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Small Talk: Uncle Sam a tougher customer for small businesses

Published August 5, 2013 8:34 am

This is an archived article that was published on sltrib.com in 2013, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

NEW YORK • Uncle Sam isn't as easy a customer to land as he used to be.

Even before $85 billion in federal budget cuts went into effect this spring, small business owners who contract with the government were finding that the cost of going after federal contracts had spiked. On average, small businesses spent more than $128,000 in labor costs and other expenses in 2012 to pursue government contracts, according to a survey by American Express. That's up 49 percent from 2010.

Now that many of the budget cuts are in place, it's become even harder and more expensive for small businesses to compete for contracts, which they often count on to generate a significant portion of their revenue.

Ken Anderson usually goes to 20 or more trade shows a year to meet with hundreds of Department of Defense employees who are interested in buying the technology made by his company, Universal Synaptics. But federal agencies' travel budgets were slashed in the so-called sequestration cuts that took effect March 1, so many of the shows were canceled. Now Anderson is spending more time and money flying to meetings at government facilities. Instead of going to one show, he has to make as many as 10 trips.

"One might be in Warner Robbins, Ga.; Cherry Point, N.C.; Patuxent River, Md., or Jacksonville, Fla.," says Anderson, vice president of business development at Universal Synaptics, which makes diagnostic equipment for military aircraft. "Instead of one trip to a show in Atlanta, now I've got to go all over the place."

Anderson says the extra trips he's making aren't guaranteed to result in a new contract for his Roy, Utah-based company. Meanwhile, his travel costs are up between 25 percent and 30 percent this year.

"You spend more time and money and energy in your business development and the process takes longer," he says. "As a taxpayer I say, this is really fantastic. But as a business owner, I say, this is tough and I have to figure out a way through it."

The cost of bidding on a federal contract can exceed 3 percent of the total amount of the contract, according to the House Small Business Committee. So on a contract worth $100,000, a business might spend more than $3,000 during the bidding process. Companies seeking federal contracts typically lay out costs for travel, product development and writing up proposals. That's money spent up front, with no guarantee that a bid will be successful.

The extra trips that Shep Brown and his staffers are making to meet with defense employees translate into an enormous time and monetary expense, says Brown, CEO of Howell Instruments, a Fort Worth, Texas, maker of testing and monitoring equipment for airplanes. They too used to attend trade shows where they could meet with a lot of people at once.

"It takes a month to do what I did in three days," says Brown, "Our manpower costs go up 200 percent."

The Small Business Administration, the government agency that advocates for small companies in other parts of the government, said it had anticipated that small businesses would get fewer contracts and fewer contract dollars because of the budget cuts.

"From the beginning, we have been clear that sequestration would have severe impacts across the government and for small business," says Emily Cain, a spokeswoman for the SBA. "We know that the economic uncertainty created by sequestration prevents small businesses from moving forward and pursuing new orders or opportunities to expand."

Rep. Sam Graves, R-Mo., the chair of the House Small Business Committee, declined to comment for this story.

The Commerce Department's report Wednesday on second-quarter economic growth might offer some hope to small businesses. The report said federal spending fell only 1.5 percent between April and June, compared with an 8.4 percent drop in the first three months of the year. If spending stabilizes, contracts might be easier to get.

In the meantime, though, small businesses that rely on federal contracts for revenue continue to spend more time and money to get and keep business with the government. And there's another hurdle: contracts are taking longer to be approved, forcing them to look elsewhere for revenue.

"The time that it takes from submitting a bid or a proposal to the award is strung out," says Bob Mander, owner of Ryan & Co., a company that writes technical documents for the government and nonprofit organizations. His Washington, D.C.-based business submitted a bid to the General Services Administration more than three months ago and he's still waiting to hear the status of the bid.

"They're not as far along as they should be at this point," he says.

In the past, federal agencies usually set a date for a decision in which a company would be awarded a contract, Mander said. But the GSA keeps pushing back the award date, and now it's not expected until the end of September. A spokeswoman for the GSA, Mafara Hobson, said the complaint wasn't related to the budget cuts.

While Mander waits, he's seeking more business from non-government customers, including advocacy groups that represent health care and real estate interests.

Small businesses that partner with companies that work directly with the government also are contending with longer wait times and a drop in revenue.

Dulles Case Center has been busy the past few months working on bids with the federal contractors that it partners with. The government has been seeking price quotes on the carrying cases that the Dulles, Va., company manufactures for weapons, radios, computers, medical equipment and other items. Owner Donna Kulesza hasn't heard anything beyond those requests.

"We've been doing three times as many quotes as we would in any given month," she says. "But we're seeing a lack of activity."

That means Dulles is doing work but not getting paid — the government doesn't pay for the work a company does when it puts a bid together.

"The lack of revenue hurts from the orders not being awarded yet," Kulesza says. She was forced to lay off one of her employees in April.

Active Care, a company that provides disease management services, is a subcontractor to federal employee benefit programs, getting under 30 percent of its revenue from the government. The contracts it has agreed to work under were approved before the budget cuts took effect. But the government isn't releasing the money to fund the contracts, which include Active Care's diabetes management services.

"We've been given an indication of an indefinite hold," says Michael Jones, chief strategy officer of the Orem, Utah-based firm.

Jones talks to the company that's the prime contractor each week, but there's no sign that the money will forthcoming. It's a big contrast with his experience doing business with the government in past years.

"We were able to move through the process quickly," Jones says.

If the delay looks like it's going to extend another six to 12 months, Active Care will need to look to other customers, including state and municipal governments, to replace the federal contract revenue that it's losing.

Right now, Jones is in wait-and-see mode.

"We have several opportunities, but most are dependent on the outcome of these programs. It's a bit of domino effect," he says.

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Follow Joyce Rosenberg at http://www.twitter.com/JoyceMRosenberg Small businesses spend more on federal contracts

Small business owners are spending more time and money to get federal contracts, but they're also making fewer bids to get those contracts.

Those are some of the findings of a survey of small business owners released Wednesday by American Express. The survey, which questioned 684 owners, found that it's getting more expensive to bid on a contract, and that a drop in government contracting dollars has contributed to a decline in the number of bids that small businesses make. As a result, companies are getting less of their revenue from federal contracts.

The survey was taken in February and March, and asked owners about their contracting activity in 2012. So it doesn't reflect the decline in federal contracting expected to result from federal budget cuts that took effect on March 1. Those cuts are likely to further reduce bidding by small businesses.

AN INVESTMENT OF TIME AND MONEY

The survey found that small businesses spent an average of $128,628 in time and money seeking federal contracts in 2012, up 49 percent from $86,124 in 2010.

The largest companies in the survey, those with 50 or more employees, spent $257,098 seeking contracting opportunities in 2012, well above the $37,172 that businesses with fewer than 10 employees spent. That's not surprising given that larger firms have more workers to devote to the bidding process, which can include product research and development along with formulating and writing bid proposals. And they have more people to execute the contracts.

The industries in which companies spent the most on bidding were construction, where the average outlay was $172,058, and information services companies, which spent an average $169,948.

Women owners are making a bigger investment in bidding than they did a few years ago. The survey found that in 2012, women-owned businesses invested $112,112 toward contracting opportunities, 82 percent of the $137,040 that firms owned by men spent. In 2009, women-owned firms invested 76 percent of the amount of money that their male counterparts put toward bidding.

THE PACE OF BIDDING IS DOWN, AND SO IS REVENUE FROM CONTRACTS

The number of bids that contractors have submitted has fallen sharply since 2007. The survey found that between 2010 and 2012, companies made an average 5.5 bids on contracts on which they would be the primary contractor, and 3.6 bids where they would be the subcontractor. That's down from an average 19.5 bids as primary contractors, and 7.9 as subcontractors from 2007-09.

Over that time, the amount of money that the government spent on contracts also fell. After spending $540.9 billion on contracts in the 2008 fiscal year, the government spent less each year through fiscal 2012, when it spent $517 billion.

The slower pace of bidding might be a factor in the higher success rate that bidders have been having on primary contracts; with fewer bids, there's less competition. Owners said their bids were successful 55 percent of the time, on average, up from 41 percent three years earlier. The subcontracting success rate was 86 percent, down slightly from 90 percent in 2007-09.

The drop in bidding is likely behind a drop in the percentage of revenue that companies get from contracting. Between 2009 and 2012, the amount of revenue that companies attributed to contracts dropped to 19 percent from 38 percent. Companies have been making up that shortfall by turning to other customers including state and local governments, non-profits and individual customers.

SUCCEEDING MORE QUICKLY

First-time contractors are winning that initial contract faster than their counterparts did in the past. In 2012, it took companies two years and 4.7 unsuccessful bids to score that first contract. Just a year earlier, contractors said it took them 16 months and 4.4 unsuccessful bids.

That might also be a function of the shrinking number of federal contracting dollars. Companies that have been contracting for 10 years or more say it took them 2.9 years and 5.6 unsuccessful bids before they landed their first deal with the government.

— The Associated Press