The basic concept to grasp here is that it is better to win prime contracts through the competitive process (the 80%) than it is to win them through relationships (the 20%). This is because the amount of time will be faster for you to build a competitive pipeline of work than for you to build a relationship with federal customers whom you hope can convince a contracting officer to circumvent competition and give you sole source contracts.
You may see in the news that these sole source contracts happen all the time. However, what you see in the news is the exception not the rule. The next time someone tells you sole source contracting is a better approach, ask them if they did an activity-based costing assessment of how much it cost them in time and business development to win that sole source work. It may have cost more to win one contract than it would have taken to compete for ten contracts and win one (which is an abysmal win rate by the way).
While I have no way to track this objectively, I estimate that it takes up the three times as long to win a sole source contract. I have watched sole source awards drag on for months, or even years, as the funding is appropriated, the Justification & Approval is written and approved, the certified cost proposal is developed, evaluated and negotiated, then the specialized contract is awarded.
For example, I once awarded a $600,000 contract through non-competitive procedures for specialized ammunition. While the contract was worth $600,000 in revenue, it took over eight months, a dozen meetings, and what the contractor likely saw as an uncomfortable amount of scrutiny from me (as the CO) to justify their price without competition. With that amount of time and money, they could have targeted and won several times the $600,000 in contracts.
Another risk of sole source contracts is that they have a limited lifespan. Many of the non-competitive contracts that you hear about in the news (or that companies brag about as their successes), end up being a one-time contract that leads to a dead end for a small business. By throwing all their energy and funding into a sole-source award, a small business could end up overcommitting resources on one effort from which they may not be able to build other business. The goal of the government is to compete requirements. Most contracts, even if they start sole source, don’t always stay that way. While you may be able to get the contract, and even grow the contract, you may be growing it to a dead end. As a course of business acumen, this is a risky process.
As a glaring example, look at the number of contractors whose revenue dropped off a cliff after 2012 when the sole source contracts they had were not renewed. A portion of these companies suffered mightily when they suddenly had to compete for work they had previously done under a sole source. This is akin to the “valley of death” than many 8(a) contractors fall into after their ninth year in the 8(a) program (note: that’s when the 8(a) advantage expires).
Then there is the post-award process.
There are a lot of rules that apply to contracts awarded without competition that create other complications like certified cost and pricing data, post award audits, weighted guidelines, commerciality determinations, and more.
I awarded a sole source contract to a vehicle manufacturer for a specialized vehicle. Only one company made a vehicle with these capabilities. Due to customer requirements, we also needed vehicle delivery in a hurry. Its off-road capabilities along with its ability to protect passengers in many environments made it a quantum leap in capability for our operators. Since it was for Special Operations Command in 2009, this company and the government team spent an enormous amount of effort (in both time and money) to get the sole source contract under FAR 6.301-2, Unusual and Compelling Urgency.
We even used a specialized contract type called an “Undefinitized Contract Action” (see FAR 17.4 for more details) to award the contract. Then, the story gets more complicated once we were under contract. As it turns out, the company’s accounting system was not robust enough to handle the cost-type contract we awarded under the UCA. As a result, they under budgeted what it would cost to manage the contract, as well as what it would cost to build the actual vehicle in accordance with the specification. The complexities of the delivery grew based on what the contractor had signed up to do under the sole source contract. The net result is that the contractor did win an $8 million contract, but in the end, they nearly went out of business because it became an all-consuming process for them to be able to deliver under this unique, sole-source contract. They had put all their eggs in this one sole source contract and as the demands and expectations of success grew, the contract consumed nearly everyone in the company. Plus, for some small businesses, the cost of having to certify the accuracy of your costs over $700,000 could potentially far outweigh the value of the contract.
And when it was over, they had succeeded in delivering an outstanding capability, but this one contract had so consumed the company resources that they risked having a 95% revenue ‘cliff’ once this contract was over. They had gotten a sole source contract to make one thing, once, for one customer. That lack of diversification was likely (and unfortunately) overshadowed by the initial excitement of a sole source contract.
Bottom line: The most successful contractors I know, have met, or have even heard of, are the ones who know how to compete and win contracts.
As a small business, be very careful when you target a sole source effort – especially a large (‘game changer’) contract. Growth can be difficult to manage in general, but when you tie that growth to the complexity of a sole source contract you may be, no, you are, tying your company’s success to that contract. Instead, focus your efforts on those opportunities that you can win. You need to focus your efforts, but not be so focused that you only have one product. If that product is either unsuccessful, or you don’t effectively manage your sole source contract, you could end up losing money on a sole-source contract.
Seems crazy, I know. I’ve actually seen this happen, not once, but three times. If your wish is to get a sole source contract, be careful what you wish for.