8(a) Contractors and Sequestration: How to Survive the Current Budget Environment
November 20, 2013 - By: SC&H Group
Last month, SC&H Group participated in the National 8(a) Association Fall 2013 Summit, which brought together leaders from industry and government to discuss the challenges and opportunities that 8(a) contractors face.
Below is an article that Willem Roos, a Principal at SC&H Group, provided to the National 8(a) Association, which appeared in the agenda for the conference. The article provides tips on how 8(a) contractors can not only survive, but thrive during this challenging economic climate.
As we head into fiscal year 2014, many government contractors are still facing highly uncertain times, which is causing ‘survival mode’ to be the new business norm.
Many contractors are hoping that agencies will be releasing unspent 2013 funds on new programs, and a flood of new opportunities will arise. For 8(a) contractors, this is especially true and many remain hopeful that these new opportunities will come to fruition.
However, the reality is that new funds for 8(a) contractors may not actually come through, and it is time for these small businesses to focus on business basics to effectively survive the next couple of years.
Fortunately, there are some tried and true business strategies that can help any 8(a) contractor survive during these challenging times. The truth is agency missions have not changed, and contractors fill a major void that cannot be filled internally. As such, there will always be a need for products and services from industry, especially when internal agency resources are being depleted.
Time to Go Back to the Basics
Now is the time to refocus your business on the basics. This involves leveraging existing relationships within current agency customers and taking the time to learn about new 8(a) opportunities within existing agencies. Rather than relying on new contracts that would happen nearly organically, it is time to start going into sales and business development mode.
The old adage “you are only as good as the last time I saw you” rings very true today. It is imperative industry members take the time to meet face-to-face with government customers.
This involves understanding customers’ pain points and offering proactive solutions for helping them meet mission goals and requirements. In addition, most agencies offer small business set-asides within multiple departments. With that in mind, establish relationships with other decision-makers who want to offer opportunities to contractors already embedded in the agency.
Don’t Fall into the LPTA Trap
It is all too easy to be lured into pursuing lowest price, technically acceptable (LPTA) contracts. With the federal government very much focusing on price alone, smaller companies can easily find themselves at a disadvantage if they actually win the business.
In order to keep the lights on, 8(a) contractors need to generate profit margins that allow them to remain profitable. LPTA contracts can cause small business to run into situations where they are not making enough revenue on these contracts to maintain their business operations, and increase opportunities for growth.
This can also put small businesses in poor performance situations. For example, if you don’t have the resources to effectively service the contract – because the margins are not there – then it is nearly impossible to deliver what the customer expects.
Finally, many smaller contractors are investing heavily to win LPTA contracts, which they may or may not be awarded, and it can ultimately end up hurting the business overall.
Maintain “Small” Status (Not Without Caution)
For many smaller companies, it’s all a numbers game, and bringing in revenue is paramount. One common strategy for achieving this is maintaining your ‘small’ status, so you can keep winning sole-source awards and small business set-asides. This strategy also allows 8(a) contractors to better streamline operations and be more nimble overall.
The risk is that this strategy could hurt future opportunities for a liquidity event or a transfer of ownership. There is balance where organizations need to enhance overall value to meet the right exit strategy. However, by remaining small, it reduces the likelihood of the desired acquisition outcome.
Examining Your Benefits Package
Today, many 8(a) contractors are taking the time to evaluate the cost structures within their organizations. While the ‘do more with less’ mindset has been in play for some time now, many companies are beginning to be more creative with reducing costs.
One key area where this is happening is with employee benefit packages. There has been a huge drop in health coverage and other benefits like tuition reimbursement and long-term disability. In addition, many companies are asking for employees to contribute more to their health plans, or are moving away from family plans.
Conversely, we are seeing some companies retaining full benefits for its employees with the vision of attracting and retaining the right talent. This is a very good thing for employees, but other areas need to be cut to effectively offset this major expense.
Maintaining a Virtual Environment
Many 8(a) contractors are looking to cut costs by moving into a fully virtual environment, where all employees either work remotely from home or on government customer sites. Some contractors are even leasing Sensitive Compartmented Information Facilities (SCIF) to be able to comply with government requirements without building out their own locations.
The challenge with moving in towards a virtualized operation is the expense that comes with managing the infrastructure and IT security. While the cost of owning or renting office space will go down, these technology investments will increase considerably.
Today’s budgetary climate presents an ideal time for doing financial benchmarking to determine the best cost-reduction strategies, as well as develop the right government contracting practices that help businesses to sustain operations. This involves conducting financial analysis, evaluating operational efficiencies, reviewing management operations, and performing a compliance review on government contracting practices.
These types of insights can help an 8(a) contractor to have the true financial vision needed to achieve operational efficiencies and drive a solid strategy for winning the right contracts.
The next couple of years will continue to be very challenging for smaller contractors. Adjusting to this new business reality, whether through smarter contract acquisition strategies or enhancing relationships with current customers, will be vital to achieving ongoing and sustained success.
Many people believe that 2014 will be one of the worst years for government contractors. As such, we are anticipating a bumpy road ahead, but with the right business, financial and contracting process, it is possible to stay out of survival mode and focus on business growth. It will just require everyone to be more nimble and focus on business basics.