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Why Can't Startup Companies Get US Government Contracts?

Federal, state, and local governments in the US are expected to spend more than $6 trillion this year. But small or new companies have little chance of earning any of that money.
Photo via Wikimedia

When the US Air Force began the Evolved Expendable Launch Vehicle (EELV) program 20 years ago, its goal was to reduce the cost of space launches by at least 25 percent, while at the same time making them more reliable and creating a competitive procurement process that more closely resembled the private sector.

The program eventually resulted in Boeing and Lockheed Martin each producing rockets — but things did not go smoothly. Two Boeing executives were charged with federal crimes, both companies sued each other, and both companies started struggling financially. Then in May of 2005, the former rivals announced that their rocketry divisions would merge to form the United Launch Alliance (ULA). Although it would eliminate the competitive arrangement the Air Force had originally sought with the EELV program, company officials insisted the new setup would actually drive down costs, projecting taxpayer savings of up to $150 million a year.


Instead, costs soared. The EELV program became the fourth-largest line-item in the United States defense budget.

Around the same time as the merger, Elon Musk's company SpaceX began pursuing its plan to drastically reduce the expense of spaceflight. Today it costs SpaceX $100 million to launch its EELV rocket, the Falcon 9, while it costs ULA $400 million to launch its Delta IV and Atlas V rockets. Despite this disparity, in September 2013, the Air Force signed a secret, no-bid contract with ULA for a "block buy" of 36 EELV launches. SpaceX subsequently took the Air Force to court, dropping its suit only when the Air Force agreed to give the company a chance to bid on future contracts.

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With a market capitalization of more than $10 billion, SpaceX had the resources to play hardball with the Pentagon. Other startups, however, are largely out of luck. Despite the fact that US politicians often hail American entrepreneurialism and bestow near-sacred status upon the nation's "job creators," if you're a startup, you almost certainly won't get a chance to sell your product or service to the US government.

That's the conclusion of a report released this month by Bay Area political think tank Lincoln Labs. Derek Khanna, one of the report's four authors, says that most government contracts are awarded to firmly entrenched, old-line companies based on the fact that they employ large portions of the "consulting class." In other words, they employ lobbyists who can get legislators to steer business their way. Startups tend not to have this advantage, which makes it extremely difficult for them to compete for the $6.2 trillion Khanna says federal, state, and local governments will spend in 2015.


Watch VICE News' 'The Business of Life: Are Startups Helping or Hurting? (Episode 11)'

The startup problem has been recognized by the government itself, says Craig Holman, government affairs lobbyist at Public CItizen, a consumer advocacy group based in Washington, DC. The federal government's Small Business Administration (SBA) attempts to help companies with fewer than 1,500 employees win government contracts. The SBA's goal was to award 23 percent of all federal prime contracts, and 38 percent of all federal subcontracts, to these kinds of businesses. But Holman says they have "failed miserably in getting anywhere near that goal."

According to a report released by Public Citizen last May, the contracts the government counted toward its small business targets in 2013 "included some held by the largest companies with which the government does business. In fact, federal contracts awarded to seven of the nation's 10 biggest government contractors were officially recorded as having gone to small businesses."

As the Public Citizen report points out, members of Congress "habitually laud" small business with an "almost religious fervor." But the conclusions of the group's report "suggest that small businesses are being shortchanged on programs expressly designed to help them." If that's the case, why would Congress stay so quiet on an issue supposedly so close to their hearts? Public Citizen's report says it is "difficult to definitively attribute the situation directly to one specific factor," though Holman says the reasons "appear to be political."


'Government is not the Fortune 500, it's not the Fortune 100 — it is the Fortune One. Government should be the customer that every company is dying to have.'

Indeed, the report concludes, it would be fair to assume that small business would get more government contracts if they were the ones that "furnished the majority of post-retirement jobs for military officials, performed the lion's share of contractor lobbying, or gave the majority of campaign contributions from contractors."

Earlier this year, Representative Will Hurd (R-Texas) was named chairman of the Information Technology Subcommittee of the House Committee on Oversight and Government Reform. Since then, the former CIA officer has taken a special interest in fixing the government procurement system.

"It's terrible that many of our startups find the process so intimidating, that they won't even try to engage in the procurement process," Hurd told VICE News. "Streamlining the system and creating more transparency could go a long way to leveling the playing field."

This ought to be welcomed by all parties involved, said former Capitol Hill staffer Mark Colwell, who helped draft startup policy for Senator Jerry Moran (R-Kansas). Competition, after all, is supposed to foster innovation and lower prices. However, relationships tend to play a powerful role in many of the government's purchasing decisions. The simple fact that a company is a known quantity counts for a lot.


"A startup like SpaceX might be very innovative," said Lee Drutman, a senior fellow at the New America Foundation and author of The Business of America is Lobbying, "but no one ever got fired for hiring Boeing."

Clay Johnson is trying to be an exception to the rule. One of the original 18 Presidential Innovation Fellows brought in by President Barack Obama in 2012 to, in the words of White House technology advisor Todd Park, "disrupt the United States federal government," Johnson developed a platform called RFP-EZ, which was intended to streamline the acquisitions process. In 2013, Johnson founded The Department of Better Technology, a for-profit company creating software for government and nonprofits.

"Government is not the Fortune 500, it's not the Fortune 100 — it is the Fortune One," Johnson said. "Government should be the customer that every company is dying to have. But most [business] people see what's involved and go, 'You know, there are plenty of other fish in the sea. What do I need this for?'"

Related: Free Flights for Life and $28 Million: What a Federal Corruption Probe Gets a CEO

If external forces make it difficult to participate in the government market, the government itself doesn't make it much easier. Johnson demonstrated what he had to do to get his company set up to begin pitching the government. First, he registered the business on, the government's System for Award Management (SAM). The site describes itself, without further explanation, as "the Official US Government system that consolidated the capabilities of CCR/FedReg, ORCA, and EPLS."


Visitors are greeted with two buttons marked "Create User Account," accompanied by a warning that "Your CCR username will not work in SAM," and that you "will need a new SAM User Account to register or update your entity records. You will also need to create a SAM User Account if you are a government official and need to create Exclusions or search for FOUO information." Users are then instructed to create an "individual user account" if they intend to "perform tasks such as register/update your entity (legacy CCR/FedReg and ORCA functionality)," "create and manage exclusion records (legacy EPLS functionality)," or "view FOUO level data for entity management registration records and exclusion records (Same as government user CCR Tools functionality)."

"What the fuck is a 'CCR username?'" Johnson said. "What is 'ORCA functionality?' What the fuck does that even mean? What does any sentence on this entire page even mean?"

The lengthy "Quick Start" process isn't much easier, and also includes an alphabet soup's-worth of acronyms, codes, and jargon without any additional explanation. Potential registrants are further advised that they "may" need their "Product Service" and "Federal Supply Classification" codes, which are deemed "optional but useful."

"This is the front door to contracting with the federal government, and the barrier to entry couldn't possibly be any higher," Johnson said. "The language they use here is a testament to people who are entrenched in the system, not for people who are new to it. What it says to startups and small business is, 'We have no desire to work with you.'"


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Most startups don't have the traditional lobbying clout that old-line companies have developed over the decades, though the grassroots approaches employed by newcomers like Uber, Airbnb, and others have been extremely effective, says political sociologist Edward Walker. However lucrative even a modest government contract might be, Walker, an associate professor at UCLA, says startups would be wise to think carefully before pursuing one.

The efficiency and nimbleness of the typical startup often has a lot to do with an absence of bureaucracy. But anyone doing business with the government is required to abide by the Federal Acquisition Regulation, which is 1,895 pages long.

Related: Is the Government Pursuit of Wall Street Criminals Too Little Too Late?

There are diversity metrics to report, complex "procurement integrity" guidelines to follow, and strict environmental protection obligations to uphold. The extra scrutiny is intense, and Walker says a lot of startups simply aren't structured to comply with the sweeping terms of government work.

"We're passing laws within an election cycle, and when administrations change, our tendency is to layer in more laws instead of reforming the ones we already have," said Virginia Lam, a former VP of government relations for Aereo and one-time deputy press secretary for then-New York City Mayor Michael Bloomberg. "Now take that and apply it to government procurement. You get this kind of mish-mosh of everything and the kitchen sink that makes zero sense. It ends up being completely ridiculous."

Which is why simply waiting for new, younger people to take over Congress won't result in a solution.

"I don't think replacing the current generation [of politicians] with a new one will necessarily fix things," report co-author Chris Abrams said. "A lot of the problems that exist within government are timeless."

Follow Justin Rohrlich on Twitter: @JustinRohrlich

Photo via Wikimedia