By Byron DeStigter, CPA

It’s been about two years since the passage of the American Recovery and Reinvestment Act of 2009. Popularly known as the "stimulus act," this vast law seemed to hold great promise for the building industry because it appropriated billions of dollars in construction spending.

Only now, however, are many of these projects finally arriving. Given the potential financial benefits, you may understandably wish to try your hand at federal contracting. Although this certainly isn’t a bad idea, it’s one that warrants some careful preparation. These jobs are a far different animal from their privately funded counterparts.

Facing the competition

Among the first things to consider when entering the public arena is whom you’ll be competing with for one of these coveted jobs. In the private sector, larger construction companies often have the advantage of cash flow, reputation, technology and readily available equipment when bidding on a project.

But in the public sector, smaller contractors may initially have a leg up on many jobs because of small business "set asides" and other federal programs. For example, the SBA oversees registration of construction companies owned by service-disabled veterans as well as those located in historically underutilized business zones (HUBZones). Once registered, these contractors may stand a better chance of winning bids over larger businesses.

If you don’t believe your construction company will qualify for any of the SBA’s small disadvantaged business programs, you may still be able to get your foot in the door by serving as a "mentor" in the agency’s mentor-protégé program. You’ll have to sign a formal agreement with the protégé company that spells out a time frame and precisely how you’ll be helping out. But, once the terms are established, you may be able to stake a claim of up to 40% equity interest in the project.

Bidding in the open

Another chief difference between public and private contracts that you should be aware of is how bidding takes place. That is, federal contracts are generally granted after a public bidding process that often pits contractors against each other to properly follow the rules.

In fact, perhaps the most challenging aspect of public bidding is that it enables participants to identify other bidders who have submitted incomplete or noncompliant bids and then bring them to the attention of the contracting agency, either informally or through a formal bid protest. It’s not unusual for a contractor with the second or third lowest bid to win a job when lower bids are bounced because of rule violations.

To complicate matters, public bidding rules vary from agency to agency, so it’s important to study the specific rules that apply to the project on which you’re bidding. Once you’ve identified a project you’d like to bid on, it’s critical to become familiar with the government agency’s bidding rules.

You should be able to find the pertinent information online. But, if an agency’s website doesn’t provide you with enough information, call the agency and request an interview or meeting.

Withholding taxes

There is also a tax code provision to consider that catches many contractors off guard: Internal Revenue Code Section 3402(t). It requires withholding 3% from the total payments you receive for a given federal project.
The purpose of this provision is to close a perceived "tax gap" between what federal contractors should pay and what they actually pay. And the withholding percentage is based on your construction company’s revenue stream from the project, regardless of profit. As a result, you may have to hand over more money than you owe. And you can’t claim a refund until you file your tax return.

It’s important to factor Sec. 3402(t) into your bid, because the withholding amount may impede cash flow for necessary operations. And having fewer free dollars for operating expenses may be especially dangerous if your business is already struggling.

Getting started

To sum up, you’ll need to invest the time and energy in learning about the federal contracting process before you dive in. Along with learning an agency’s bidding rules, you’ll need to know, among other things, how to bill and how to get additional work approved.

But that doesn’t mean you shouldn’t pursue these opportunities. Federal projects offer many potential advantages, not the least of which is establishing a relationship with a "moneyed" owner that regularly provides projects. If you’re ready to get started, check out FedBizOpps.gov.

Ethics count, too

Financial requirements aren’t the only difference between a federal government construction project and a private sector one. There are also ethical requirements.

Under the recently revised Federal Acquisition Regulation (FAR), all federal contractors are now required to disclose certain overpayments and legal violations. In addition, contractors involved with larger projects must implement rigorous business ethics programs and internal control systems. (Certain disclosure requirements are limited to contracts or subcontracts in excess of $5 million with a performance period of 120 days or more.)

For example, you must disclose any procurement-related criminal offenses, such as fraud and bribery; violations of the civil False Claims Act; or significant overpayments. Plus, disclosure is required for three years after final payment is received. So, if you’ve been previously involved in federal contracting, you’ll need to look back at completed contracts. Penalties for nondisclosure include suspension or debarment from federal jobs.