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Government Contracting Through the Use of Electronic Procurement

Filed under Government Contracting. Fact checked on May 24, 2012.

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Government contracting is done electronically, through two types of electronic means; e-commerce websites and EDI, which stands for Electronic Data Interchange.

The concept of electronic procurement for a small business not yet comfortable with new technology can be overwhelming. E-procurement takes many forms and has become a requirement for doing business with the government. But the electronic procurement requirements that we describe here are not unique to the government. They are the same as a large private-sector business requires of its suppliers. Therefore, it is essential that any business at least consider these issues, whether it does business with the government or not.

Electronic procurement with the government typically takes two forms: e-commerce websites and/or Electronic Data Interchange (EDI).

Doing Business Via Government Websites

As a consumer, you've most likely purchased a product or service such as an airline ticket or an item of clothing on one of the many e-commerce web sites. When you complete your order by entering the required information and electronically submit your order via a website instead of calling or mailing in your order or visiting a store location, you are participating in electronic procurement. The information that you provided is electronically connected into the merchant's internal systems. The benefit to you as the consumer is saving time; the benefit to the merchant is saving the costs associated with processing a paper order, paying phone order takers, printing a catalog, and maintaining a store location.

When it comes to government-sponsored, e-commerce web sites, the set-up is similar to the one described above, except that in this situation, the government agency is the consumer, you are the merchant, and it is the government that provides the website for performing various procurement transactions, such as displaying requests for proposals, submitting bids, delivering invoices, etc. This is a great benefit if you have a limited number of order transactions because the only technology it requires of you is a computer, Internet connectivity, and a web browser. A contractor will need to speak with the buyers of each agency to determine if an e-commerce website is available, where it is located (the web address), and what procurement functions can be performed. Also, you may need to obtain a username and password from the agency to access the site.

Doing Business Via EDI

Government agencies that do not offer an e-commerce web site will most often require a contractor to communicate order transactions via EDI, the second form of electronic procurement with the government. EDI is a set of standards that defines how data/information is presented in an electronic form, thereby allowing the electronic equivalents of common business documents, such as invoices, forms, bids, requests for quotes, purchase orders, etc., to be transmitted electronically between the computers of what are called "trading partners." A trading partner can be the federal government, a prime contractor, or another commercial business.

Why are EDI standards necessary? For purposes of illustration, let's say that the government has contracted with you for certain supplies and wants to receive your invoice electronically. You go ahead and oblige by sending your invoice file in a format that is unique to your system. Since the way that data is presented in the government's system is also unique, in order to import your file into its system, it must first convert the data into the format that matches the format required by its system's database. Now imagine how difficult it would be for the government to manage this process if each of the thousands of government contractors were each to send electronic invoices in a format unique to their system.

So, instead, the government asks its contractors to convert their files into a standardized format (EDI) prior to sending into a standardized format. Using EDI as the standard, the government receives only one standardized format for all invoices and only has to manage converting files into one file format for each document type (invoice, purchase order, shipping notification, etc.).

Who sets EDI standards? There are nonprofit committees that define EDI standards for the country. The set of standards most often used is called ANSIIx12 4010. Within that set of standards, there are many documents, referred to by versions and numbers (e.g., 810 is the standard invoice document, 850 is the standard purchase order document, and 997 is the standard functional acknowledgement that confirms the receipt of the files by each party).

An explanation of these standards and the specifications for each version can be found at the Department of Defense and Defense Information Systems Agency.

Advantages of Being EDI-Capable

Converting data into EDI. There are three basic options for getting your data into EDI format. It's best to check out all options as prices and functionality vary greatly.

  • Translation software: There are many EDI companies that offer software that allow you to "map" the various data conversions that need to occur in order to convert your files. There will be upfront costs to purchase and install the software, and you will also have to pay an employee, often called an EDI coordinator, to manage the software or pay a consultant to do so.
  • Third-party solutions: Many EDI companies offer services that take your paper or electronic files, convert those files to the required EDI format, and then deliver those files to the right location. Typically the fee for this type of service would be based on the number of transactions and the number of unique formats being translated (called "templates"). For instance, an 810 invoice is one template and an 850 purchase order is a second template.
  • Hosted software: Finally, some EDI companies offer solutions that allow you to take advantage of the translator software technology without the cost of purchasing and maintaining the software. You simply send your electronic files over the Internet in the format you normally use to the EDI host company. The EDI host converts your files into the EDI format required and then delivers the files to the specified location. Charges for this service typically include a one-time set-up fee for each trading partner and a smaller monthly fee that may or may not be based on the number of transactions.

Which is the best option for you? In order to define a return on investment for any of the options, you should take the following factors into account:

  • Transaction volume: Certain solutions will have a per transaction fee. Understanding the number of transactions your business will perform will allow you to estimate your monthly costs.
  • Employee costs: It is helpful to find out the cost to process a paper document in order to determine savings that may occur by implementing an EDI solution.
  • Opportunity cost/cost of not doing business: You should understand the dollar impact if you choose not to do business with the government (or with another trading partner). This helps greatly in determining what your business can "afford" to spend on a solution.

A recent development in data exchange is the use of XML (extensible markup language), a new high-powered web language developed for e-business. Unlike HTML, which displays text and images on web pages, XML enables the exchange of structured data over the web. This new technology will allow greater integration of e-partners, so they can track material/parts/supplies through the supply chain.

What EDI can do for you. Here are just some of the advantages of being EDI-capable:

  • increased business opportunities; remember that once you've mastered EDI with the government, you can use the same technology to provide EDI to your larger, private-sector trading partners.
  • faster and more accurate processing of orders, resulting in improved inventory management and, best of all, greater customer satisfaction
  • faster billing; since orders are filled and delivered sooner, billing and closeout can occur sooner
  • lower mailing costs, a reduction in mail room sorting/distribution time and elimination of lost documents
  • improvements in overall quality through better recordkeeping and fewer errors in data
  • better information for decision-making; EDI provides accurate information and audit trails of transactions, enabling you to identify the areas offering the greatest potential for efficiency improvement or cost reduction

Exchanging EDI files. To manage various security and tracking issues associated with exchanging the high volume of files the government exchanges, it uses what is called a Value Added Network (VAN). In simplest terms, a VAN is a for-profit private-sector business that provides and manages a collection of secure mailboxes that are used to deliver and receive order files.

If you are doing business with the government, via EDI, you will need to acquire a mailbox from a VAN from which you will pick up and deliver files from and to the government via a dial-up connection. The VAN of your choice will offer you technical assistance in this area.

It is not a requirement that your mailbox be located on the same VAN as the government's. Most VANs have agreements with one another that enable them to exchange files. However, there is a cost for this, referred to as an Interconnect Fee. If you're doing business with only one government agency, you may decide to obtain a mailbox on that agency's VAN to avoid Interconnect Fees.

There are many other fees for optional ancillary services VANs offer. The main fee incurred is the "per kilo character" charge (per 1000 characters). VANs are becoming more competitive these days, so be sure to compare prices. As an ancillary service, most VANs also offer third-party translation services.

In closing, our advice is to use the information we have provided to perform a methodical appraisal of all the solutions available to you, and then choose the best one for your company.

Work Smart

It always amazes us how most people willingly and unhesitatingly give out their credit card number, Social Security number, address, and almost anything else that is asked for when placing an order by phone. Yet, when it comes to ordering over the web, people will hesitate to give out any information, thinking that anyone "out there" could access and misuse it. However, the truth is that most e-commerce sites are completely secure and safe. Just know the site you are dealing with.

Safety Measures Enable Secure Electronic Government Contracting

All branches of federal government are required by law to migrate their business practices to a paperless operation. In implementing the new e-procurement way of contracting, it is clear that there is a need to ensure the confidentiality, security, and authentication of information exchanged between government and its contractors in the electronic environment. This need has been addressed by the adoption of a mandatory electronic system.

Public Key Infrastructure (PKI)

The Department of Defense (DoD), the buying giant of the federal government, has addressed the need for security in the e-government environment by adopting a mandatory system, referred to as "public key infrastructure" (PKI). PKI allows DoD to electronically communicate with industry by enabling paperless, secure, private electronic business contracting. In addition to adoption by DoD, PKI use is expanding at all levels, including federal, state, and local levels of government as well as in the private sector.

What is PKI? It works much like a realtor's lockbox. Under this arrangement, the seller has agreed to "trust" the realtor to gain access, via a key or combination to a lockbox, and show the home to prospective buyers when the seller is away.

PKI uses a process similar to the realtor's lockbox, although in this case the lockbox is digital and is stored on computers. For government contracting purposes, a unique PKI digital identity certificate file is issued to a contractor's authorized officer or agent. In essence, this PKI digital certificate file verifies that the contractor is in fact authorized to conduct business electronically with the government contracting office. In this way, PKI helps the contracting parties to establish a "trust relationship" while doing business via computers in a virtual world, and digitally protects the information assets of both parties in much the same way a lockbox protects the seller from allowing just anyone to enter the home while still providing access to the "trusted" parties and potential buyers.

In addition to ensuring the security of the electronic information at all times during transit through shared networks and storage on network servers and desktop hard drives, it ensures that the document being signed and sent online is from the company or person authorized to provide the information within the electronic document, that the document is legally signed in accordance with current federal and state laws, that the document has not been altered since being completed and electronically signed, and that the electronic document is time-stamped and requires an electronic return receipt.

What PKI means to you. At this point, you may be wondering how all of this could affect you. Here are answers to the questions businesses most often ask about PKI:

  • Why not just use a PIN number? While a number of government agencies have successfully used PINs to provide security in innovative applications, particularly the Securities and Exchange Commission for regulatory filings and the Internal Revenue Service for tax filings, they are planning for an eventual transfer to digital signatures. PKI technology fosters interoperability across numerous applications--PIN numbers can't do that.
  • Are you required to get PKI-certified in order to do business with the government?It's only a matter of time. The plan under federal e-government initiatives is to ultimately provide all U.S. citizens and companies interested in procurement activities with a single entry point to all government online services and information through www.FirstGov.gov, a web portal from which anyone can access virtually all federal government information. The ability for a citizen to access information will be based on the nature and sensitivity of the information being accessed. Government contracting with federal agencies falls into the area that will require a PKI digital certificate authenticating the identity of the online user and insuring they have the authority to access and provide secure online data and documentation when required.
  • Does it cost anything to get PKI certification? There is no charge. It's just a matter of downloading and filling out a form from one of various sites.
  • How do you get a digital ID or learn more?Microsoft Corp. in conjunction with VeriSign.com has enabled their email applications, Outlook Express and Outlook 2000, to install PKI certificates. Microsoft and VeriSign have also enabled Office XP and a number of versions of Internet Explorer browsers to include PKI digital certificates. You can get a detailed explanation of how VeriSign's PKI digital certificates work and instructions for obtaining a PKI certificate for your Outlook email at VeriSign. You can also find more information about how to get your own certificate.

The following websites can give you more detailed information on the various PKI programs for GSA and DoD:

Security is, and will continue to be, an issue in many aspects of our lives, including e-business. Although digital authorization is not currently a requirement, it certainly may be one day. It's a good idea to keep yourself informed about changes and developments. In the next several years, you will start to see more adoption of digital identities through the government implementation of Homeland Security policies.

With the surge in identity theft, you'll see an increase in PKI. If you are going to do any type of business on the Internet, you'll need to protect yourself and your company. It will cost you little-to-nothing to get there. It only takes a little time and effort.

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