Myth No. 8: We can treat government customers the same as commercial ones

by Thompson Coburn LLP
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Over the last 20 years or so, the Government contracts sector has seen countless new entrants. Many of these newcomers are experienced commercial-sector concerns that have decided to give the Government a try. Others are just newcomers. Some have succeeded better than others, but all of them have bruises to show for it. That is because they made the mistake of focusing on the potential sales they could make rather than on the procedures and practices that would be involved, and they learned about those the hard way.

About 10 years ago I visited a software company in the Washington, D.C., suburbs. The CEO had invited me out to discuss a problem the company had run into with a Federal civilian agency. I sat down with the CEO and several members of his team. They told me a story about how they were about $800,000 in the hole on their contract, and they asked me if I thought there was a solution to the problem. I said, “There might be, but let me ask a few questions. First, who is the contract administrator?”

“Well,” the CEO said, “we don’t have anyone here with that title. What does a contract administrator do”? After I explained, the CEO said, “Well, John keeps the correspondence; Sally has all the contract documents; and Ken is our point of contact with the agency’s program manager.” Although the CEO’s answer already answered my next question, I asked, “Where is the contract file”? And, of course, I learned that there was no central contract file but that John, Sally and Ken each kept what was important to their duties.

Any experienced Government contractor reading this article would be shaking her head because a splintered approach to a Federal Government contract is a recipe for trouble. While that approach may be typical in a commercial setting, it is far too risky for a Government contractor that will be dealing with a contracting officer who maintains the master contract file and through whom all important documents, discussions and decisions must flow.

The importance of centralized and knowledgeable contract administrators is not the only distinction between the Government contracting world and the commercial world, but it is certainly an important one. Sales and marketing practices also need to be studied. The types of things that are common in the commercial sector — entertainment, golf outings, and meals — are dealt with in an entirely different way in Government contracting.

While Federal employees may be able to accept certain things up to a $20 limit (actually, the gift must be $20 or less, as long as it is not cash, and the employee may accept no more than $50 in gifts, in the aggregate, from the same source in a calendar year), they are flirting with trouble if they go beyond that limit, and both the contractor and the employee could be in hot water. Many of the major prime contractors impose similar, if not more rigid, limitations on their employees. The rule of thumb here should be that you never want to embarrass your customer. In order to achieve this goal, you have to familiarize yourself with the rules that govern your customer.

The pricing practices you use in the commercial sector might also be a problem for you in the Government arena. For example, if you are selling goods or services through the GSA’s Federal Supply Schedule (FSS), you are governed by something called the “Price Reduction” clause (See 8.405-4). While this clause and its potential problems are a worthy topic of much more discussion, in essence, before the contract is awarded the Government and the contractor review the contractor’s customer list and select a customer or class of customer that will serve as the basis for the FSS award. Once the contract is awarded, if there are any improvements in the pricing offered to that customer or customers, the contractor is required to pass the same improvements on to the Government. Failure to do so could lead to both civil and criminal liability. Given these risks, contractors have to train their sales force to avoid any such infractions, and they must implement policies and controls designed to prevent them from occurring.

Similarly, inexperienced contractors rarely have accounting systems that are tailored to the Government sector. As a contractor becomes more reliant on Government business, however, it will discover that simply having a system that conforms to generally accepted accounting principles will not impress a Government auditor. This can be a problem if a contractor is seeking reimbursement for an equitable adjustment ordered under the “Changes” clause or recovery under a claim. The lack of an adequate accounting system can prove to be fatal to either action.

My list of examples could go on, but it is probably a better idea to say that a company doing business with the U.S. Government for the first time needs to either hire or align itself with people who have experience with and knowledge of this very unusual customer. It also should dedicate a group within the company to the Government sector, centralizing all Government-related activities. The failure to take these two simple steps simply means that the question is not whether your company is going to run into trouble with its Government customer but when.

(This article is part of a series for the Public Contracting Institute called “10 myths of government contracting.”)

 

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Thompson Coburn LLP
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