Evaluating the Risk vs. Rewards of Pursuing Government Contracts

Austin, TX

Everyone’s talking about the ten-year, one-trillion-dollar public-private partnership opportunity that President Trump has proposed to modernize American infrastructure. You may even be among the many businesses across the nation weighing the potential risks versus rewards of pursuing such lucrative government contracts – if and when they come to fruition of course. But it doesn’t – and shouldn’t – take such significant spending commitments to entice companies to do business with the government. With federal, state and local agencies posting thousands of new solicitations every day, there are many opportunities out there for companies to vie for contracts – and win. That’s why many organizations that have traditionally serviced only private sector customers are increasingly shifting their focus towards public sector opportunities that align with their categorical expertise. At the same time, many companies are considering a more drastic expansion of their goods and/or services portfolios to pursue growth opportunities in the Administration’s priority sectors: infrastructure, energy, transportation, IT and defense.  (Sometimes, the grass can be greener on the “other side” right?)

Not So Fast

It’s not always easy to make a fast switch from commodities or services to construction, for example. Here’s why:

  • You’ll need extra capital to secure several types of “insurance” – bid guarantees, performance bonds and payment bonds – from a surety before you can compete for construction contracts over a certain value.
  • Bid guarantees protect you and the government against unexpected liabilities in case you’re ultimately unable to enter into the proposed agreement for any reason – if the government’s intent was to award your company the contract (i.e. if you were the lowest bidder in an RFP or IFB).
  • Performance bonds protect the government in case you’re unable to fulfill your contractual obligations at any point during the project.
  • Payment bonds protect your employees and/or subcontractors. If, at any point, you’re unable to pay your laborers, the Department of Labor can intervene and pull from your payment bond to compensate (i.e. back pay) them.

Understanding Payment Schedules is Crucial

To that extent, you must remember that payment for construction contracts is based on progress. You will typically invoice the government every 14 days; however, the invoice amount will be based on the percentage of the project that has been completed. For example, if you complete 10% of a $100K project in the first two weeks, your first invoice would be for $10K. Then, since construction payments are net 14 payments, it will still take another two weeks before you will be paid. Therefore, you must have the capital means to pay your employees accordingly while you wait for reimbursement from the government.

Some construction contracts are solicited as RFPs and can be awarded based on past performance evaluation factors. If you’re a newcomer to construction, a lack of past performance in this category can challenge your ability to compete – even if you are a top performer in a service or commodity realm. Therefore, it may be smart to seek out IFBs (i.e. bids) first since they only evaluate responses and award contracts based on lowest price. This will you give an opportunity to establish a performance record and, in the near future, become competitive for all construction opportunities. 

What Does This All Mean For You?

Whether you’re just testing the waters by pursuing a few small dollar solicitations or hinging your company’s entire growth strategy on winning new government business:

  • Never rush to abandon your current business model or blindly broaden your scope of operations in “hopes” of securing more government business. Balance your resources to equally support your current income-drivers and your new business pursuits. After all, your business needs to be stable, and in good standing with existing customers, in order to meet government vendor qualifications.
  • Always evaluate the risks vs. rewards of pursuing contracts in a new category. Will your increased investment lead to an even greater payoff? Will you be profitable on every project, even if unexpected costs are incurred? Remember, even if the risks of your new business strategy or expanded investments appear low, your desired ROI may not be immediate.
  • If you do your homework and prepare a solid strategy, you will eventually win government contracts – which will open up the door to more government opportunities and, therefore, drive more growth for your business.