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When small businesses are considering entering the federal marketplace, often the Small Business Administration and experienced contractors will suggest they go the route of becoming a subcontractor to a prime. Subcontracting can be a great way for business owners to learn about the common ins and outs of government contracting while working alongside another company that can offer advice and expertise.
Although good results can come of subcontracting relationships, there are some risks associated with these agreements. A series of American Express OPEN studies reported that one of the downsides of being a subcontractor is the possibility of being subjected to a “prime shutout,” which occurs when a small business participates in a winning bid as a subcontractor but does not subsequently perform on the contract. The most recent study found that 27 percent of firms have experienced a shutout, and even more surprising, they’ve experienced it more than once – an average of four times!
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Fortunately, the government has realized this is a serious problem and recently has made updates to federal regulations to provide protection to small businesses in limited circumstances. These regulations will hopefully help to curb this problem, but like anything else, it’s important to educate yourself to avoid a loss in time and energy put into a bid when no work comes your way.
So what are some of the things that you can do to avoid prime shutout?
When a small business subcontractor is named in a proposal or bid and the business’s past performance credentials are part of that same document, these factors help to protect their position as a subcontractor on a winning bid. One of the most important things that should be done is to make sure that you have a document, called a subcontracting agreement, which clearly and specifically defines details of your work. There are a number of important things that should be included in a subcontracting agreement, but be sure to do the following:
- Clearly define the work that you expect to do on the contract as a subcontractor.
- Be specific in how and what you will charge for the work you perform and under what conditions.
- Have a clear understanding of how and when you will be paid.
These items are key to protecting yourself in a teaming arrangement. But what really drives success in the area of subcontracting? As expected, it’s all about building and maintaining relationships. On a panel at a recent ChallengeHer event, LaVern Jackson, president and CEO of Joint Logistics Managers, Inc., shared what has made her successful: “It’s all about relationships. Get to know and make yourself known to potential partners and clients before you want or need something from them.”
Strong subcontracting agreements are great, but if you are in a relationship that is lacking, you can find yourself losing time or money in an effort to protect your business. Relationships that are built on professionalism, trust and shared corporate values will help you to capture bigger, better awards and spend less time dealing with disputes. At the end of the day, winning results truly come from winning relationships.
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About Doña Storey
Doña Storey is the American Express OPEN Advisor on Scale Up, advising entrepreneurs on how to find rapid growth through corporate and government procurement as well as helping large organizations scale their entrepreneurial partners to better meet demand in both the commercial and government marketplaces. She is an entrepreneur herself with extensive experience running and scaling up a business. For more information, visit www.openforum.com/governmentcontracting.
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