Many businesses are scrambling for solutions as the COVID crisis continues to force many companies, especially small businesses, to lay off workers, cut expenditures, or ultimately shut their doors. One area of potential business-saving revenue that companies should consider during the economic downturn is government contracts. This article breaks down five reasons why government contracts are becoming extremely valuable in these unprecedented times.
A Source of Consistent, Recession-Proof Income
The most valuable aspect of government contracts is arguably their ability to provide companies with a consistent source of income, even through the current COVID-caused economic downturn. Federal contract spending has been growing at a rate of 5.8% per year between 2014 - 2018, culminating in federal contract spending reaching $560 billion in FY2018. The government is a potential customer that is operating with a spending budget in the billions and will always be able to (or - be in a position to) buy, recession or not. In fact, the government’s spending budget tends to increase once we enter a recession as a means of trying to stimulate the economy. Whether you agree with the politics behind more government spending or not, the COVID pandemic has effectively boosted the government from a customer with a billion-dollar budget to a customer with a trillion-dollar budget thus making government contracting opportunities all that more abundant and lucrative. Many companies who weathered the 2008 financial crisis did so by leveraging these types of government contracts.
Consistent rescission-proof revenue is not exclusive to federal contracts as state and local governments are also constantly procuring items and services even amidst an economic downturn. In some cases, state and local contracts may be even more promising than federal contracts since bidders will often face less competition, fewer regulations, and an overall shorter award process.
The Government Procures Everything
Many people have the misconception that the only lucrative government contracts are defense-related. While defense-related contracts are among the most financially fruitful and do make up a sizable portion of the government’s spending (especially on a federal level), the idea that they are the only place to make a profit is false since the government actually purchases everything from hand grenades to hand sanitizer. The government doesn’t just purchase physical items either; many of its contracts are for services. In fact, any service that isn’t considered an “inherent government function” can technically be contracted out. This means service contracts cover a wide variety of areas from medical research to HR services, janitorial duties, and even snow removal. While you would be hard-pressed to find an industry or company that hasn’t been negatively impacted by the COVID pandemic and the related economic downturn, you would also be hard-pressed to find an industry or company that is selling a product or service that the government would not be interested in purchasing. Consequently, government contracts are a potential partial solution to many companies’ current revenue woes.
Large Contracts and On-Time Payment
One of the biggest barriers that stops many companies from pursuing government contracts is the massive amount of work it takes to compete, win, and then comply with the regulations that come with any government contract. While it is true that government contracts may require more effort than other ventures, there are plenty of benefits on the other side of this extra work. One of the reasons government contracts require so much work is also one of their benefits, namely, they typically make large purchases. The mindset behind government procurement practices centers around two tactics: 1) save money, and 2) reduce risk. In their drive to fulfill these two tactics, governments tend to make large purchases because 1) they can often save money by buying in bulk and 2) since they have spent significant time and resources in their market research and evaluation of the product or service to determine that it is a good purchase, they want to avoid repeating that process (which costs money) sooner than necessary.
The presence of extra work on the front end of government contracts is also rewarded by the lack of additional work when it comes to collecting payments. In the commercial sector, payment terms can be varied and ambiguous, often causing payments to stretch out. The government’s policy, on the other hand, is clear and predictable in paying off its invoices within 30 days.
Incentives for Small Business Contracts
Small businesses are being hit disproportionately harder by this pandemic and downturn, to the point that many will not survive. Relying on government payroll protection loans isn’t the only way these small businesses can leverage the government to weather this storm. On a federal level, government agencies have mandates to work more with small businesses. Many agencies have a quota of contracts or contracting dollars that they must award to small or disadvantaged businesses. This is often accomplished through “set-aside” contracts that are only open to small or disadvantaged businesses to bid on, thus thinning the competition and providing excellent opportunities for small businesses to gain an anchor government client.
The federal government’s incentive to work with small businesses isn’t just lip service. In FY2018, the federal government exceeded its small business federal contracting goal for the sixth consecutive year, awarding 25.05 percent in federal contract dollars to small businesses, totaling $120.8 billion. Incentivizing agencies to award contracts to small businesses isn’t exclusive to the federal government, however, state and local policies on the matter vary widely by location. Additionally, state and local contracting opportunities are also more likely to be naturally geared toward small businesses since this helps the local economy as well as the fact that many state and local contracts are large enough to warrant much interest from large businesses.
A Powerful Reference
Securing a government client doesn’t just provide a company with instant revenue benefits, it also greatly strengthens that company’s ability to secure revenue in the future in numerous ways. The government is a powerful past performance reference for clients in both the public and private sectors. Successfully securing and performing a government contract is an indication to future clients (especially other government agencies) that a company has the capacity to support a client with very high standards. A government reference doesn’t just go a long way with potential clients. The steady stream of income and quality assurance that comes with government contracts is extremely attractive to both insurance companies and investment partners. In fact, a business’s selling price is often valued much higher if they have government agencies as clients.
Another advantage of having the government as a reference is the increased probability of repeat business. The government procurement process is similar to the election process in that, barring a major issue, the “incumbent vendor” is often at a significant advantage to rewin the bid. This advantage is tied back to the fact that government buyers are risk-averse and are therefore more likely to select a proven. The incumbent also has an advantage when it comes to the price. In many cases, there are “moving costs” associated with switching to a new vendor. The government often factors these costs into their evaluation thus making it very hard for new vendors to come in at the lowest price. The “incumbent advantage” also extends to the RFP itself. The government often uses the current product or service as a template to write the RFP, thus placing the incumbent at an advantage. Before assuming that the process is rigged, it should be noted there are plenty of effective rules and regulations that facilitate fair procurement competition and prevent the incumbent from having an unfair advantage, even though being the incumbent still presents an undeniable advantage.
In conclusion, with customers scarce and the future uncertain, small or struggling businesses can’t afford not to pursue government contacts as a means of stability through this volatile economy. With the stakes this high, winning a government contract could be the difference between a company’s doors staying open or closing for good. Those companies that recognize and capitalize on the value of government contracts won’t just weather this economical storm, they will emerge even stronger.