Introduction
The federal government of the United States is the largest customer in the world. According to USA Spending, the budget for fiscal year 2021, out of a total of 8.5 trillion dollars, includes 832 billion for services and supplies, as well as 165 billion for asset purchases. On the other hand, states and local governments (counties and cities) manage budgets totaling more than 4 trillion dollars.
International companies often ignore or avoid the US government market because they incorrectly understand that it is closed to them or is very difficult to access. If they do, they may miss out on great opportunities.
Of the top 100 companies that win contracts with the US government, about 35 are headquartered in other countries. As an example, BAE Systems, a British aerospace and defense giant, is one of the 10 largest US government contractors and earns 43% of its revenue from the US, its main market, where it gets more than twice the revenue made in its own country.
This article defines the structure of the US government, the ways that a non-US company can use to access this gigantic market, the initial procedures to be followed, types of government contracts and aspects to take into account when preparing offers. In future articles we will discuss in detail rules applicable to government contracts, barriers to consider and important advantages that small companies, even foreign-owned ones, can take advantage of.
In a second article on this topic, we explore regulations that must be taken into account, how some of them pose entry barriers of special relevance for international companies or their US subsidiaries and what solutions can be used to avoid them. In a third and final installment of this series, we analyze the advantages that small businesses can benefit from and how they can be used by international companies as a way to access government contracts in the US.
Structure of the US Government
The US is a three-tiered system of government:
Federal Government: The executive branch, which is the one who manages the assignment of contracts for the purchase of products and services, includes:
- Presidency: President, Vice President, various advisory teams and associated offices
- Departments (Ministries): Agriculture, Commerce, Defense, Education, Energy, Health, Homeland Security, Housing and Urban Planning, Justice, Labor, State Department (Foreign Affairs), Interior, Treasury, Transportation and Veterans Affairs. Each department includes a wide variety of linked sections and agencies. For example, NSA (National Security Agency) is linked to the Department of Defense (DoD).
- Independent Agencies, not linked to any department, such as the CIA, NASA and many others.
- Councils, commissions, committees and quasi-official agencies of all kinds
Special mention deserves GSA or General Services Administration, an agency of the federal government that centralizes part of the purchases of products and services made by the various organizations of the federal government.
State Governments: One for each of the 50 states. Led by a governor and structured in a series of departments and agencies similar to the federal government, but on a smaller scale. The District of Columbia (Washington DC), as the capital, has a special status, more like a city than a state.
Local governments: Structured in two levels, counties and municipalities.
Each of the functions assumed by the government is assigned to one of the levels. For example, everything related to the defense of the nation, space exploration or air traffic management is managed by the federal government. Large local infrastructures are normally managed by the states. Local governments manage local police, fire, parks, and other municipal services.
Pathways to the government market
According to the report “Foreign Sourcing in Government Procurement” of the US Government Accountability Office or GAO, in 2015 the US federal government awarded contracts worth 12 billion dollars to foreign companies for the purchase of products. This data illustrates that sometimes it is possible to obtain contracts with the federal government from outside the United States, something that is facilitated when the acquirer is an organization located abroad, such as an embassy or a military base. However, that figure, which may seem high, is only 4% of the total contracts awarded that year by the federal government for product purchases. In addition, table 11 of the report shows that a third of those 12 billion were granted to US-owned companies located abroad.
Therefore, the presence of a subsidiary in the United States is an enormously valuable step to be able to access the government market and in many cases it is an unavoidable requirement, since multiple federal agencies and state and local governments do not award contracts to foreign companies except in exceptional situations. As a consequence, any international company that wants to gain entry to the US government market should seriously consider creating a company in the US. This step is complex and is described in detail in our guide that you can download following this link:
The presence of a company in a specific state or county will facilitate access to contracts awarded by the corresponding local governments, but it is often not a requirement, as long as the company is incorporated in the United States and, when required, is has been registered in the state in question.
There are various access routes to get government contracts, available to international companies:
- Direct response to an offer request (RFP or ‘Request For Proposal’) through the US subsidiary. For federal contracts, this page of the Acquisition.gov website can be consulted to identify the opportunities that will arise as far in advance as possible and be ready to prepare the offer. It is important to understand that in many cases, especially large contracts, cycles are long (up to several years) and competitors perform preliminary work during a period that begins long before the RFP is published.
- Subcontracting of work packages granted by the prime contractors. Generally, for large packages, an agreement needs to be reached before the government awards the contract to that contractor, often even before the RFP is published. In general, if the contract is reserved for companies with certain characteristics (for example, small companies or companies owned by certain minorities), you cannot subcontract more than 50% to companies that do not have those characteristics. In federal contracts this point is regulated by the law CFR 125.6.
- Acquisitions: An additional way of entering into government contracts is the acquisition of companies that are already participating in that market. An important aspect to consider is that the value of the acquired company can be significantly reduced if the purchase eliminates some quality that has facilitated its access to contracts. This occurs, for example, if a large company buys a small company that has benefited from ‘small business set-aside contracts’. It can also occur in the market for state or local contracts that require the contractor to be a small US-owned company, when the acquirer is a foreign company even if the sum of the subsidiaries falls below the maximum thresholds defined for small businesses.
Initial paperwork required to compete in federal government contracts
One of the first actions that a company that intends to participate in federal government contracts must address is to register at the System for Award Management or SAM, a portal where opportunities can easily be found in all federal ministries and agencies, which are required to use SAM to advertise contracts over $25,000. Registering with SAM is complex and time consuming, it can be valuable to have the support of an advisor. It is worth taking the time to provide detailed information about the company as it will be the company’s letter of introduction to the federal government.
SAM provides information on active opportunities as well as contracts awarded in the past, in addition to data of all kinds that can be extremely useful when preparing an offer.
In all cases, to register an entity in sam.gov, it is necessary to provide its DUNS number (Data Universal Numbering System), it is a requirement for any firm bidding for any type of government contract in the United States. It can be obtained free of charge at DNB’s website, which is the company that manages them for now. The use of this number is expected to disappear in 2022 and be replaced by another one provided directly by SAM.
Also, to register a US entity in SAM, you need:
- Legal commercial name and physical address of the entity
- Tax identification number of the entity (TIN) and name of the associated taxpayer
- Details of a bank account in the US, to configure the electronic transfer of funds
In the case of registration in sam.gov by international entities, it is necessary to provide:
- NATO Commercial and Governmental Entity Code or NCAGE, from the NATO Acquisition and Support Agency (NSPA). If you don’t have one, you can request a free NCAGE code from NSPA at this NATO portal .
Types of contracts
There are many kinds of government contracts, most of which are of one of the following types (or a combination of them):
- ‘Fixed-Price’: They have a precise definition of the scope of the project and its deliverables. The price can be firm (predefined) or adjustable (modifiable according to certain parameters defined in the contract).
- ‘Cost-reimbursement’: In this type of contract, the government reimburses the contractor for the costs incurred plus a specified margin. The contract defines objectives and a spending ceiling that should not be exceeded without government approval. A wide variety of contract types are included here, such as ‘Labor-hour contracts’ (the hours dedicated are paid by applying an hourly rate agreed in advance), ‘Time and Materials contracts’ (similar, it also includes the reimbursement of material expenses and other costs), ‘Cost-plus contracts’ (the government reimburses the costs incurred by the contractor plus a margin which can be defined as a certain percentage or through incentives for the achievement of specific objectives).
A concept commonly used in government contracts is ‘Indefinite-Delivery, Indefinite-Quantity (IDIQ) Contracts’. These are framework contracts in which some details are not known on the signing date and are subsequently defined through specific work orders.
Federal contract types are precisely defined by the section 16 of the Federal Acquisition Rules or FAR .
Preparation of bids for government contracts
There are countless companies specializing in obtaining contracts from agencies of the federal government or state and local governments. The cost of preparing a proposal with a reasonable probability of success is significant and is usually around 3-5% of the contract value.
It is important to have in the proposal team experts familiar with this type of contract and with the organization that awards it, so that the result is aligned with the expectations of the people who will make the decision on the client side.
The applicable rules of the contract and the RFP requirements should be studied in detail, they are normally not negotiable and will cause the disqualification of an offer if they are breached for any reason. Likewise, delivery dates are immovable, so it is highly recommended to work with margins to be able to manage last minute surprises that could ruin many months of work.
Conclusions
The importance of the government sector for international companies is considerable but will be even greater in the coming years, taking into account the huge infrastructure investment budgets that the US Congress is expected to approve in a near future and that will be of maximum interest for sectors as diverse as infrastructure (construction of roads and bridges, telecommunications, transport), electric vehicles, clean energy or cybersecurity.
Markentry USA helps international companies from multiple sectors in their process of entering the US government market, providing support in all the necessary steps from a feasibility study and strategic planning to the creation of a subsidiary and support for business development including support for the preparation of proposals.
In a second article on this topic, we explore regulations that must be taken into account, how some of them pose entry barriers of special relevance for international companies or their US subsidiaries and what solutions can be used to avoid them.
In a third and final article, we discuss in detail important advantages that small companies, even foreign-owned ones, can take advantage of.