be several agencies in each state that do the purchasing, including the state GSA, community colleges, universities, and prisons. “Sometimes one borrows the approval of another agency,” Hobba says. “But it still takes lots of research, paper, and patience.” Just filling out forms can easily take a year. “Many people do not want to spend the time, but that eliminates some competition.”

One shortcut is seeking business as a subcontractor for a major firm that already has a master contract with the government. Larger firms often receive incentives or preferences for bringing small firms into government business. Subcontractors still need approvals, but this is a much simpler process. “It can take only 30 to 60 days and an hour of paperwork,” Hobba estimates.

The challenge is finding and dealing with the master contractor. These firms often mirror their government clients with elaborate procurement processes. “You must scan the horizon for master contractors and find out how you can bring special value to them, solve a painful problem, or save them money,” Hobba says.

Prospecting

Prospecting in government markets is similar to the same step in B2B sales, according to Eades. “The techniques to gain entry are similar, except you must shape your message to government requirements – not profits, but cost saving, productivity, benefits, and solving problems. You must know the decision maker’s problems and how the agency is organized.”

Tim Sullivan, SPI director of innovation, says public agencies release more information on their missions, what they do, and how they are organized than private firms. Plus, there are paid services, such as FedSource, on federal needs, and INPUT, on federal, state, and local IT purchases, as well as free sites such as FedBizzOpps. “Initial research is a little easier than for B2B,” Sullivan argues. High-level Internet research is more productive. “But what they say explicitly is not always what they will want implicitly,” Eades observes.

Learning buyer intentions in broad terms can be simpler in government. Many public agencies publicize buying intentions over the coming year or budget cycle. But competitors have this information as well. “The real key is getting in before that and trying to shape the buyer’s intentions,” Eades says.

The government often asks for advice on buying in Requests for Information (RFIs) and for bids in RFPs. Sullivan worked with a large firm that waited for RFIs and RFPs to come out. “They had a whole team dedicated to government, but they did not sell, they just responded. You want to let them know about products or services they may want to buy.”

Qualifying and Building Relationships

This step is also similar to its counterpart in private markets, but personal relationships do not count nearly as much. The government wants to treat all vendors fairly and equally, and regulations enforce that preference. As a result, “you must build relationships with performance,” Sullivan says. One strategy is buying your way in with a very favorable offer, doing a good job, and then raising price to match now-proven value.

And government vendors must document why their solutions make sense, before, during, and after awards. “The best salespeople make it easy for government customers to document provable value of the award,” Eades says. This can be an extra cost burden.

But qualifying government customers can be simpler than qualifying private buyers. Businesses purchase products based on complex decision criteria, and there are opportunities to adjust offers after initial awards. Businesses need not accept low-cost bids, because they can seek discounts at the end. The government usually has less flexibility to renegotiate prices. To qualify as a likely winner of a government contract, a firm must 1) be the low-price bidder, or 2) have a unique differentiator justifying a higher price. “Decide which you can be,” Eades urges. “If neither, do not go after the business.”

Closing and Negotiation

This step is significantly different for government, where much negotiation is done before the RFP is put out. “You must get in at the front end and try to shape the RFP,” Eades says. “Once it’s out, there is very little room to negotiate.”

Negotiations can start with the RFI and conference for interested bidders. If multiple vendors are necessary, teams of bidders must be assembled. This is a completely separate and critical negotiating step.

Handling price objections is also different and simpler. For many standard contract elements such as labor categories, agencies may publish schedules of fees that are acceptable. “You should know [the fee schedule], because they told you,” Eades says.

Balancing Costs and Benefits

Regulation, documentation, fairness, and other factors make government sales cycles significantly longer than in the private sector. That may not be obvious. “If you’re not used to it, it may look very short,” Eades says. “By the time you notice the RFP, you’re already in the middle of the process.”

Selling costs are higher for complex purchases due to documentation, proof of concept, and longer sales cycle. Significant deals are highly competitive on price, so margins are thinner than many private deals.

Selling to the government can be frustrating. “They are bureaucracies, and they have no sense of urgency,” Hobba says. “Your quota and quarterly report mean nothing to them. Salespeople have urgency. But if you push too hard, you can foul it up. You must be responsive without being pushy, or you will offend rather than change them.”

But government volumes can be immense, and these volumes are steady. Firms can look to the government for volume and seek profits in private markets. Sullivan cites an electrical supplier that did 45 percent of its business with the government. “Government sales kept the lights on, and they made money in B2B.”

Payments tend to take longer but are more predictable. “Make sure you understand the payment cycle and terms and can live with them,” says Eades. On the other hand, credit checks and references are not necessary.

Moreover, the government can do what private companies cannot. For example, the research arm of the Defense Department awards contracts to develop new technologies if they have defense applications. It states a military or security problem to be solved, then gives bidders 90 days to propose a solution. “Even if you are planning to seek commercial markets eventually, but the technology has defense applications, the Defense Department may fund start-up,” Hobba notes. “Lots of household names got their start that way.”