Article
Government contractors: How to understand your contract risk profile
Sept. 25, 2024 · Authored by Joseph P. Bentz, Drew Lewis
Although many factors can influence the nature and extent of government contract oversight, five—including contractor size, product/service commerciality, contract type, contract size, and competition and negotiation—have the greatest impact. They are interdependent of each other and, therefore, must be considered both individually and in the aggregate. As you seek to better understand your contract risk profile and chart a successful path forward, consider using these factors as a tool to understand, anticipate, manage and mitigate government contract compliance risk.
Five factors to understanding your contract risk profile
Contract requirements and regulatory exemptions vary for smaller and larger firms, as well as whether a firm is a contractor or a subcontractor. Small businesses (meeting the Small Business Administration’s size standards) are exempt from some of the government’s most onerous regulations. As contractors grow, they can expect to trigger more regulatory burdens and more direct government oversight.
The government’s rules establish a preference for commercial products and services and require it to acquire them at reasonable prices established in the commercial marketplace -without regard to a contractor’s costs of production. Accordingly, commercial item contracts are exempt from many onerous regulations and are generally insulated from most (but not all) government audit and oversight activities. Contractors selling commercial and non-commercial items on a single contract must persuasively demonstrate commercial pricing to rebuff the government’s ever-present desire to audit production costs (and deny reasonable commercial margins).
Contract type is the nucleus of government contract risk. It is the instrument by which performance and cost risks are allocated between the parties. Contractors willing to accept greater performance and cost risk are rewarded with less burdensome administrative requirements. As the government accepts greater performance and cost risk, contractors must accept heavier regulatory compliance and oversight burdens. Those new to cost reimbursable contracts must enter with eyes wide open and with considerable organizational preparedness for the oversight that will ultimately follow.
Contracts below the simplified acquisition threshold ($250,000) generally carry the fewest compliance requirements. Additional regulatory burdens may accumulate (depending on contract type) as contract values grow beyond $2 million. Generally, a large volume of low-dollar contracts will attract less direct government oversight than a small volume of large dollar contracts.
Competition and negotiation:
The competition spectrum ranges from sealed bidding (highly competitive price shoot-out) to sole-source negotiation (noncompetitive cost-based pricing). Combined with the four factors above, competitively awarded fixed-price contracts for commercial items offered by small businesses below $250,000 carry the least compliance and oversight risk. The opposite carries the most risk. In the absence of commercial market information and competitive forces, the government deploys its arsenal of regulations to prescribe nearly every contractor business activity.
