Key Takeaways

  • A government contract is a legally binding agreement between a business and a federal, state, or local government agency for goods or services.
  • These contracts are governed by unique laws such as the Federal Acquisition Regulation (FAR), ensuring transparency, competition, and accountability.
  • Common types of government contracts include fixed-price, cost-reimbursement, time-and-materials, and indefinite-delivery/indefinite-quantity (IDIQ) contracts.
  • Working with the government offers stability and long-term revenue but also involves extensive compliance and oversight.
  • Small businesses can benefit from set-aside contracts and SBA certification programs that provide competitive advantages.
  • The contracting process involves registration in SAM.gov, identifying solicitations, submitting bids or proposals, and managing post-award performance.

Government contracts are any formal agreements made between businesses and government agencies that summarize business arrangements.

An Overview of Government Contract Law

The government of the United States buys more products and services than any other entity worldwide. The United States Department of Defense (DOD) makes up a large portion of the country's purchases. 

There are three main differences between government purchases and those of the private consumer:

  1. Government contracts are highly regulated to ensure the most competition, guarantee proper use of government funds, and promote a healthy economy.
  2. Government contracts include clauses, like the "changes" or "default" clauses, that allow the government to enact special rights within the contract like being able to change the terms of the contract or even end it. 
  3. Government contracts follow the procedures laid out in the Contract Disputes Act should there be any claims or legal action, because the government is a sovereign entity.

The Competition in Contracting Act and Federal Acquisition Streamlining Act are both important laws that regulate government contracts. 

The Federal Acquisition Regulation (FAR) controls any acquisitions performed by the United States Executive Branch, and it is outlined in title 48 of chapter one in the Code of Federal Regulations parts 1 through 53.

Agencies like the DOD, NASA, and the General Services Administration (GSA) can create supplements to the Federal Acquisition Regulation. Those three specific agencies actually amended the FAR in pursuit of the Administrative Procedure Act.

The United States Government can only be contract-bound by an authorized contracting officer who has been issued a warrant by the executive agency. These contract warrants (or certificates of appointment) can be held to a specific amount or allowed an unlimited amount of money. 

A contract officer is authorized to grant, manage, or terminate a government contract.

The Contract Disputes Act will rule over any legal issues regarding a government contract once they are submitted to a contract officer. 

Once the contract officer makes a decision regarding the legal claim, either entity represented in the contract can appeal the decision with the United States Court of Federal Claims (CFC) or a board of contract appeals.

The claim can then move on to be appealed before the Court of Appeals of the United States for the Federal Circuit, and even eventually to the Supreme Court. 

Legal Requirements and Procurement Process

To become eligible for federal contracting, businesses must register with SAM.gov (System for Award Management), obtain a Unique Entity ID (UEI), and comply with federal procurement laws.

The procurement process generally includes:

  1. Market Research: Agencies identify needs and available suppliers.
  2. Solicitation: Government issues a Request for Proposal (RFP), Invitation for Bid (IFB), or Request for Quotation (RFQ).
  3. Bidding or Proposal Submission: Businesses submit offers outlining pricing and capabilities.
  4. Evaluation and Award: The contracting officer reviews submissions and selects a vendor.
  5. Contract Management: Once awarded, performance is monitored, invoices are reviewed, and compliance is enforced through the FAR.

Additionally, government contractors must adhere to labor laws, cybersecurity requirements under CMMC (Cybersecurity Maturity Model Certification), and small business subcontracting plans where applicable.

Types of Government Contracts

Government contracts fall into several categories that determine how pricing, performance, and risks are allocated between the contractor and the government. Understanding these contract types helps businesses decide which structure aligns best with their capabilities and risk tolerance.

1. Fixed-Price Contracts These contracts establish a set price for the goods or services being delivered. The contractor bears the risk of cost overruns but can benefit from efficient performance. Variations include:

  • Firm-Fixed-Price (FFP): No cost adjustments are made once agreed upon.
  • Fixed-Price Incentive (FPI): Allows price adjustments based on performance or cost savings.
  • Fixed-Price with Economic Price Adjustment (FPEPA): Adjusts prices to account for inflation or material cost changes.

2. Cost-Reimbursement Contracts The government reimburses the contractor for allowable expenses plus a fee. These are used when costs are uncertain or difficult to estimate. Subtypes include:

  • Cost-Plus-Fixed-Fee (CPFF)
  • Cost-Plus-Incentive-Fee (CPIF)
  • Cost-Plus-Award-Fee (CPAF)

3. Time-and-Materials (T&M) and Labor-Hour Contracts These are used when it is not possible to estimate the duration or cost of work accurately. Payment is based on hourly labor rates and material costs.

4. Indefinite-Delivery/Indefinite-Quantity (IDIQ) Contracts IDIQ contracts allow the government to order supplies or services as needed within a defined timeframe. They are common for recurring needs and often include task or delivery orders.

5. GSA Schedule Contracts Also known as Multiple Award Schedule (MAS) contracts, these long-term agreements with the General Services Administration (GSA) allow pre-approved vendors to sell products and services to government buyers at negotiated prices.

When the Government is Your Customer or Client

The United States Government spends anywhere from $350 billion and $500 billion annually through government contracts. 

Like any business entity, the government needs products and services to be able to function.

The government needs big items, like vehicles and weapons for the military, as well as pens and paper clips for government offices. Services like marketing consultation, transportation, and janitorial duties are also regularly purchased by the government.

Any company that sells its products or services to other business entities or nonprofits could probably also sell to the government.

The United States Government can make a great customer or client because of the following:

  • Government needs are easy to see through publications like Commerce Business Daily.
  • Rules and regulations ensure fair trading practices.
  • Government purchases are usually large and long term, providing a reliable income for the business.
  • Contracts are set aside for businesses owned by minorities and women, as well as small businesses.
  • Government business will give your company a good reputation as it means that your products or services meet high standards.

Conducting business with the government can also be difficult as it can be tough to find the right channels for marketing your company with so many employees throughout different branches. 

The paperwork involved and regulations for government business contracts can also be a bit overwhelming as a business owner. Thankfully, there are lots of options for assistance.

Visit the website for the Small Business Administration (SBA) for help making the government your customer. 

If you're interested in working with a particular federal government agency, like the Postal Service or the DOD, you can contact that particular agency and get your business on their mailing list. 

The federal government isn't the only option, state agencies and local entities, like school districts, also make great customers.

Smaller, non-federal agencies have more opportunities for trading and, even though they are smaller, they can offer just as much potential for growing your company as working with the federal government would. 

How to Succeed as a Government Contractor

Success in government contracting requires preparation, persistence, and compliance discipline. Businesses can improve their chances by:

  1. Building a Strong Capability Statement: This summary highlights the company’s expertise, experience, and differentiators.
  2. Networking Through Procurement Events: Attending government contracting expos or agency vendor outreach events helps connect with contracting officers.
  3. Partnering Through Subcontracts: New contractors often start as subcontractors under larger prime contractors to build experience.
  4. Monitoring Opportunities: Use platforms like SAM.gov, USASpending.gov, and GSA eBuy to find relevant solicitations.
  5. Maintaining Compliance: Regularly update SAM registrations, renew certifications, and follow audit guidelines.

Federal, State, and Local Government Contracts

Government contracts exist across multiple levels of government:

  • Federal Contracts: Managed by major agencies such as the Department of Defense (DoD), NASA, and the General Services Administration (GSA). These contracts are usually governed by FAR and are the most competitive.
  • State Contracts: Each state has its own procurement system, which may follow simplified rules and prioritize local businesses.
  • Local Contracts: City and county agencies purchase services for public infrastructure, schools, and municipal operations.

Each level involves specific registration, bidding, and compliance requirements, but all share the goal of obtaining value for taxpayer funds while promoting fair competition.

Benefits and Challenges of Government Contracting

Working with the government can be rewarding but comes with its own set of challenges.

Benefits:

  • Consistent Revenue: Government agencies are reliable payers, providing long-term financial stability.
  • Growth Opportunities: Many contracts include options for renewal or extension.
  • Reputation and Credibility: Securing a federal contract enhances a company’s credibility in the private sector.
  • Small Business Set-Asides: Programs like 8(a), HUBZone, and Women-Owned Small Business (WOSB) certifications give eligible firms exclusive opportunities.

Challenges:

  • Complex Regulations: Contractors must comply with FAR, agency supplements, and socioeconomic reporting requirements.
  • Lengthy Approval Processes: Bid evaluation and compliance verification can take months.
  • Audits and Oversight: Contractors are subject to performance evaluations and cost audits by agencies like the Defense Contract Audit Agency (DCAA).
  • Payment Delays: Government payment cycles may extend longer than typical private-sector terms

Frequently Asked Questions

1. What is a government contract?

A government contract is a legally binding agreement between a government entity and a private company to provide goods or services under specific terms, subject to public procurement regulations.

2. What are the main types of government contracts?

The main types include fixed-price, cost-reimbursement, time-and-materials, IDIQ, and GSA schedule contracts, each defining different pricing and risk structures.

3. How can small businesses qualify for government contracts?

Small businesses can qualify by registering with SAM.gov, obtaining relevant certifications (such as 8(a) or WOSB), and pursuing set-aside contracts reserved for small enterprises.

4. What are the risks of government contracting?

Risks include strict compliance requirements, delayed payments, and heavy oversight. However, these are offset by the financial stability and prestige of working with government clients.

5. How do I find government contract opportunities?

Opportunities can be found on SAM.gov, through agency procurement websites, and local government portals that list open solicitations.

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