The federal government is among the world's largest purchasers of goods and services, with the Department of Defense (DOD) accounting for a large portion it.

When doing business with the federal government, you will find a customer who behaves very differently from commercial customers. This unique behavior results from the customer being a sovereign power that conducts its procurement activities under specific laws and implementing regulations. These procurement statutes and regulations govern the process the federal government follows in its business dealings with private industry.

Procurement Overview

Many purchases made by the federal government are for standard commercial products and services where the demands and competitive forces of supply have established the market price. For these purchases, the buying agency is similar to any other customer seeking to satisfy procurement needs at the most favorable prices available in the marketplace. Under these conditions, the federal procurement process is relatively simple and straight-forward. However, it is important to recognize that for a substantial amount of its purchases, the federal government is the only customer for the products and services it acquires. In these circumstances, prices have not been established by the marketplace. Therefore, the price the government pays is determined by other means, such as negotiations based on estimated or actual cost to produce, plus a consideration for profit.

Competition is used to the maximum extent practical by the government. Procedures for sealed bidding and negotiation of competitive proposals, as outlined in Federal Acquisition Regulation (FAR) Parts 14 and 15, respectively, form the basis of full and open competition. Under sealed bidding, the federal government issues an Invitations for Bids (IFB), which specifies what the government wants to buy and the terms and conditions under which it will procure. Contractors respond to the IFB with sealed bids that are opened publicly. Award is made to the responsible bidder that submitted the lowest responsive bid, unless there is a compelling reason to reject all bids and cancel the solicitation. Competitive proposals are submitted by contractors in response to the government's Request for Proposals (RFP), Request for Quotations (RFQ), or Request for Information (RFI). Written acceptance of the contractor's proposal in response to an RFP creates a binding contract. However, the government cannot unilaterally accept a proposal submitted in response to an RFQ or RFI, because neither response is a valid offer. For an RFQ or RFI, further negotiations occur to reach a binding agreement between the two parties. To solicit offers of items defined as commercial items, the government may use a simplified procedure, which more closely resembles the terms and conditions customarily used in the commercial marketplace (FAR Part 12). Simplified acquisition procedures are used for procurements below the threshold specified in FAR Part 13.

To accomplish its procurement objectives, the government uses a variety of pricing arrangements in its contracts. These pricing arrangements, usually referred to as contract types, reflect varying degrees of financial risk that are assumed by the parties. For example, the contractor may accept the contractual obligation to deliver the required product or service for an established price without regard to actual costs incurred. Alternatively, the government may retain most of the financial risk by agreeing to reimburse the contractor for actual costs incurred in return for the contractor's best efforts to achieve the contract's objectives. In this latter instance, the contract price is established after the work is done and actual costs of performance are known. Between these two extremes are other pricing arrangements that assign varying levels of risk to the government and the contractor. In negotiated contracts, according to policy guidance for procurement officials, the type of contract is a matter on which both parties agree.

The amount of government financial review and surveillance is determined by the type of contract awarded. The government is likely to scrutinize a single-source procurement closely, regardless of contract type.

  • The government has a greater interest in the company's accounting practices where incurred costs are the primary factor in establishing the amount the contracting agency ultimately pays for the work performed. Consequently, the terms and conditions of the contract give the buying agency fairly broad rights to review the contractor's books and records. The objectives of the government in conducting these reviews include ascertaining whether the contract pricing conforms to applicable procurement regulations and assessing the adequacy of the contractor's financial management systems.
  • When the final contract price is unaffected by actual cost of performance, government procurement policy ordinarily requires considerably less review and oversight of the contractor's financial management activities.

Contracting officers are authorized to act as exclusive agents to enter into and administer contracts. When inadequate information is available to effectively evaluate proposals prior to contract award, the contracting officer may obtain assistance from administrative contracting officers, contract auditors, price analysts, quality assurance specialists, engineers, small business specialists, and attorneys.

                                                                                                                            June 2012