Should Your Tech Company Work with the Government?

MICHAEL VALERIO: Hello everyone and welcome to the first in a short series of podcasts where we will explore how and why technology companies may want to work with the federal government, including where the government is spending, how they engage, and how to navigate related compliance matters.

MICHAEL VALERIO: My name is Michael Valerio and I'm the Practice Leader for Cherry Bekaert's Technology Industry Group.

CRAIG HUNTER: Hello. Thank you, Michael. Glad to be here and to share a little about my experience working with technology companies as they engage with the federal government.

MICHAEL VALERIO: Craig, let's jump in. As I mentioned, this is the first in a series focusing on opportunities technology companies may have as government contractors. Today we'll look broadly at how and why tech companies may consider this, and future episodes will dive into details and nuances.

MICHAEL VALERIO: Let's say I have a tech company with a product or service the government may wish to purchase. First, can I? Secondly, why would I want to work with the federal government?

CRAIG HUNTER: Yes, you absolutely can. Contracting with the U.S. federal government means working with the world's biggest customer; it's unlike working with any other client.

CRAIG HUNTER: The recent federal budget was $4.7 trillion, so opportunities are substantial. The U.S. government pays contractors hundreds of millions and billions of dollars each year, and once a company enters the market it can be a highly lucrative and reliable revenue stream.

CRAIG HUNTER: Another advantage is that the government pays on time. Commercial companies often face accounts receivable risk, but the government typically pays reliably.

CRAIG HUNTER: For technology companies in particular, the White House requested an IT budget of almost $110 billion for fiscal year 2022, the highest ever. That includes almost $60 billion for civilian programs, $38.6 billion for defense unclassified programs, and almost $12 billion for classified programs.

CRAIG HUNTER: The government's focus areas important to technology companies include securing data and systems, delivering citizen services, and furthering a vision of digital government. Current priorities are modernizing legacy systems and migrating to the commercial cloud, increasing shared services, and other modernization efforts, which present substantial opportunities for technology companies.

MICHAEL VALERIO: That's really interesting. How does the government make acquisitions of goods and services? How do tech companies work with them?

CRAIG HUNTER: The government makes purchases at three procurement levels, classified by monetary value. The first is the micro-purchase threshold, which covers purchases up to $2,500 for services or $10,000 for goods; for micro-purchases no competition is required.

CRAIG HUNTER: The second level is simplified acquisition, used in a simplified environment where agencies need not use a formal evaluation plan or score offerors. The simplified acquisition threshold is capped at $250,000.

CRAIG HUNTER: The third level is full procurement for amounts above $250,000, where the government follows a competitive procurement process in accordance with the Federal Acquisition Regulation (FAR).

CRAIG HUNTER: The government has an extensive web of contracting laws and regulations, with the FAR governing procurement and courts that decide disputes. This labyrinth of regulation and bureaucracy can be daunting for companies, including tech firms, and many companies stop pursuing government work because of it.

CRAIG HUNTER: There are resources to help navigate these challenges, and Cherry Bekaert helps clients work through them every day.

MICHAEL VALERIO: I've heard small businesses have some advantages contracting with the government. Is that true?

CRAIG HUNTER: Absolutely. Small businesses have distinct advantages. The federal government provides many resources and programs, and most agencies have small business offices aimed at maximizing opportunities for small firms.

CRAIG HUNTER: Many contracts specify that small businesses must perform a certain amount of work, and some contracts are set aside entirely for small businesses. The Small Business Administration (SBA) offers several programs to help small businesses win contracts.

CRAIG HUNTER: Examples include the Women-Owned Small Business program, where the government aims to award at least 5% of federal contracting dollars to these firms. The Service-Disabled Veteran-Owned Small Business program targets 3% of federal contracting dollars.

CRAIG HUNTER: The SBA-certified Small Disadvantaged Business program targets at least 5% of federal contracting dollars annually to qualified small disadvantaged businesses. The HUBZone program targets 3% of federal dollars to Historically Underutilized Business Zones and focuses on the location of the business and its employees rather than ownership.

CRAIG HUNTER: The government also sponsors the Small Business Mentor-Protégé program, where small businesses receive business development help from experienced large government contractors. Overall, there is substantial support and targeted funding for qualifying small businesses.

MICHAEL VALERIO: I've also heard the government provides assistance to help develop technologies. Can you expand on that?

CRAIG HUNTER: Yes. While it's not free money in every sense, the government does provide significant non-dilutive funding through programs like the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. These competitive programs encourage domestic small businesses to engage in federal research and development with commercialization potential.

CRAIG HUNTER: These programs enable businesses to explore technological potential and offer incentives to profit from commercialization. The government funds R&D topics posted on agency websites, covering areas such as advanced analytics, data mining, decision modeling, predictive analytics, optimization, and simulation.

CRAIG HUNTER: SBIR has three phases. Phase I establishes the technical merit and feasibility of the R&D effort, with awards between $50,000 and $250,000 for a period of six months. Phase II continues the effort initiated in Phase I, and Phase II funding depends on Phase I results, with awards up to $750,000 for a period of two years.

CRAIG HUNTER: Between Phase I and Phase II, a company can receive about $1 million to fund R&D. Phase III is typically not funded by the government; if the results from Phases I and II align with government needs, it may lead to government contracts or purchases.

CRAIG HUNTER: The government does not claim ownership of IP generated by these programs, though it can review the work as part of program oversight. Companies generally retain IP rights from R&D funded through SBIR and STTR.

MICHAEL VALERIO: As a provider to the government, do I need to work directly with them?

CRAIG HUNTER: You can work directly as a prime contractor, or you can work as a subcontractor to a prime contractor. Some contracts require large companies to subcontract with small businesses, creating opportunities for smaller firms.

CRAIG HUNTER: Large companies often handle a larger share of contract management, compliance monitoring, and FAR enforcement when they are the prime. Another option is entering into a joint venture where you may not be the managing partner but are still part of the organization performing work for the federal government.

CRAIG HUNTER: Subcontracting can help you build relationships with large companies and other contractors, and those relationships can be valuable over time. The government contracting environment is unique: you may subcontract with a company on one contract and compete against them on another.

MICHAEL VALERIO: Thank you for the insight today, Craig. How can listeners get in touch with you if they're interested in learning more?

CRAIG HUNTER: You can visit cb.com for more information; we have a page on Government Contracting with many useful links. You can also reach me directly at craig.hunter@cb.com.

CRAIG HUNTER: In the next episode we will dive into capturing federal business for your tech company. Stay tuned; we look forward to talking then.