Subcontracting Provides Huge Government Contracting Opportunities
Assess the opportunities for small businesses doing business as a subcontractor for a prime contractor with the government. Being a subcontractor permits you to participate in the government contracting arena without dealing directly with the government, since you'll be working for the primary contractor, and not the government directly.
OK, so maybe you tried several times to get a government contract and are not satisfied with the results. Or perhaps you don't feel quite ready to be a prime contractor and wish there were a way to ease into the government contracting business and learn gradually. Or maybe you are the type of person who finds dealing directly with government structure a bit daunting, but would still like to participate in the multi-billion dollar government market.
If you fit into any of these categories, then you are in luck because there is an excellent option: You can become a subcontractor to a prime that has a government contract. As a subcontractor, you would enter into an agreement with the prime to provide supplies and/or services that the prime needs to fulfill the requirements of its government contract. As such, your contractual agreement would be with the prime, not the government, and would provide an opportunity for you learn the ropes from someone who is familiar with all the rules, regulations, and what is required in dealing with the government.
Read on to get a feel for the opportunity that exists for subcontractors to government primes, as well as what you need to know to succeed in your bid to be a sub, including how to lay the proper groundwork and the secrets that you need to know to tip the scales in your favor.
What Are the Sub-Opportunities?
There is a huge market available to you as a subcontractor for a government prime. In FY 2008, for example, about 100 of the top DoD prime contractors were awarded $369 billion in contracts, of which $160.7 billion (or 37.2 percent) was awarded to small businesses. Specific civilian statistics are more difficult to identify, but they are also impressive.
Government rules regarding primes and subs have changed over the years, and current regulations are designed to assure sub-opportunities. Even so, a new practice known as contract bundling is changing the way small businesses get contracts from the government.
Prime-Time Players and Our Top Picks
There are many sub-opportunities to be a subcontractor for a large prime contracting firm for the federal government.
Following is a listing of some of the big players in government contracting and their area of interest. This data should give you some understanding of the amount of contract support that the large primes provide to the federal government. Note that this is the most current data that we had available to us at the time of publication.
Following are our picks of the 20 federal contractors out of the top 100 that we think small businesses stand the best chance of getting some work from. We eliminated foreign companies because they are not required to comply with laws protecting subcontractors. (We are not saying that they wouldn't, but it is an issue that you don't have to even think about when you subcontract with U.S. manufacturers.)
We also eliminated educational institutions when picking our top 20. While they may offer some service opportunities, they are generally looking for very specialized expertise, and opportunities are thus very limited for the general population of small businesses.
|Our Top 20 Federal Contractors |
|Federal Contractor ||Total $ Awards for 2008 |
|Lockheed Martin Corporation ||$27,320,616,068 |
|Boeing Company ||$20,861,418,122 |
|Northrop Grumman Corporation ||$16,769,641,721 |
|General Dynamics Corporation ||$11,472,032,565 |
|Raytheon Company ||$10,411,293,336 |
|L-3 Communications Holding Inc ||$5,039,851,151 |
|United Technologies Corp. ||$4,574,841,469 |
|General Electric Co. ||$2,933,412,010 |
|Computer Sciences Corporation ||$2,763,028,827 |
|ITT Corporation ||$1,746,012,846 |
|Textron Inc. ||$1,664,145,663 |
|Honeywell Inc. ||$1,543,035,227 |
|Alliant Techsystems Inc. ||$1,267,797,253 |
|Booz Allen Hamilton Inc. ||$1,224,531,249 |
|The Alliance Contractor Team ||$999,318,445 |
|Oshkosh Truck Corp. ||$947,223,894 |
|General Motors Corp. ||$806,377,723 |
|General Atomics Technology Corp. ||$676,008,667 |
|McKesson Corp. ||$670,352,054 |
|Aerospace Corp. ||$653,969,926 |
Government Rules Assure Sub-Opportunities
One of the government requirements that primes must meet in order to
be awarded a federal contract really works to generate a significant
market for small business subcontractors.
Major prime contractors and subcontractors receiving contracts valued
over $500,000 ($1 million for construction) are required by federal
regulations to develop plans and goals for subcontracting with small
businesses, small disadvantaged businesses, women-owned small
businesses, Historically Underutilized Business Zone (HUBZone) small
businesses, and service-disabled veteran-owned small businesses. Under
the law, if a prime contractor selected by the government fails to
negotiate an acceptable subcontracting plan addressing all of these
groups, it will not be awarded the contract.
It is easy to see why this requirement alone generates a significant
and on-going subcontracting opportunity market. It is also easy to see
why primes are always looking for "good" small business subcontractors.
They need you in order to be able to do business with the government.
Note that if a prime has a federal contract that requires it to
develop a subcontract plan and goals, only small disadvantaged [i.e.,
small disadvantaged owned and 8(a)] and HUBZone businesses that are
officially certified at the federal level can be counted toward meeting
plan and goal requirements. Currently, federal certification is not
required for small businesses, women-owned small businesses, or veteran-
or disabled veteran-owned small businesses; self-declaration is
Since certification is required before a prime can count a small
disadvantaged or HUBZone subcontractor toward meeting its subcontracting
plan requirements, it is to your benefit to have your certification
available when you meet with the prime contractor or other company
representative for the first time. Being able to prove that you are
officially certified could actually tip the scales in your favor over
another sub that might still be in the process.
Another reason primes need good subcontractors is that most prime
contracts are so big that the primes cannot do everything in-house, and
they have needs that only small businesses can fulfill. Because of the
size of the contracts, the economic situation, and the fact that one
company is buying out another company that's buying out another company,
and so on and so on, many of the big primes can't manufacture the end
product like they used to. Instead they just get the parts from other
sources and then become the assembler for the product. All the
manufacturing expertise that was originally in the company that did all
the work is often dissipated, so it now has to farm that out to
So, if you can make a prime's life easier by helping it do its job
well and fulfill on its government contract efficiently, on time, and
with quality products/services, you have a great chance of creating a
long, rewarding relationship.
Primes Depend on Subs
The following are examples of how much primes depend on subs:
- AlliedSignal, consistently among the top prime contractors,
depends on materials and components from 7,500 to 10,000 suppliers who
accounted for 60 percent of its defense contract costs at one time.
- Sixty percent of the dollar value of Pratt & Whitney's military aircraft engines goes to suppliers.
- To build the inertial guidance system for the MX missile, Northrop relied on more than 500 subcontractors to make 19,000 parts.
- At Lockheed/Fort Worth, subcontracts consumed 75 percent of the cost of making the F-16 aircraft.
Bundling Increases Sub-Opportunities
Another factor that has increased subcontracting opportunities, while
at the same time decreasing prime contracting opportunities, for small
businesses is the recent (and controversial) trend by federal agencies
of combining or bundling small contracts for different activities or
requirements into large contract packages.
The government maintains that combining several smaller projects
under one large umbrella contract is more efficient than managing
several smaller contracts, allowing it to leverage its purchasing power
to its advantage and to reduce its operating costs.
However, the umbrella contracts are too large for small and mid-size
companies to realistically handle and often require project management
capability that they usually don't have. The upshot is that thousands of
small businesses have lost federal contracts in recent years because
government agencies bundled contracts into large packages that were
awarded to big businesses.
But there is a silver lining in all of this: Many big companies that
get these awards are managers, not doers, and therefore must find
capable subcontractors to help get the work done.
There is another boon to prospective small business subs. Under new
SBA guidelines, if a bundled contract is seen as a necessity by the
buying agency, the agency must establish a significant evaluation factor
that will allow, to the maximum extent possible, subcontracting by
small businesses. Part of this may include evaluating the prime
contractor's past efforts in providing small firms with the chance to
Effects of bundling. The Small Business Reauthorization
Act of 1997 stated that federal agencies are allowed to bundle
contracts only to achieve "measurably substantial benefits" in terms of
cost, shorter acquisition cycles, or better terms and conditions, among
other benefits. Congress and the SBA, which have been tracking the
increased use of this trend, have been concerned that if left unchecked
the trend could lead to a decrease in prime federal contracting with
small and mid-size businesses, which, according to 1998 statistics,
averages about $40 billion per year of the $180 billion total.
Recently, the SBA has issued new rules that prohibit government
buying agencies from combining contracts unless it is necessary and they
can document "measurably substantial benefits" from doing so. In a move
that may enable small businesses to compete for big umbrella contracts
that, to date, only big companies could handle, the SBA also has
established guidelines for small businesses that want to create joint
ventures to go after bundled contracts. Under the former rules, small
businesses banding together were sometimes disqualified because the
resulting new employee count or combined revenues would exceed SBA's
definition of a small business. However, the new SBA guidelines provide
that, if the firms are small before they enter the arrangement, a joint
venture won't change that status.
According to a study released by Congress, the number of federal
contracts fell 50 percent from 4.4 million at its peak to 2.3 million in
2005. This bundling issue is making it harder for small businesses to
compete. More and more, communities and states are banding companies
together regionally to bid on larger contracts (flexible networks). This
is one solution to bundling, but it's not going to fix the problem of
larger contracts becoming unreachable to small business.
Advantages of Subcontracting
As a subcontractor, your agreement to provide supplies and/or
services would be with the prime; you would have no contractual
relationship with the government. Therefore, you have another
entity—-the prime, in this case—between you and the government.
This can work to your advantage since dealing with a prime is
generally more straightforward, less complicated and less burdensome
than dealing directly with the government. Administrative requirements
are reduced. In addition, government rules offer more protection to subs
when it's time to be paid, because the subs are required to get their
money before the prime does.
Although the primes are looking for good suppliers, the key operative
word is "good." You are not going to get a contract just because you're
small, minority, woman-owned or some other defined category. You still
have to supply them with good quality products on time and at a
Less administrative burden. In general, there is less
administrative burden for a subcontractor because many of the
administrative requirements imposed by the government are borne by the
prime. Some burdens might pass through or "flow down" to subcontractors,
but there are relatively few. Also, the dollar value of a subcontract
is often below the dollar threshold that must be reached before many of
the government requirements kick in.
Have a problem while working on the job? If your contract is directly
with the government, you would have to follow a certain prescribed
procedure and chain of command, as would the government, for submitting
your problem and getting it resolved.
If your contract is with a prime, you could probably get your problem
resolved with a phone call. There will be structure in dealing with a
prime, but it is not as rigid as the government structure. In addition,
there is another advantage—payment protection.
More protection. Traditionally, small businesses have
dreamed of doing business with one of the "Big 3" auto makers.
Associated with doing subcontracting work for any big player is the
perception that you are part of a small, but "elite" group of small
businesses that will always have work and will end up making lots and
lots of money.
However, perception is not reality, and there are some definite
disadvantages that you could experience in working for the Big 3 (or for
any other big commercial company, for that matter) that you won't
experience in working for a government prime. Some subcontractors to big
players have found themselves dependent on these companies for 50 to 90
percent of their work and, because of that, having to work on slimmer
and slimmer margins when "requested" to do so. It's easy to see why
these small companies probably end up feeling more "stuck" than "elite."
Why won't you experience this same thing working for a government
prime? Because just as the government is required, by law, to pay its
contractors within 30 days after receiving a proper invoice, so are
government primes required, by contract, to pay their subcontractors.
In fact, contractors do not get paid until they have shown proof that
they have paid their subcontractors. This is called "flow down"—where
the government requires specific prime contract requirements to flow
down to subcontractors and be incorporated into their subcontracts.
However, there is a down side of "flow down." For example, if right
now you are thinking, "Great! If I have no contractual relationship with
the government, I won't have to deal with all that government paperwork
and all those rules and requirements," you'd better think again. If the
contract is complex, you could actually be required to put up with some
of the same paperwork, rules, and obligations as the prime under a
"flow down" clause in your subcontract.
Flow-down clauses are especially common in government and
construction subcontracts. The government, recognizing the need to
assure that important federal policies are followed throughout
performance, sometimes will require specific prime contract requirements
to flow down to subcontractors and be incorporated into their
The usual flow-down clause will incorporate, by reference, parts of
the prime contract into the subcontract. Such clauses bind the
subcontractor to the prime to the same extent that the prime is bound to
the government. In effect, the prime contractor's duties and
obligations "flow down" to the subcontractor. What was that about no
However, if you have a problem with a prime contractor that involves a
flow-down clause in the prime contract concerning subcontractors, such
as paying for work performed or some technical issue, the government
could possibly decide to step in on your side and help you fix it. (This
depends on the nature and severity of the problem. There is no
guarantee that the government will do anything.) However, if your
problem does not involve a government flow-down requirement concerning
subcontractors, you are on your own; the government will not help you.
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