Government contracting is often considered the coveted prize for both small and large companies. To this end, businesses invest countless hours, often involving high-level personnel, to respond to RFP (request for proposals). Many businesses operate under a belief that the time is well invested—if they secure just one contract they will receive payback plus dividends. However, this is not always true statement. Many companies, especially smaller ones, may find that winning a government contract can actually cost them money.

Most companies recognize the low margins in the contract and consider it acceptable due to the sales volume they offer. This statement can be misleading, especially in service oriented businesses and distribution businesses where a true economies of scale does not exist.

Another negative and potentially costly aspect of government contracting  is the payment terms. Many of the government contracts do not allow deposits and pay 45 days after merchandise is fully delivered and installed. This can be very problematic for distributors that must inventory the product prior to delivery.

For example, a commercial furniture dealer may need to purchase product from several manufacturers to complete a government facilities project. This may also involve aggregating the product in the warehouse for a combined delivery.

In regards to billing and collections, commercial furniture manufacturers require payment upon shipping or 30 days therein. The time period between the manufacture shipping, aggregating, and delivery to the client can be 1-2 weeks minimum. In this, when the dealer finally is able to bill the government client the invoices from the furniture manufacture is already due. If the dealer has to use their line of credit in order to pay the manufacture prior to receiving payment from the client the cost of funds (to borrow money) must be calculated into the project. With already low margins the cost to borrow may make the project unprofitable and not really worth doing. The dealer would have been better served doing several smaller projects with higher margins.

Companies should take a sharp pencil to the government contracts it pursues, considering the margins, cost of capital and the labor involved. Don’t let assumptions of economies of scale and sales volumes lure you into believing a government contract is a positive return on investment for your company.