The United States Federal Government is one of the biggest, if not the biggest buyer in the world. Every year, multitude of government agencies buy billions of dollars in goods and services from companies with as few as one employee to multi-national conglomerates. This is an extremely complex industry that tries to balance agency needs, vendor performance and oversight, with the congressionally mandated regulations designed to prevent waste and fraud.

When approaching Federal Government Contracting, most small businesses, particularly those new to the industry, focus on the \”top line\” – the winning of the award. While this of course is a key ingredient of creating a successful government contracting business, it is ONLY the beginning of the process. A far too often mistake many small businesses make is to assume that everything will go well if they perform and deliver with excellence. In practice, however, nothing can be further from reality.

The simple truth is that performance is not the main concern in government contracts. While of course important and quite significant, it takes the backseat to the single most important success factor in government contracts: Accounting.

Yes! Accounting.

Most small business entrepreneurs are shocked when the award of their first contract is held up – sometimes cancelled – because the company\’s accounting system is not certified by a government-designated cognizant audit agency. In addition to possibly not getting the contract that you just won, you could also lose your existing contracts if at any time during the performance period, the auditor deems your accounting system inadequate. But that still isn\’t all. Most small business entrepreneurs can only sigh in frustration when they learn that a percentage of their profit can be held back and that the contract is not actually done unless it undergoes a final audit, which in our experience is at least two years after it was physically completed, meaning you delivered everything and your customer accepted the final deliverables.

To be sure, this accounting requirement is necessary though many wish there was some differentiation between a small company with a couple of contracts and Boeing, Halliburton, or Xi Services. Unfortunately, with some relatively minor exceptions, all companies have to implement the same basic accounting system regardless of size, scope of operation, or revenue numbers. Further, this system must conform to a rather strict set of rules and regulations dictated by various components of the Federal Acquisition Regulations (FAR).

It is important to note that not all contracts are subject to audit but if you are going to stay in this industry, be successful and grow, you will not be able to avoid auditable contracts for long. An entrepreneurial segment that is particularly surprised by this process are those small businesses that enter the government contracting industry through the Small Business Innovation Research (SBIR) program, as we did at our company. One of the most attractive features of the SBIR program that you do not even have to have a formal company set up before you may submit a proposal. We submitted our first set of proposals under my personal Social Security number and only set up a company after we won our first contract from the Air Force Research Laboratories (AFRL). Another surprise for those new to the game is that the Phase I SBIR contracts are Fixed Priced and therefore are not subject to audit but the follow-on Phase II award, if you win one, is far larger and subject to the full cost accounting and audit processes. The third surprise is that the contract is not \”done\” until the government – make that the government\’s auditor – says it is done. The final suprise to a lot newcomers is that the government contractually has the right to ask for refund after the final audit if the audit shows any overcharge. This means that some two years after you have delivered the contract, toasted the completion with your employees (who may no longer even be with you anymore) and the customer\’s technical personnel have been reassigned, the government could ask you to write a large refund check, plus interest of course.

The message of this article is simple. If you are starting out in government contracting, you need to understand the pivotal role accounting plays in your company\’s, and your own success.

Author Bio: Bob Dourandish is a co-founder at Quimba Software, a software technology research and development company in the San Francisco Bay Area. You can read his blog at http://quimbasoftware.wordpress.com/

Category: Business
Keywords: Smabll Business, Government Contracting, DCAA, Defense Contract Audit Agency