Tuesday, June 24, 2008

Government Whore

Even though I once worked for a defense contractor, I never thought about federal government contracting until a government contractor approached me about subcontracting on an extension to a contract they had. I looked at the requirements, which my product met off the shelf, and thought wow, that's a lot of money I could make if we win! 500 seats at $10K a seat (the off-the-shelf discount price), means easy government contractor money! Woo-hoo!

Hmmmm, doesn't quite work that way, at least for a product company like mine. For whatever reason, the contractor (the "prime;" I was a "sub") just didn't understand how a subcontractor could exist that simply sold products. They just couldn't fathom it, for some bizarre reason!

Well, by "they" I mean the mid-level project manager lackeys that were running the contract.

I admit there was confusion on both sides though because I just couldn't fathom how anyone could think otherwise, and I was new to government contracts. I mean, isn't buying products from a vendor very simple? You order the product, the vendor ships it to you, and bills you. I kept telling them this but they kept asking for a "cost breakdown." I kept saying "look, we're just a vendor of a product and we sell it to you and you resell it to the government. Isn't that all it is?"

Then they'd say no, we want you to be a subcontractor. We need a cost breakdown.

Our initial conversation went like this:

Prime: "Send us a quote for 500 seats with cost breakdowns"
Me: "500 x $10,000"
Prime: "Okay, but how did you arrive at that price?"
Me: "That's the market price -- that's what I and my competitors charge."
Prime: "You can't price it like that. I need you to break it down by material cost, and labor."
Me: "That's all included, it's turnkey, we install, train, provide support for one year, everything."
Prime: "I know but I need you to break it down. I have two columns here: material cost, and labor. What are those numbers?"
Me: "We don't break it down that way, we have a firm fixed price. $5 million for everything."
Prime: "You can't do it that way on this contract. You have to break it down."
Me: "Okay, material cost is $5 million, labor is zero."
Prime: "You can't have zero labor. About how many hours does it take to install and train those locations?"
Me: "Ummm, 300 hours?"
Prime: "Okay, and the labor rate for that is $97.65 an hour, times 300 is $29,295. Is that all the labor? What about one year help desk support?"
Me: "Hold on, where did you get $97.65 an hour from? We don't price that way, I'm telling you it's very simple, send us a purchase order and we'll..."
Prime: "Sorry, but that's how you have to price it. How many more labor hours are involved?"

Well that all seemed stupid but I didn't want to lose a $5 million sale over some lackey contracts guy wanting numbers to fill in his boxes, so we came up with some "labor" estimates and "travel" estimates, and "project manager" labor estimates, and "administrative labor" estimates, then it got to materials cost which I presumed would be for the actual software. So I took $5 million minus the above computed labor and said that's the material cost for the software.

Prime: "You can't do it that way. How much do the materials cost you?"
Me: "What do you mean -- the CD's and binders?"
Prime: "Yes, if that's what's involved."
Me: "I don't know, are we delivering one per seat or what? $2500 maybe?"
Prime: "Okay, and this contract allows 13% markup so we'll put down $2,825."
Me: "Fine -- put the rest as the software license."
Prime: "We can't do it that way. You have to get quotes from three vendors."
Me: "We are the vendor! That's the price."
Prime: "You can't charge that. You have to charge it by labor or materials. How many hours does it take you to make?"
Me: "Zero, it's already made."
Prime: "Then you can't charge for it."
Me: "Yes I can."
Prime: "No you can't."
Me: "Yes."
Prime: "Sorry, no, that's not how this contract works."
Me: "Well that's our price."
Prime: "Sorry but no, it has to be labor and materials."
Me: "Sorry but yes, it's my company and that's how we sell it."
Prime: "Doesn't matter. You're the sub and we're the prime, you have to price it how it's allowed in the contract."
Me: "No."
Prime: "Yes."

There was a lot more detail but that was the gist of it in so many words. This was all before we had signed any agreement, too, so I didn't have to do anything -- who were they to tell me how I had to sell it to them? It was bizarre and confusing to me because we were just on different pages. I "had" to sell my $10K software for five bucks because I was only "allowed" a certain profit level above the physical material cost? Screw that.

So I did some research and asked around. I just wasn't clear on how government contracting worked (and I'm still really not, there are entire professions devoted to understanding it)! But the way I believe most these big government contractors work and make their tens of billions annually, is they're simply whores to the government. They don't make money creating and selling things. They sign up to be a whore and do whatever the government tasks them to do, and they simply get paid by the hour and reimbursed for expenses plus pre-agreed profit markup. The rates are already set or are established in the contract. For them, income billed minus salary paid to the employee = their profit.

Build you a widget transducer you say? Okay.... whew, that took us 10,000 hours. Here's your bill. What do you want next? Build a new missile? Okay, that took us X hours times the labor rate, and $10 million in materials. Here's your bill. On and on for billions of dollars.

So the confusion between me and my prime was they assumed my business was the same as theirs -- that we simply whore ourselves out to provide whatever the government wants, or in their case whatever they decide to task us with. They assumed I knew they knew this, but I didn't because I didn't know anything about that. Recipe for mutual confusion.

The "confusion" got cleared up though after talking to the VP in charge of that division, so the project manager reluctantly massaged their numbers ("wellllllllllll, we'll make an exception this time but that's not how it's normally done here...") into whatever format their boxes required, and we agreed on the $5 million firm fixed price.

Oh and we won, yay! (Although it turned out to be "only" $4 million because the government revised their needs... and wanted it installed over multiple years).

My lesson from that though was "no, people don't necessarily understand what your business does. You have to explicitly tell them sometimes and sometimes refuse something when they insist."

Actually I still encounter that kind of confusion. Like they then sent a "subcontractor agreement" to be signed and returned. To me it had a lot of weird non-applicable clauses, left out key important things like ownership of the product, etc, and our lawyer had the same and other concerns. I told the prime we were reviewing it because it had problems, to which the contracts guy seemed baffled. "What do you mean? Everybody signs it... we've never had problems with it."

"Maybe, but we're not a labor company like this agreement assumes. We're a product company and just want to sell you our product. Don't you have a vendor agreement or something?"

"No, this is what we use -- everybody signs it."

"Well I'm not signing it because it doesn't cover what we're providing. Here's our revisions and my signature at the bottom."

After lots more back and forth: "Fine...we'll make an exception this time."

They signed it and so far it's going well. But wow, you'd think they'd have a better clue. Is all of federal contracting like this?

What's with these customers, anyway?

Other than federal customers I also sell to institutions (sort of "public utilities"), some for-profit businesses, and local and state governments. Institutional and government selling is its whole sub-art form from regular consumer sales, so some of what I've described is unique to that. But businesses I've found are pretty good customers because they "get" business. It's the government and institutional customers that can be a pain because sometimes they just don't "get" how businesses work, I think. Maybe 30 years in a government office will do that to you, but I have to deal with it a lot.

One issue I keep having with them and is really, really annoying is the whole "request for proposal" and their requiring anything they want in the proposal. The customer has their procurement process and like the anal projects guy above has specific boxes they need filled out, and if they're not filled out they will simply throw your proposal away. Just like that. All my competitors know that, and so does anyone who sells to government entities I'm sure, but I didn't know that at first and found out the hard way.

It was a request for proposal that required audited company financial statements showing sales and profit, and breakdowns of the product price showing costs and profit. Huh? I'm a privately held company and am not about to give that out. I politely put down "company confidential/privately held" and of course they promptly threw away my proposal without even looking at the rest. We had the lowest price and were truly best value I think, yet they just threw it away, just like that. Fail.

Huh? What gives a customer the right to demand that and expect to get that confidential information? So I asked them that afterward, in so many words. They said they needed to know our costs to make sure we weren't gouging them. That was just their procurement rules which they were required to follow. Oh, and they generally "allowed" no more than 20% profit.

Uhhhh, okay, but this is a free market we have, isn't it? I mean, if this were a communist country I could imagine justifying prices, but the market price in a free market is simply the going market price. Or am I way off base here?! Do western countries tell OPEC "sorry, you can't charge $135 a barrel because your costs are only $5 a barrel. Therefore you have to sell it to us for no more than $8 a barrel."

Well of course a customer can ask for whatever they want and demand whatever they want and throw out whatever proposal they want. Fine, but it's "their loss." I'm just mystified why some organizations operate that way, but they do.

Unfortunately, I soon found out all my competitors bend over backward and kiss any customer's ass and give any and all requested information, so now I have to as well. Whatever. Another thing I get to gripe about, like they probably do too I'm sure.

Next Time


I'll try to start posting some positive things about running a small software company eventually... it's not all bad!

38 comments:

Anonymous said...

Loved the story. Was sounding like who's on first there. Funny.

Good effort on the contract win.

I could use one of those right now.

All the best

Martin said...

Fascinating story, Bill. I'm loving your blog :)

Anonymous said...

Great post. I once had a $300 order from a county in Florida. Before we could proceed I had to fill out a 20-page vendor information sheet. I called them and politely told them it wasn't worth it, sorry. I felt bad for the guy who ultimately wanted the software -- guess he had to settle for something else.

Fogus said...

But working as a gov't contractor allows you to explore its rich IT ecology!

http://www.earthvssoup.com/static/it-ecology/

-m

Anonymous said...

Well, the prime was either staffed with idiots writing the proposal or they were just obstinate. There are multiple types of contract vehicles but there are three primary ones:

Time and materials (which you described), another which I forgot but it was for labor only (sort of like a temp agency vehicle), and firm fixed price. Which is usually used when the government just wants to buy something that already exists.

The problem is that your idiot prime wanted to put your clearly FFP contract into their mold which was T&M already and they didnt want to do the work to seperate that out.

Not saying that the government is efficient by any means, just that your prime was to blame in this instance.

Sergej Andrejev said...

Well this is just fun :) Still you are lucky that some other company didn't just bribed the goverment. I hear a lot about such "deals" here in Lithuania

Anonymous said...

I was a contractor for IBM Federal for a few years. My understanding is that IBM Federal existed as a distinct company for precisely the reason that big IBM refused to divulge all the details of its business. If you spin off a little subsidiary, then you can bound the release of confidential price information to the government.

Bill said...

Anonymous (three above), actually their contract was also FFP which made it even more pointless. I think though it was a negotiating ploy, maybe from some higher up thought they could get me to break it down then have to justify each category until they could whittle my price down.

David said...

Welcome to government contracting. Don't make the mistake of assuming the federal government is like any other customer; federal laws mean you have to be more open about your costs.

Anonymous said...

That was an interesting read.

Maybe you can do a followup one day later :)

The guy seemed to have a tunnel-vision, everytime you tried to "distract" from his vision, he seemed baffled and tried to put you "back" again onto his agenda

Anonymous said...

The system works that way because it is open to rorting. Breaking things down and adding a reasonable (13%) margin is an attempt to prevent outrageous profiteering.

A lot of government projects, especially defence projects, are by necessity from a monopoly supplier. When there is no competition then the vendor will tend to pick the highest price they think the customer can afford, and when the customer is the US Government, it can afford quite a lot.

Yes, its easier for you to just set a price and tell the customer to take it or leave it. That works in an open and competitive market, but if the government allows itself to fall into that trap, even more of taxpayer's money will be wasted.

Bill Robertson said...

So, earning the $4 million was a bit of a hassle? I can think of worse problems to have.

Info said...

When a software subcontractor finds that the company he's been pimped out to has and is committing a federal crime what should he do? how does he handle the various NDA's that he's signed?

Anonymous said...

Then there's a whole bunch of other rules about not being able to sell to one branch of the goverment for less than to another branch.
So if you sell to the feds you can't offer a lower educational price to a state university - but you can to a rich private university!

Peter Michaux said...

I just finished reading all your blog articles so far. Great reading! I look forward to future articles.

Bill said...

To the above comments regarding cost accountability, I do know and understand that, but mine is a commercial software product with four domestic and about five international competitors, with a good public record of established market price, and my competitors' similar products on the GSA schedule. My price was lower than that and completely fair.

Also there are rules about a prime getting multiple bids for a commercial product from vendors, which I don't think they did which is why they insisted I be a subcontractor instead of vendor.

Also, they asked for firm-fixed-price and had nothing beyond vague specs -- I asked them how many sites to install it to and they said "we don't know yet, but tell us the price anyway." And how much support did they need, 24 hour help desk or office-hour email or what? And they said "we don't know, but tell us your firm fixed price anyway."

Bill Robertson, well the $4 million is spread out over 5 years and with 7 employees now it certainly isn't all profit, but yes the 10 years I spent with no social or family life hacking away at code, quitting my job for zero income to live off credit cards while I hoped to complete my first sale, having negative net worth and high interest debt all those years, finally getting money but spending it on employees who may or may not work out, yes I'd say landing that contract was a hassle! I'm not complaining, but I probably could have had as much money in the end, with less headache, if I had stayed with my corporate job, saved in my 401K, bought and sold a house or two in the boom, worked on climbing the corporate ladder, and still got to go home at 5:30 every day. It really is a tradeoff.

Gordon Martin said...

Great blog Bill!

I happen to be one of those government whores - a consultant working for time - or "per diem" as we like to say in Canada. I realized a long time ago that this job works well in the short term. Nice money up front, but I'll be poor at the end if I don't take care of my retirement, etc. The only real way is to find a way for someone to pay you for an item - something other than time.

I have always felt my answer would be developing a software product. So I will be reading your blog with interest. Keep up the good work.

BTW, you are going to need a add some navigation to this blog - a way of getting to an archive or something. I use the same template as you over at http://VistaVitals.blogspot.com - you might take a look and see what I've done.

Bill said...

Thanks Gordon, although I think life as a government whore can be perfectly okay... $99.76 an hour times 2000 hours a year, going home promptly at 5pm every day, can make you just as much as running a million-dollar business with payroll and taxes and management problems and stresses about sales and everything else. And you probably take home the same $175K, without benefits, at the end.

Gordon Martin said...

I think you might have the wrong idea about us government whores - we are far more alike than you might expect.

Although 9-5 is typical for someone who is employed by one of these primary contractors - it is not the reality for us subs. From 9-5 I work for the client and get my money. But after 5 I have to start running my company. Whether this means upgrading certifications, reading up on something the client expects me to know (but I don't) or marketing myself due to an upcoming contract end. I find consulting has a high PITA factor (pain-in-the-ass factor).

You can also look at my skills much the same way as one of your products. Hopefully there is a market for my skill and many people want it so the price goes up. But I have competitors that may have better skills or may sell themselves more cheaply. Perhaps my skill is based on a technology that falls our of favour so I fall as well... Many of the same issues I should think.

But I can't scale like you can. I only have one of me to sell. I can't sell more of me without starting a company up and hiring employees who I sell... then I have many of the same problems as you again.

The problem is, I can also have gaps in income like you if I fail to find my next customer in a timely manner - but I can't make huge sales like you can to weather the storm - I can only make slightly more than a typical employee and have to be mature enough to sock some of that away. I can't get used to a better lifestyle just because there is the illusion that I can - that would eat up my buffer.

Now what happens when I get older? Will clients pass me over for a younger, sexier model? Will I still have the drive to adapt to the rapidly changing IT technologies?

I'm not saying that your life is a walk in the park - but I can see some solutions there for the shortcomings of my business.

Anonymous said...

this post shows a total lack of understanding of government contracts. did you (the blogger) actually read contract? your attempt at fabricating false cost figures is unethical and shows a cynical attitude to learning a different market than the one you already know.

so if a customer wants to do business in a way different than you understand, said customer is inefficient/ignorant/useless?

wow, can't imagine why anyone buys your "product"
this is the last and only time i'm visiting this page.

Bill said...

It's unethical to submit a bid in an open competition, for the same amount we sell it to everyone else? Okay, bye.

MaxVT said...

Speaking from the government side, you won't believe the amounts of paperwork and red tape that is necessary to do even the most trivial things, both on our side and on the side of the companies we work with. This often means that smaller (and sometimes better) companies simply don't participate in tenders, as they can not afford putting a lot of people and money into preparing a bid that would in all probability be underpriced to win by one of the major contractors.

Please keep writing, I'm thinking about starting something not unlike your company in the future, and sharing your experience will be much appreciated by me and surely by other "lurkers" as well.

Not a Govvie said...

Anonymous said... so if a customer wants to do business in a way different than you understand, said customer is inefficient/ignorant/useless?

In the case of the U.S. government, absolutely. I've spent about half my career working in the real world and the other half working for government contractors. Right now I'm in the latter position and am giving considerable thought to getting out. I no longer find myself willing to lend my talents to support organizations that display waste and incompetence on the level the government does.

If I had a prospective customer whose disruption to my business would offset any potential benefit from doing business with him, I'd tell them to take a hike, too.

Bill, my advice is that if you can avoid getting too deeply with the feds, avoid it. Your business will undergo significant changes that will make it doing business with the private sector difficult.

wow, can't imagine why anyone buys your "product"

Probably because when folks from the real world want to buy his product (without quotes), they do so based on whether or not it does what they want and whether they feel his asking price is fair. At some point in history, contractors started giving the government the shaft, the govvies weren't able to figure that out for themselves and the results were the incredibly complex procurement regulations.

Working for the government was a pretty groovy gig 30-40 years ago, but lately I find that federal service has become a dumping ground for people who couldn't hack it in the real world.

But why am I wasting my breath? You're not reading this anyway... are you?

Bill said...

Thanks for the tip, notagovvie... it's just hard to turn down a sale like that!

Raiha said...

Great story, doesn't sounds too much different from how the Australian Federal government works... Love your writing. Thanks.

Tim Martin said...

Maybe you can deal with the government bid requirements by setting up a separate company for doing the company bids.

It will buy the product for $x, and sell it for $x+20%.

And you won't mind giving all its account details.

As long as $x+20% is the same price you sell to other people at, there does not seem to be an ethical issue. You are just keeping all the government stuff in its own little world.

Dan said...

This story just made me laugh and cry. I've been working for government contractors for about 10 years now, and I am familiar with the common contract mechanisms they use. FFP (Firm Fixed Price), T&M (Time & Materials), and CP (Cost Plus). Others have already commented on FFP and T&M, so I'll just add that Cost Plus is where the company is reimbursed for costs and the company can earn a cash reward (or plus) for meeting contractual performance criteria.

The real issue you have isn't related to a mismatch in between you and your prime using two different contract types. The real problem is that you are a product company where government contractors, including subcontractors, are basically government developers.

The mature government-contracting companies bid a Request, detailing the solution, how the solution will be managed, what job-types and how many will be employed, etc. along with a significant cost breakdown of labor & materials.

THEN development starts after the contract has been awarded. It does not matter if the contract is FFP, T&M, or CP, they all work this way. FFP just means the company's profits are directly impacted by the amount of time it takes to complete the job. This is why T&M and CP are preferable in the industry. Taking longer than anticipated does not directly hurt the bottom line.

The other key characteristic of government work, with some simplification, is this: there is only 1 customer with dozens, if not hundreds of suppliers.

Add in the effects of nepotism, cronyism, and the politics involved with multi-year million/billion dollar projects, you can quickly see how the industry has reached its current state.

Anonymous said...

This doesn't surprise me one bit. I work for probably one of the most incompetently managed local government agencies in the country, so I can imagine what the federal level must be like. We still use multipart forms in conjunction with typewriters (for which maintenance contracts in the millions are awarded regularly - go figure - maybe I should open up a typewriter maintenance contracting shop). Telex terminals are still in operation as well, as are IBM mainframes from the 1970s powering command-line terminal systems. I have no clue what our fairly large IT department and all of its contractors do all day, because the systems we have are barely functional and we certainly see *very* little - if any - improvements from year to year.

Clearly, in my agency's case, the complex "procurement regulations" we have are doing little to reduce wasting the taxpayer's money. I'm sure this isn't much different at the federal level.

Anonymous said...

The people doing the work DO NOT make $99.76 as a government whore. Generally you work through layers of contracting company and this is how it works.

Prime pays $99.76 to first sub. First sub takes out $20/hour+ as profit. Gets a second sub to find the candidate and they take out $20/hour for themselves nd the whore gets $60/hour or so without benefits.

Lauren said...

Hi Bill,

I really like your blog. I hope you start writing again!

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Eva Fonda said...

This things can really be tricky. In fact, you're quite lucky that you won. Anyway, sometimes it really helps to get in touch with reliable government consultant firms. This way, you'd be more aware of all the things regarding contract matters.

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