How Not To Use Federal Contracting

By: Admin
Date: 2018-08-30

I have a friend/client that a few years ago purchased a fulfillment company.  The company he purchased at the time obtained approximately 80% of its revenue from one large national clothing/jeans company.  He knew the contract was a problem when he purchased the business but once he took ownership he realized the contract was far worse than expected and setup a meeting to review the terms of the contract with the clothing giants purchasing department.  By his figures he would need to raise his rates over the course of the year by $900,000 in order to make the client worth keeping.  In that meeting he showed them his book, end result he was told “too bad” and he was out 80% of his business.  He went back to his businesses and on that sad day he cut 70% of his workforce, but the reality was he was going to be losing money just not as quickly as the day before. 

Federal Contracting

My friend is a very good business person and therefore had been selling from the time even before he purchased the business.  His vigilance paid off and a few small deals he had been working on started coming in and losing the jeans company gave him the ability to focus on new business.  After a few months he got the firm to break-even and a few months after that was back in the black.  Three years later he is doing great by any metrics.  His big two tenants for being successful at business are:

  1. Never have one client be so large that losing that client will take your firm under.
  2. Always be selling new business.

These two tenants have led him to do business with our firm as he is making selling to the federal government a priority and wants it for protection for any future economic downturn. 

How the Typical Firm Differs

The reality is most firms are reactionary when it comes to obtaining new business.  Here is a statistic that demonstrates this observation.  The Federal Government has lost 25% of all small business prime contractors since the last downturn in the economy.  They no longer needed federal work to stay afloat and left the government segment.     

Year

Number of Small Business Federal Contractors

2016

105,000

2010

140,000

 

The Scary Part - Federal Lead Time

If your firm decided to get into federal contracting tomorrow the reality is the firm would not hit peak federal selling for several years.  Firms obtaining their GSA Schedule in 2017 averaged $40K in annual sales.  There are not many businesses where a single year $40K contract justifies the effort, however federal sales is all about growth over time.  Those firms that started in 2015 are at over $1MM per year in federal sales. 

Year

Number of Firms

Average Sales per GSA Contract Holder

2017

702

40,208

2016

853

552,604

2015

1,586

1,098,553

 

These numbers look attractive however if a firm was in my friends position where they needed new business or they were “turning off the lights” realistically there is not enough time to add a federal sales channel and save your business.  Additionally it becomes much more difficult for a firm to obtain a GSA Schedule as proving financial stability is part of the application process.  Firms in desperate need of new clients in my option should focus on the private sector.

So when times are good is really the best time to add your federal sales channel, further diversify your business like my friend is doing to build your business to whether any storm.