From the November 2001 issue of Entrepreneur

Experts tout it as the $200 billion market entrepreneurs can't afford to ignore. But as this sector becomes overwhelmed by contract bundling, shrinking profit margins and federal agencies' inability to meet their goal of giving 23 percent of contracts to small businesses, just how lucrative are government contracting and subcontracting?

It depends on how you approach it.

Computer Consulting Operations Specialists Inc. (CC-OPS), a Culver City, California-based hardware and software installation firm, started going after government subcontracting almost as soon as Mary Ann Mitchell founded the firm in 1985. Her experience working on government subcontracts has been like medicine-necessary but bitter.

"There's a limited scope of work. Often you're subject to what the prime contractor wants to give you, and they take all the top-level business," says Mitchell. She's also found that pay comes excruciatingly slowly (she's still owed about $700,000) and believes subcontractors frequently become scapegoats for problems that occur on a project.

Despite the drawbacks, Mitchell still subcontracts, but has developed guidelines to govern how she does it. She only accepts government work from the right prime contractors and walks away when she runs into problems on a deal.

Like CC-OPS, Ronan, Montana-based S&K Technologies, a $23 million IT firm, jumped into subcontracting shortly after its founding in 1999. But, unlike Mitchell, Greg DuMontier, S&K's owner, bypassed a lot of subcontracting's woes by implementing an ambitious specialization strategy: "We wanted to acquire competencies in a particular field so we could move into a prime contractor position," says DuMontier, 47. The strategy paid off. After two years of subcontracting and prime contracting smaller projects, S&K won a $325 million project as a prime contractor.

Even entrepreneurs who score big know the government offers some kinks as a customer. "This includes paying slowly [and demanding] that companies be e-commerce-ready and have the ability to provide a quality product in a timely manner. To improve efficiency, that's led to contract bundling," says Darryl Hairston, SBA associate deputy administrator for government's contracting and business development. By "contract bundling," he refers to the government rolling smaller contracts together into one large contract, which makes it more difficult for small businesses to qualify. "Your company needs the infrastructure to handle the idiosyncratic way government operates . . . as well as access to financing and a sufficient level of expertise, whether through subcontractors or in-house employees," Hairston says. Also familiarize yourself with the government's buying process, because, according to Hairston, it's "a different ballgame" that requires knowing what and how agencies buy and how to handle sometimes extensive paperwork.

Perhaps the biggest goof entrepreneurs make when pursuing government jobs is being so eager to land the contract that they price themselves right out of business. "Small businesses [in particular] tend to underprice or undervalue their products to get business," says Harriet Michel, president of the National Minority Supplier Development Council. "But when the customer comes back for a repeat order, and you're not charging enough per unit, you won't make enough money to cover costs, let alone profit."

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