The government spends billions of dollars each year on goods and services, and by tapping into this vast marketplace, small businesses can secure lucrative deals, gain steady income and heightened visibility. In this episode of The Agent of Wealth Podcast, host Marc Bautis and guest Richard C. Howard dive deep into the world of government contracts.
As a career military acquisitions officer, Howard oversaw $82B+ in DoD contracts, and has advised and trained over 400 companies as a consultant. He’s the CEO of DoD Contract – which guides, trains, and mentors small business owners and sales executives through the government sales process – and the host of DoD Contract Academy Podcast.
In this episode, you will learn:
- The benefits of selling to the US government as a small business.
- How small businesses can find opportunities to sell their products or services to the government.
- How small businesses can stand out in the government procurement process.
- How small businesses and startups can utilize the Small Business Innovation Research Program.
- And more!
www.dodcontract.com | DoD Contract Academy (Podcast) | Usaspending.gov | Sam.gov | Small Business Innovative Research Program | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth. This is your host, Marc Bautis. I’m joined by a guest for today’s episode, Richard C. Howard. Richard is a leading authority on US federal government contracts. As a career military acquisitions officer, he oversaw $82B+ in DoD contracts, and has advised and trained over 400 companies as a consultant. Richard is the CEO of DoD Contract, which guides, trains, and mentors small business owners and sales executives through the government sales process.
Richard is the host of the DoD Contract Academy Podcast, and speaks extensively on the nuance of federal contracting strategy. Richard, welcome to the show.
Thanks for having me on, Marc.
I don’t think people even realize that government contracts are out there. Can you start off by explaining this market size, and some of the benefits of selling to the government as a small business?
The Benefits of Selling to The US Government as a Small Business
The US government is the single biggest purchaser of goods and services in the world. When people think about government spending, most immediately think of big defense contractors. But in reality, the government buys just about anything you could think of – from defense and weapon-related spending, to tai chi instruction, to commodities, to food. Think about it like this: Every military base is basically a small town, or city in some cases. All of the infrastructure that goes into that town or city is paid for by the government. And they have a mandate to buy from small businesses.
So whether you’re in – cybersecurity, accounting, legal, you’re selling food, you have a franchise, you have a training business – the government is most likely buying in your area. It is very rare that I find an area where the government isn’t spending money, so the spending is vast.
The government has to buy from small businesses, yet less than half of 1% of US small businesses are actually participating in the government contracting process, despite the high spending levels.
Alright, so there’s a lot of opportunity here. How does a small business find the contracts?
How Small Businesses Can Find Opportunities to Sell to The Government
Because we’re talking about the government, there is a lot of regulation that exists to ensure there’s fairness and that the public can see what the government’s doing. So everything the government spends money on – with the exception of a couple classified contracting avenues – is public knowledge.
So, as a small business owner, you should ask, “Does the government buy what I sell?” To find your answer, go to a website like usaspending.gov and begin searching public records to find out what the government spends on.
Whatever you sell, it probably falls under something called a North American Industry Classification Code, or NAICS code. When you go into usaspending.gov, type in what you sell under NAICS – for example, accounting. The website will suggest different codes that you would fall under. You can click on that, and sort it by small business spending.
You can quickly see how much the government spends on small business contracts in your industry and area of focus.
Are these contracts location specific? Does it help if a business is located near a military base, for example, or does it not matter?
It depends on what you’re selling. By the way, government contracts certainly extend past the Department of Defense and military bases. There’s lots of different federal agencies that spend money.
Okay so once a business owner discovers how much the government is spending in their niche, what’s the next step?
Once you know that the government buys what you sell – if it’s local, they buy it in your state, or if not, you can work anywhere – the next step is to register your company. You can do that at sam.gov. That’s where all registering and most of the solicitations take place.
So when you go to sam.gov, you’ll find instructions on the screen for registering. Of course, you need to have a legal business in the United States, and come ready to register with your EIN number.
All in all, the process takes a couple weeks sometimes, but at the end of it you’ll get what they call a CAGE code and UEI number – these are federal identification numbers for your business. Once you have those, you can start bidding on contracts.
By bidding, do you mean writing proposals?
How Small Businesses Can Stand Out in the Government Procurement Process
What can a small business do to separate themselves from the others trying to do the same thing?
Good question. This is really where most companies fail in selling to the government…
Once your business is registered through sam.gov, you will begin to see what’s called a request for proposal, or RFP. At that point, a business can begin writing a proposal. But, the government is very regulated in how they buy products and services.
For instance, if I saw an RFP come out that the government is looking to buy a $3 million landscaping contract for base X, I can’t just pick up the phone and talk to someone to get my questions about the contract answered. Now, if it’s a big contract, the government will answer most questions publicly through sam.gov. In those cases, you might get some answers that can inform your proposal.
But otherwise, you won’t be able to set up a meeting with a government worker. You won’t be able to develop a relationship…
So, before the RFP comes out, there’s something called the market research phase. Let’s say you’re a software developer, and the government is putting a command and control platform together, and you have a great user interface for that. Well, it’s during the market research phase that you can engage with the government if you really want to have a shot at landing the contract later on. Meaning, before the RFP comes out, we want to know who is doing the purchase, and we want to know the details of the opportunity ahead of time.
If you want to differentiate yourself from the rest of the herd, you want to look for things like a request for information or sources sought. When those come out, they’re squarely in the market research phase. At that point, you can set up a meeting with the government.
I recommend small businesses to respond to requests for information. They’ll answer questions like:
- How long have you been in business?
- Do you have past performance?
- What do you think of the approach the government wants to take?
And, you’ll be able to suggest things. For instance, when you register your business, there are different certifications. Examples include:
- Small business certification
- Woman-owned small business certification
- Disabled Veteran-owned small business certification
If you happen to have one of those certifications, you do have a leg up, because the government needs to set aside a specific percentage of contracts to those certified businesses.
But, back to the market research phase, you can actually recommend that the government lists the contract for a specific certified group. So, you’re helping the government write the solicitation, and you can give yourself a leg-up if you suggest a certification you have.
Okay, so you’re trying to influence the decision a little bit. Have you ever seen a case where a small business had a product or service that the government isn’t spending on, but they propose it to them?
Yeah, there are a couple of ways to do that. I would say if you take away one tip on selling to the government, it’s to get meetings and build relationships with the people that actually buy what you sell. There’s a lot of ways to do that, but mainly through research.
If your business sells a product or service that the government is not actively looking for, but you want to sell to the government, the government needs two things: A requirement, and funding.
The Small Business Innovation Research Program
If it’s an innovative solution of some kind, for example a patent, you can go after something called the Small Business Innovative Research Program, or SBIR. Any government agency that spends a certain amount of money in research and development has got to contribute to this program. So, the SBIR program spends about $4 billion a year on innovative research and development contracts with small businesses.
This is a way to basically propose your product or service to the government, because they have funding in the SBIR program. If the review panel thinks that what you have is innovative, and that it would achieve a government need, you can win one of those contracts.
Phase one of SBIR is kind of low dollar. Let’s say, for example, you’re creating a VR training system. In that case, phase one might just be a feasibility study. You might propose that the government uses a VR or augmented reality training system to help maintain or fix aircrafts, for instance. Well, that might resonate with the board. That first phase one event is probably going to be somewhere around $100,000-$150,000, which is small for government contracts.
But, what you’re really doing is:
- You’re establishing past performance with the government, because now you have a contract.
- They’re now going to help you find people in the government that would potentially sponsor you.
Now you can’t totally rely on the government SBIR office, you also need to put yourself out there to find a sponsor. If you find somebody willing to sponsor, but they don’t necessarily have to have money, they just sign a memorandum of understanding for you to go to phase two.
Phase two is to develop a prototype, or set up a demonstration. There could be a lot of different things that you’re recommending, but that’s the phase two piece.
The Small Business Innovative Research Program is really great for getting your feet wet. Even if you have a developed product but you’re modifying it for government use, that would also qualify for the program.
Going back to finding these opportunities, my father actually had a government contract through a larger corporation. He created a pellet that went into 50 caliber ammunition. He wouldn’t get the government contract himself, but General Dynamics or Olin would go through him to create this component of their contracts with the government. Are there opportunities like that out there?
Yes. That’s a really good point. There is a variety of ways the government can buy things from a small or large business owner. For example:
- Sole source contracts.
As a business owner, you need to understand how the government is buying what you’re selling. That’s something that you can do pretty easily with the research tools the government offers.
Let’s say you own a company that is licensed to do HVAC. Over time, you’ve built a relationship with the government office that purchases contracts in construction. From that relationship, you learn that next year, Hanscom Air Force Base is going to be building an office building, and you have interest in installing the HVAC system. But, you aren’t able to take the full construction contract.
What I recommend you do is look through a website like usaspending.gov to see which construction companies have done that type of work with the government – illustrating past performance – and reach out to them about this upcoming opportunity. The fact that you’re bringing them this opportunity sweetened the pot for them to work with you, involving you in the project.
If you reach out to three companies like that, you’ll get at least one or two bites to form an agreement and go after a large contract together. That’s very helpful for a small business, because the big company can handle the proposal writing, and so on.
Artificial intelligence is all the rage right now. Do you see AI being used to uncover some of these opportunities, or to help small businesses in this process?
It’s interesting that you bring that up. Two of my recent episodes on the DoD Contract Academy Podcast were about AI in the government space.
One of them is called Govly, which uses artificial intelligence and machine learning to enable government contractors, OEMs, and distributors to accurately plan for government purchases years in advance
The other is called Rogue, which is an AI tool specifically designed to help businesses write proposals for government contracts. It kind of works like ChatGPT.
Business Financing and Government Contracts
What happens if a business needs financing to fulfill an order from the government?
First, it depends on the contract. If it’s a SBIR contract, where the business is developing something for the first time, then you can win the contract before you have to start development. But those are research and development contracts.
So let’s say you win a small services contract that involves employing 20 people. The small business will have to pay those individual employees before the government pays the small business. That’s because there’s about a 90 day turnaround time on invoicing to the government.
Now, there are certain financing houses set up specifically for government contractors. One thing to know is once you win that government contract, it’s one of the most secure contracts you’re going to have. So a lot of banks know they can count on the government paying the business.
That’s also one of the reasons companies go after government contracts – because it increases the value of your company.
Are Government Contracts Recession-Proof?
In addition to AI, the other thing that we’re constantly hearing about is this looming recession. At a high level, how is government spending compared to other industries?
Government spending is more stable. I always recommend that business owners – small or large – have one stream of income from commercial sales and another stream of income from government sector sales. The government is spending year over year, whether there’s a recession or not.
But I would say that the government experiences difficulties in different ways, and typically at different times.
Usually, if you have a three-year government contract, for example, you’ll receive that funding month over month. Now, there are times when the government shuts down, or when there is sequestration. The government can terminate a contract for convenience. But if they do, there are regulations to protect the companies that held the government contract.
That’s good. Well, we’re just about out of time. Richard, thank you for joining me today. You did a great job explaining how businesses can leverage government contracts as well as how to navigate the government procurement process. What’s the best way for our listeners to contact you or learn more about your advisory coaching services?
Your listeners can go to dodcontract.com to schedule a consultation. On the website, we also have courses available. And of course your listeners can check out my podcast, DoD Contract Academy, on whatever platform they like to listen on.
Great, we’ll link to those resources in the show notes. Thanks again, Richard. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review on the show.
Last Friday, Congress signed a mammoth $2 trillion stimulus package into law called The Cares Act (Coronavirus Aid, Relief and Economic Security). Many of the programs and initiatives in The Cares Act are intend to assist business owners through a variety of needs. In this episode of The Agent of Wealth Podcast, host Marc Bautis shares details on the three relief programs: The Economic Impact Disaster Loan (EIDL), The Payroll Protection Program (PPP) and The Employee Retention Tax Credit (ERTC). Bautis also answers frequently asked questions about each program, such as:
- What are the eligibility requirements?
- Do I have to personally guarantee the loan or provide any collateral?
- What do the loan funds have to be used for?
- Is the loan forgivable?
- What’s the maximum loan amount I can receive?
- How do I apply?
This is the second part of a two-part series on The Cares Act. Listen to the first part, which covers the individual relief efforts outlined in the Act.
Bautis Financial: (862) 205-5000 | agentofwealth.com/42
Key Business Provisions of the CARES Act
Economic Injury Disaster Loan (EIDL)
This is a program through the small business administration.
The SBA has been a great resource for businesses who need start-up money or come across hard times and need loans to get through disasters.
That’s why the CARES Act now permits businesses to take an Economic Injury Disaster Loan (EIDL) for up to $2 million for businesses impacted by the coronavirus.
The EIDL is now available in all 50 states and can be used by any small business that has fewer than 500 employees. Self-employed individuals and non-profits are also eligible for this program.
How is this different from a regular SBA loan?
Under a normal SBA loan, there is stringent qualification and testing that must take place to complete the loan. The red tape is significantly easier to cut through with the EIDLs. Qualification can be based solely on sufficient credit and/or some way to prove that you have the ability to repay the loan. Further documentation may be required, but whatever is required should be limited.
For self-employed individuals, you’ll need a copy of your Schedule C or proof of income and expenses as well as potentially 1099-MISCs.
In addition to a small business disaster loan, there is also a grant component that is available
- The CARES Act allows for a $10,000 emergency grant to be issued for anyone who applies for an EIDL.
- The reason for the grant is due to the fact that processing for EIDLs can take quite a bit of time, especially with the additional business owners who are sending in applications.
- The $10,000 emergency grant is given to business owners within three days of their application, and they’re allowed to keep that money regardless of whether or not they ultimately qualify for an EIDL or not.
What can the EIDL be used for?
Basically anything. You have to prove that your business has had an economic injury, and once that injury is proven, the EIDL can be used for things like payroll, monthly debt payments, rent, accounts payable or other operating expenses.
What are the terms of the EIDL?
The terms for the EIDL are designed to be incredibly favorable. Though the SBA has final say on the terms, repayment can be stretched over 30 years, and the interest rate is set at 3.75%. To give you an idea of just how affordable that is for most businesses, injecting $100,000 into your business and paying it back over 30 years would only cost $463 per month.
Next we’re going to talk about the paycheck protection program which is looked at as the golden goose of the CARES Act.
If you had already acquired an EIDL before the PPP program became available, your EIDL can be wrapped into your PPP. However, if you received the $10,000 emergency grant, that money will be docked from the amount that is ultimately forgiven on the PPP.
Paycheck Protection Program (PPP)
The PPP is a $349 billion dollar program as part of the CARES Act. It’s backed by an SBA Loan and is potentially forgivable.Potentially forgivable.
The SBA and the Treasury are putting the rules out as this is written. Even though the bill was passed last week, the guidelines aren’t out on it yet. The law requires the SBA put regulations out within 15 days from enactment. Because of that you have to take everything I’m going to tell you to take with a grain of salt. It may change.
While regulations may not be out for several weeks, the first applications are going to be accepted this Friday, April 3rd. You heard that right. Loans are going to be given out before we understand all of the rules of the loans that are applied for.
Sole Proprietors and Small Businesses can begin to apply by 4/3
List of eligible financial institutions to apply for the loan
Self Employed and Independent Contractors can begin by 4/10
Who qualifies for the loan?
There are Three factors to qualify
- You have a business
- You have less than 500 employees
- You have to meet certain certifications
- There’s an economic uncertainty of this crisis that makes the loan necessary to support ongoing operations
- Certify that you’re going to use the funds for payroll, leases, utilities, mortgage payments
- Certify that you’re not going to get any other loan under the program
Terms of the Loan
A lot of confusion, because the law had wording such as “up to this” or “max of this.” The Treasury came out and provided some clarity. Everyone is going to get
- 1% interest rate
- Payments would be deferred 6 months
- 2 year loans for everyone
What the loan can be used for
- Rent in force before February 15th
- Interest on mortgages that were in force prior to February 15th
- Utilities (Heat, Electric, Oil & Gas, Phone, Internet, ..)
- Payroll costs the big one and it is up to $100,000 ratably per employee
- Wages, sick leave, health insurance premiums, state and local taxes, net earnings from self employment
- You can apply for a loan to pay yourself an amount for your own net income
- If you get to $100k of compensation that equates to 20,833 of compensation over a 2.5 month period which is the maximum amount that you would be able to take advantage
How much of a loan can you get
- The amount of the loan a business will receive is the lessor of $10MM or 2.5 x monthly average payroll costs over the prior year
- For self-employed or independent contractors it will be your net income divided by 12 multiplied by 2.5.
How much of this loan can be forgiven?
- The amount that you spend on qualified expenses in the 8 weeks from when you get the loan
- Payroll costs are the big one. Mortgage interest, rent, and utilities. The non-payroll costs that are forgiven cannot be more than 25% of the forgiven amount
Because there is a limited amount of money allocated to the Paycheck Protection Program bucket,there is a lot of urgency applying for the loan. The loans are given out on a first come / first serve basis.
Secretary Mnuchin said they would go back to congress and ask for more money. You don’t want to leave yourself at the mercy of Congress to allocate more money to it
There is a catch. The whole purpose is to keep your staff employed. There are two things you cannot do or the forgivable portion will be reduced
- You cannot reduce the compensation for employees earning $100k or less by more than 25%
- Not decrease full time equivalent headcount. Either from 2/15/2019 through 6/30/2019 or from 1/1/2020 through 2/29/2020. You get to pick which of those time frames to be judged against.
The rules will allow you to hire back those people through June 30th and you will not be impacted
How do I get the loan?
- It’s going to be done through either SBA approved lenders. If you have a relationship with a bank I would reach out to them first and ask for an application.
- Federally insured banks, credit unions
- CARES act also authorize the SBA to authorize other lenders
There’s a four page application that just got released out there. It will be linkedin the show notes. It’s pretty straightforward
You can have a consultant or CPA help you fill out. The compensation for that service will come from the loan originator. You can’t be charged for those services
What are some Questions?
How does the PPP interact with other parts of the CARES act?
One of the other programs of the CARES Act is the Employee Retention Tax Credit ERTC. You are not allowed to take both the ERTC and PPP.
For some businesses, the better alternative will be to use the ERTC. It is up to a 50% credit on up to $10k of an employees wages. It’s capped at the $10k. The more you have average salaries that low, the more it may make sense. We’ll cover this option in a second
The second option is the deferral of payroll taxes. An employer may defer half of their 2020 payroll taxes until 12/31/2021 and the other half until 12/31/20202.
Company A has existed for a number of years and has three employees. In the last 12-month period, Employee 1 made $50,000, Employee 2 made $60,000 and Employee 3 made $150,000.
Company A’s total compensation for the prior 12-month period is $260,000.
But remember, the total compensation for Employee 3 is $150,000. Since we’re capped at $100,000 per employee, we have to deduct $50,000 from our qualifying payroll costs to come to a total of $210,000. Take that number, divide it by 12 months and multiply it by 2.5 months to come up with a total loan amount of $43,750.
What Happens Next?
Over the course of the next eight weeks, Company A uses the PPP loan to pay not just wages and benefits, but its rent, mortgage interest, utilities and interest on debts that were acquired before February 15, 2020, too.
At the end of the 8-week period, Company A gets to go back to the bank that gave him the loan in the first place and provide them with payroll records and receipts for these miscellaneous qualifying payments. If those items total at least the $43,750 that was borrowed in the first place, the entire loan is forgiven.
What if the company doesn’t use the whole PPP loan in qualified expenses?
More good news. It isn’t like you have to give the money back to SBA immediately. The remainder is put into forbearance for a term of 6-12 months, and at the conclusion of the forbearance period, the loan becomes a 2-year term with an interest rate of 0.5%
What happens if your headcount changed and the impact to the forgiveness of the loan.
Let’s go back to our example from Company A. In that example, what if Employee 1, who earned $40,000 in the last 12-month period, was let go in advance of this loan?
The PPP requires that you have the same number of full-time employees or equivalents in place from the period of February 15, 2020-June 30, 2020 as you had for the same period in 2019. If you’ve reduced staff, you’re going to get the amount of your forgiveness docked. You also can’t reduce wages by more than 25% year-over-year to any individual, or you also get docked.
If we just look at the reduction of staff, Company A would be penalized to the tune of 33% of its forgiveness for not having Employee 1 on payroll. But if Employee 1 was rehired by June 30, 2020, that forgiveness penalty is waived.
The same can be said for reduction in wages. If the wages are restored by June 30, 2020, the full forgiveness is also restored.
Employee Retention Credit
What is it?
It’s a new credit against payroll taxes from March 13, 2020 to December 31, 2020 up to 50% of wages paid to each employee up to a max of $10k of wages per person.
How do I qualify?
In order to qualify for the ERTC, your business needs to fall into one of two categories:
- Was completely or partially shut down by local, state or federal government order
- Experienced a “significant decline in gross receipts”
Let’s take these two qualifiers one at a time.
Was completely or partially shut down by local, state or federal government orders
It seems to be the intent of Congress that if your business is forced to shut down for any COVID-19-related reason for even a single day in a quarter, you would qualify for the entire quarter’s wages. If this interpretation is correct, if your local government officials were to issue a stay-at-home order on March 31 and lift the ban on April 2, you would theoretically qualify for the ERTC for both the first and second quarters. However, this is going to be up for IRS determination when it comes up with its regulations at a later date.
We also don’t have a great idea of what “completely or partially” shut down means yet either. My best assumption for the time being is that your business would have to be located in a place where stay-at-home orders are in place, and you don’t meet the local list of essential businesses OR if your business is in an industry that has been forced to shut down nationally such as sporting events, travel or tourism.
Experienced a “significant decline in gross receipts”
A “significant decline in gross receipts” is defined as any given quarter during the year in which your business has no more than 50% of the gross receipts that it had in the same quarter the previous year. If Company A had $100,000 in gross receipts in the second quarter of 2019 and $49,000 in gross receipts in the second quarter of 2020, that would be a qualifying quarter. But if Company A had $100,000 in gross receipts in the second quarter of 2019 and $51,000 in gross receipts in the second quarter of 2020, Company A would be out of luck and wouldn’t qualify for the ERTC.
Do I get unemployment compensation as well as qualify for PPP? It’s a little bit of a grey area.. There is federal unemployment pandemic assistance as part of the CARES Act that gives self employed the equivalent of unemployment. If you receive a loan and you are using it to pay yourself a salary I would assume that you would not be able to double dip and collect unemployment and a loan that is designed to keep people on the payroll. If you run out 2 months of the PPP loan you may then be able to collect unemployment insurance
Alright so we covered the Economic Injury Disaster Loan, Payment Protection Program, and the Employee Retention Tax Credit. There are pros and cons to each and one may be better than the other for you.
When you couple this with the regulations and details of the loans and credit programs are still being flushed out it could be hard to make a decision of which one to go with. If you have any questions I’d be happy to talk.