Fewer Small Businesses Seeking Federal Contracts Due to Reporting Requirements

A decreasing number of small businesses are seeking and receiving government contracts. And part of the reason for this decline may be the strict reporting and compliance requirements.

The good news is that small businesses are receiving a higher amount of government contracting dollars than before, about 28 percent. However, the amount of small businesses receiving contracts decreased from 62,670 to 61,298, a 2.2 percent decline over the past year. So basically, fewer small businesses are receiving contracts, but those contracts are larger than before.

In a recent discussion on the Federal Drive with Tom Temin, Founder and CEO of PROCAS, Jim Wesloh suggests that the strict reporting requirements may be scaring away some small businesses from the world of government contracting. Specifically, small businesses must keep careful track of time and expenses related to all government contracting efforts in order to justify the expenses.

Wesloh said, “People have to record their time every day. If it’s a digital system, they have to be a unique user login times other people can’t get in and do your time for you. If you make a change, there has to be an audit trail of the changes with a reason for the change. And at the end of the period, they have to certify it. And then a supervisor has to approve it. So, these are just some basic elements that you must have. And if you don’t have a system that can handle that, then the defense contract audit agency or some other auditor might come in and say that these costs are not justified, they’re not allowable, we have no confidence in them. So, the government may not reimburse you for them. So, you might not get paid on your contracts.”

These reporting requirements can lead to extra strain on small business teams due to the increased steps and potential for more sophisticated software and tracking systems. And these requirements don’t just relate to resources used in the government contracting space. If a company secures any federal contracts, their entire operations may face higher levels of scrutiny, since general overhead expenses are often factored into contracts.

Wesloh added, “If you’re a government contractor, everything falls within the scope of the audits, because things that you do on the commercial contracts will also affect the government contracts, you have direct costs that are for a particular project. But you also have indirect costs that are allocated across contracts, both government and commercial. So you have to establish your base, which would be like the denominator of a fraction, to show how much needs to be going to the commercial contracts and the government contracts, you have to record time for all your contracts, and also your indirect expenses, your overhead and your general administrative expenses, as well as your paid time off and holiday, those also get allocated to your government contracts and your commercial contracts.”

These compliance requirements can certainly stretch small businesses. But the lighter competition among small businesses for government contracts could make them more lucrative than ever, especially with federal agencies trying to allocate a certain amount of dollars to small businesses. So it is definitely important to make sure your operations can handle the additional strain. But larger contracts and decreased competition could make this a worthwhile endeavor for many small businesses.

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