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Types of Federal Contracts

Federal contracts exist broadly between two categories: products/goods and services. The former includes almost everything from food to furniture and medicine to machinery. The latter includes professional services, research and development, management and administration, and consultancy. The majority of federal contracts, by dollar value, are awarded in the following sectors:

  • Facilities and construction, including real estate purchases and leases, building materials and services, etc.
  • Professional services, including financial, legal, public relations, marketing, and technical expertise.
  • Information technology, including hardware, software, consulting, telecommunications, and security, etc.
  • Transportation and logistics, including delivery, motor vehicles, support, and fuel, etc.
  • Medical, including health care services, pharmaceuticals, medical equipment, and consulting, etc.
  • Industrial products and services, including machinery, tools, and maintenance, etc.
  • Security, including state-of-the-art systems and real-time services, etc.
  • Human capital, including educational services and vocational training, etc.
  • Travel and lodging, including event management services and food and beverage supply, etc.
  • Office management and administration, including purchasing furniture and essential supplies, etc.

After classification based on industry sector, product, or service, there is further categorization depending on contract terms:

  • Fixed Price Federal Contracts
    • This type of contract is applicable for both goods and services. Open government contracts of this kind typically invite bids from eligible contractors or vendors. If it is a product, then a specific unit is preset for the pricing— such as by the carton, ton, or some other metric. For services, the pricing is typically per hour. It should be noted that fixed-price federal contracts may have specific clauses that could alter the calculation of billable amounts depending on relevant factors, such as quality or regulatory compliance.
  • Cost Reimbursement based Federal Contracts
    • Federal contracts for typical goods and services are usually fixed-price agreements. Cost reimbursement-based federal contracts are common when a fixed price is difficult to ascertain or predetermine. Research and development services, for example, are difficult to price at the outset. There are myriad variables in such contracts, especially in the deliverables. Hence, a cost-reimbursement policy is pragmatic for contractors and, to an extent, for the government.
  • Time and Materials based Federal Contracts
    • This type of contract is commonly used for services wherein select materials may be requisitioned for the deliverables. The service is billed hourly, and the cost of materials is added for the billable time. There is, of course, a price cap as agreed upon in the bid or proposal. Time and materials-based federal contracts are typical for tasks or operations spanning a relatively short period.
  • Incentive-based Federal Contracts
    • This should not be presumed as a contract that pays only incentives. Instead, it is labeled as an incentive-based federal contract due to a provision. Most incentive-based federal contracts are either fixed-price or cost-reimbursement agreements, with a bonus payable only if a certain quality and compliance standard or other criteria are met.
  • Delivery-based Federal Contracts
    • There are a few types of contracts wherein the deliverables are not precise or wholly defined. The variables in such cases may be time, materials, the type of product or service, and other factors. In these cases, it is practically impossible to have fixed price or cost reimbursement-based contracts. Hence, delivery-based federal contracts are the only feasible option. 

Benefits of Federal Contracts

There are myriad advantages of federal contracts. The most noteworthy benefits are:

  • Financial reliability.
  • The potential for growth and expansion.
  • Enhanced brand value.
  • Long-term business viability.
  • Special advantages.

Financial Reliability

The federal government is a reliable paymaster. Unless there is something seriously wrong with the deliverables, the federal government generally does not delay payments and is consistent as per the billing cycles. Moreover, unlike private or public enterprises, the federal government is not vulnerable to a cash crunch or probable bankruptcy. Hence, companies know they will be paid for their products or services.

Potential for Growth and Expansion

A company can grow and develop its expertise by working on federal contracts. This is primarily due to the stringent regulatory and compliance standards that force businesses to take their business practices to the next level. As a result, most businesses emerge as more efficient organizations after working on a few government contracts. Business expansion also becomes easier when a company starts winning federal contracts due to the infusion of reliable capital. 

Enhanced Brand Value

The importance of having the federal government as a client in a portfolio cannot be overstated. Every industry veteran knows the stringent regulations for federal contracts. If your company has won and delivered on a few federal contracts, your potential clients will be assured that you can and will live up to your commitments.

Long-Term Business Viability

The federal government is never going to be out of business. If your company continues to win federal contracts and deliver the products or services as per the terms, then your business will find its place in subsequent shortlists. The federal government alone can make a private or public business viable in the long term.

Special Advantages

There are federal contracts designed to give advantage to minority-owned enterprises, female entrepreneurs, and others who have been traditionally disadvantaged in various spheres of employment and business. These are called “set asides,” meaning the competition for that work is set aside for those businesses in that category.  

Challenges of Federal Contracts

While you can gain financial viability and grow your business with federal contracts, government contracting is not without its fair share of challenges:

Stringent Rules

As a business, you are undoubtedly familiar with your industry’s regulations. These will be in full effect while working in the federal government space. Additionally, there can be additional regulations or compliance standards for specific government contracts. These rules are quite stringent. Any company vying for federal contracts should be prepared to deal with stringent regulations.

Stiff Competition

Competition is perhaps the most daunting of all challenges concerning open government contracts. You have to prepare well to gain an edge over your competitors. First, you need access to an up-to-date federal contracts database. It also helps to have insights into government procurement contracts to understand what it takes to submit a winning bid.

Red Tape and Bureaucracy 

Red tape and bureaucracy have become more manageable in the last two decades. However, some bureaucrats will still slow down with paperwork, the various processes involved in doing business with the government. You must learn to endure the red tape and bureaucracy if you want to leverage federal contracts.

Intrusive Supervision

In most cases, the government is not unnecessarily intrusive, but businesses must learn to deal with supervision and oversight. On the other hand, intrusiveness can help companies improve their efficacy, efficiency, and compliance, so there is a silver lining.


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