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!