Contract Killer

Local businesses struggle with dwindling government deals

Back Longreads Feb 1, 2012 By Robert Celaschi

Not anymore.

California’s fiscal 2012 budget had $15 billion in spending cuts, and Gov. Jerry Brown warns of more to come if voters reject tax hikes. Sacramento County’s $3.4 billion budget for the current fiscal year is $90 million smaller than last year’s.

Even the military is tightening its belt. Beale Air Force Base near Marysville did about $61 million worth of business with regional companies in 2011, down from $71 million the year before. For 2012, the figure is expected to drop at least another 20 percent.

Looming over all of this is $1.2 trillion in automatic across-the-board cuts in the federal budget for fiscal 2013, thanks to the inability of Congress to craft a more nuanced deficit reduction plan.

For companies dependent upon government contracts, the impact has been staggering.

“In the last four years, we went from probably 60 percent of our revenue coming from government agencies to now about 25 percent,” says Raul Martinez, business development manager for Network Design Associates Inc. The Fair Oaks information technology firm has 25 employees and did about $5 million in revenue in 2011.

What really hurt were the government IOUs, Martinez says, some of them six figures. A contract may require payment in 60 days, but there’s little a company can do if a government agency decides to take six months.

“We weren’t expecting to see IOUs for contracts in place,” he says. “We saw it coming in the respect that people were talking about it. But there wasn’t an exact date of when it was going to happen.”

Then, suddenly, the money stopped coming on schedule.

“They were good for it, but just not in the time we expected,” he says.

Martinez anticipates more government contracts will vanish. He’s been talking with a couple of government security agencies that can’t get their funding signed off for a fresh round, and the only reason they’re still sending Network Design Associates work at all is because the departments’ internal IT resources are stretched so thin, he says.

Empire Safety & Supply has been selling safety equipment to the state for 20 years. It did $6.3 million worth of business with the state in fiscal 2011, down from $9 million the year prior, according to the Department of General Services. That number is still dropping.

“We just finished a five-year contract we had with the state in August, and they have not gone back out to bid. That has hit us pretty hard,” says Tom Crawford, vice president for the Roseville company. “They say they are regrouping and will send out a new bid after the first of the year.”

Empire asked if it could just extend the prices on the old contract in the meantime, but the state nixed that idea, Crawford says. He’s worried departments might buy the coveralls, first aid kits, flares and other safety equipment through bigger companies that can piggyback the orders on existing contracts.

Miles Treaster & Associates used to do about 25 percent of its business selling office furniture and related items to the federal government. That has dropped to about 15 percent, on tighter margins. But the company is grateful to keep even that, says CEO Therese Kingsbury.

“You can’t create money where there is no money,” she says. “As much as you service and value the relationships, if they don’t have the money there is nothing there.”

That doesn’t mean Kingsbury and the others have given up. Government contracts may be down, but it’s still a huge field and far from making up the bulk of the regional economy. Companies have revamped business models to keep as much of the government work as they can and are looking elsewhere to make up lost revenue.

“My general impression is that businesses are hunkering down and doing the best they can with the market that’s there,” says Jack Toney, director of the procurement assistance program at The Federal Technology Center in North Highlands. His job is to help companies increase their odds of getting a slice of the shrinking pie.

A good tactic to follow even in a strong economy is using downtime preparing to assault the government marketplace. That includes making sure the company is registered with all levels of government that let out contracts, lining up any certifications necessary to win a bid and taking a tough look at how the company crafts proposals.

Yes, price is important, probably more now than ever. But government contracts don’t always go to the cheapest bidder. Sophisticated contracts have a point system for other aspects important in executing the deal, Kingsbury says. That could include speed and quality of service. Government agencies know that simply going with the low bid can mean costly change orders and other add-ons later, she says.

“If they are looking at best value, it would typically be a two-step procurement,” Toney says. The first step is the technical proposal that spells out how the company would meet the contract requirements. That would get a score, and high-scoring companies would be asked to send a price proposal. The type of scoring can vary greatly from one contract to the next.

Empire Safety & Supply has made a push to get more federal business as local and state work has dried up.

“We see a lot of room to grow there,” Crawford says, but it can be tough finding the route to the door. There are only so many hours in the day, and devoting too much time to making contacts takes away from other aspects of business.

Individual government agencies can be a good source of information about how to put a good bid together.

“Usually, they will make an appointment and come into the office, and I will tell them what they need to do to get going,” says Vivian Celentano, director of contract operations and small business at Beale Air Force Base near Marysville. The U.S. Small Business Administration can also provide help in getting military contracts. Private-sector agencies such as the Yuba-Sutter Economic Development Corp. have been lending a hand as well.

“As soon as we hit this recession, we saw an immediate increase in interest,” says development corps President Brynda Stranix. Construction companies especially asked for introductions to the right people on the base.

“With these private businesses, if they will get involved and start looking for opportunities to partner, there are going to be opportunities. Even a small machine shop can partner and provide services,” she says.

A company doesn’t have to be a prime contractor to get government work. Toney often suggests companies seek out subcontracting work. Among other things, it frees a company from having a direct, legal relationship with the government.

Third-party organizations like Toney’s or an entity called U.S. Federal Contractor Registration offer free market assessment and registration evaluation. They won’t write the contract for a company, but can go over the solicitation to make sure a company has all the bases covered before submitting a bid.

For companies still providing service after a sale to a government agency, it’s important to give good service on the existing contracts even if the department isn’t buying anything new at the moment, “Because some day they will,” Kingsbury says. “And you want to be in a position where you earn the business.”

Contractors also are learning to wean themselves from so much dependency on government.

“When we knew our contract would be ending with the state, about a year and a half ago, we focused on adding more private industry to our mix,” Crawford says. Since then, private sector work has grown from 30 percent of Empire’s business to about half.

Network Design Associates also focused on the private sector to overcome the government drought. It, too, had to get used to a different way of doing business.

“We’re getting a lot of smaller clientele than we are used to,” Martinez says. The effort has paid off with 2011 bringing a growth spurt in revenue.

But it produced a new problem: Now Martinez is having trouble holding on to enough good computer engineers. Senior-level talent is heading to the Bay Area and Seattle, where tech companies have left the recession behind.

“Especially if they live in West Sac or Elk Grove, they can commute to the Bay Area for a 40 percent raise,” he says.

It’s important to remember that a specific company isn’t necessarily destined to follow regional statistics. Just as some companies fail in a boom, some can thrive in a recession.

Pride Industries had 20 percent top-line growth in 2010 and was expecting similar totals as 2011 drew to a close. The Roseville-based nonprofit gets about two-thirds of its revenue from government contracts.

Pride has two main divisions: manufacturing and logistics, and integrated facility services. The latter is where most of the government dollars come in, primarily through federal contracts for such things as custodial services, building maintenance, landscaping and commissary operations.

“We are fairly well diversified both by our sectors and by our industries,” says Audrey Farrington, vice president of marketing. “We all know that we are going to see significant belt-tightening. All business works in cycles. Diversification and a focus on cost controls helps you get through those challenges. The key is to recognize that it is a reality.”

Realizing that customers’ budgets are being squeezed, Pride finds ways to stretch dollars further, she says.

No matter what happens to government budgets in the coming year, there are still critical necessities that will have to come from private-sector vendors. A combination of preparation, persistence and price can help a company hold on to some of that business.


 

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