Small federal contractors feeling the pinch of reduced government spending

By Olga Khazan,

In 1994, Doña Storey secured one of the largest federal contracts in the history of her small company. The project management firm, Quality Technical Services, was charged with installing thousands of workstations for the massive new IRS towers, and in order to do it, Storey planned an 18-month, minute-by-minute schedule for the building’s loading docks.

What she didn’t plan on was a series of ice storms that struck the Washington region that year.

“We had to call the truckers, find a spot on the map to waylay them, then get them into the city and onto the IRS dock at the exact hour. If they were late, that would throw us off by an entire week,” she said. Borrowing a phrase from a former boss, she likened the work to “diving from the top of the Empire State building into a bucket of water — you have to know exactly where you want to land.”

Providing services for the federal government has always been hard work, and now it’s getting even harder. Small business owners are having less success in securing U.S. government contracts even as they pursue contract work more aggressively, according to data from a new report released this week by American Express OPEN, which polled 740 small business federal contractors in an online survey.

Active small business contractors reported that they spent an average of $86,124 seeking federal contracts in 2009, but they spent $103,827 doing so in 2010 — an increase of 21 percent. The costs include both staff time and expenses such as travel, mail and meetings.

At the same time, small businesses are having fewer victories in getting contracts. From 2007 to 2009, AmEx calculated that these companies had a .410 contracting “batting average” — the number of secured contracts divided by the number of attempts, or “bids.” From 2008 to 2010, that number was down 8 percent, to .379. The average number of bids the contractors submitted also dropped, from 6.5 prime bids and 2.6 subcontracting bids from 2007 to 2009 to an annual average of 3.4 prime bids and 1.4 subcontracting bids from 2008 to 2010.

The changes likely stem from government spending cuts, which have shrunk the amount available for contracts to $476.4 billion in 2011 from a high of $541.8 billion in 2008.

“Contracting has gotten more competitive,” said Julie Weeks, an AmEx OPEN research adviser. She said the slump in bids might have resulted from an increased pressure to make each attempt count. “As there’s more competition, small business contractors are spending more time making sure their i’s are dotted and t’s are crossed.”

Subcontractors hit hardest

The success rate declined even more — by 27 percent — for subcontractors, who tend to be smaller. Weeks’s team thinks this might be because prime contractors are holding on to more of their work as government spending dries up, rather than doling it out to subcontractors.

“Large primes are not opening up for as much subcontracting activity,” Weeks said. “Federal spending is down, and it’s impacted big contractors, which then has a ripple effect on small businesses that are suppliers to the larger primes.”

Bill Stuby, president of the Association for Procurement Technical Assistance Centers, said another problem is that many subcontractors work on highway projects, but the six-year highway reauthorization bill is still stuck in Congress.

“Because of that, they can’t do any planning on highway construction with primes,” he said. “Even if they know there will be opportunities in the future.”

Experienced firms are far more likely to be successful in securing contracts. Companies with 10 or more years under their belts get about half of the contracts they bid on, but those with three or fewer years get about one-fifth, the study notes.

That’s partly because the government uses what’s called “best value contracting,” meaning it considers the past experience of each company when deciding on a winner for a bid. Small business contractors said it took them an average of 4.4 attempts before they won their first contracts.

“The new contractors don’t have any experience, so they don’t add any value to that evaluation process,” Stuby said. “It’s more and more difficult in this tough time for new people to land their first contract.”

Storey now runs a site that assists small firms in navigating the contracting world, and she said it helps for small companies to have previous exposure to the quirks of government work. The alphabet soup of government acronyms can be particularly hard to master. (The agency that aims to help small contractors — the Office of Small and Disadvantaged Business Utilization — goes by the tongue-twisting “OSDBU,” for example.)

“There’s a new culture, a new environment and of course, new acronyms,” she said. “But if you learn the process, there are a lot of opportunities out there.”

The federal government has a goal to devote 23 percent of contracting dollars to small businesses, but it has fallen short of this number each year since 2006. Last year’s Small Business Act specifically aims to reduce “bait and switch” tactics among prime contractors who don’t follow through on plans to subcontract work to smaller firms.

How to increase your chances at contract success

The federal contracting scene may get even tougher next year as contract spending is likely to decline by between one and five percent, according to the market research group FedSources.

To increase odds of success, Storey recommends that companies register with the Central Contractor Registration, the government’s contractor database, and to get on a U.S. General Services Administration schedule — the “Sears catalog” for government purchasing.

She said a small contractor should network with agencies and prime contractors, attend all industry trade shows and build a stellar Web site that showcases examples of past work.

Storey’s rule of thumb is that a contractor should “say ‘no’ more than they say ‘yes’ to decisions to bid” so as to ensure that they’re not wasting resources on contracts they likely won’t get. The AmEx survey found there are diminishing returns for those taking a scatter-shot approach: Bidding on more than six contracts in a three-year period actually caused a business’s “batting average” to decrease, suggesting companies are better off trying for just two or three contracts each year.

“More successful contractors focused on just a few opportunities, and the relationships you build with agency people let you know what’s coming down the pike,” Weeks said. “If you’re not winning, don’t just keep bidding.”

And if you’re not winning? “Ask for a briefing,” Weeks suggested. “If you don’t get a contract, maybe your pricing was wacky, or maybe there was a technical thing that you didn’t know about. You learn as you go.”

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