Understanding your contract risk profile

Although many factors can influence the nature and extent of government contract oversight, five have the greatest impact. They are interdependent on each other, and therefore must be considered individually and in the aggregate. Successful contractors use these factors as a tool to understand, anticipate, manage, and mitigate government contract compliance risk.

1. Contractor size

Contract requirements and exemptions vary for smaller and larger firms, as well as whether a firm is a contractor or a sub-contractor. Small businesses (meeting the Small Business Administration’s size standards) are exempt from some of the government’s most onerous regulations. As contractors grow, they can expect more regulatory burdens and more direct government oversight.

2. Product/service commerciality

The government’s rules require it to acquire commercial products and services at reasonable prices established in the commercial marketplace, making a contractor’s production costs irrelevant. Accordingly, commercial item contracts are exempt from many onerous regulations and generally insulated from many (but not all) government audit and oversight activities. Contractors selling commercial and non-commercial items on a single contract must persuasively demonstrate commercial pricing to rebuff the government’s ever-present desire to audit production costs (and deny reasonable commercial margins).

3. Contract type

Contract type is the nucleus of government contract risk. It is the instrument by which performance and cost risks are allocated between the parties. Contractors willing to accept greater performance and cost risk are rewarded with less burdensome requirements. As the government accepts greater performance and cost risk, contractors must accept heavier regulatory compliance and oversight burdens. Contractors new to cost reimbursable contracts must enter with eyes wide open and with considerable organizational preparedness for the oversight that will ultimately follow.

4. Contract size

Contracts below the simplified acquisition threshold ($150,000) generally carry the fewest compliance requirements. Additional regulatory burdens accumulate as contract value grows beyond $700,000. Generally, a large volume of low dollar contracts will attract less direct government oversight than a small volume of large dollar contracts.

5. Competition and negotiation

The competitive spectrum ranges from sealed bidding to sole-source negotiation. Combined with the four factors above, competitively awarded fixed price contracts for commercial items offered by small businesses below $150,000 carry the least compliance and oversight risk. The opposite carries the most risk. In the absence of commercial market information and competitive forces, the government deploys its arsenal of regulations to prescribe nearly every contractor business activity.

Next steps: identify high risk areas

Start the conversation within your organization to determine where your contract risks are greatest. Be sure to include your contracts, legal and compliance teams in the discussion.

For more information on this topic, or to learn how Baker Tilly government contractor specialists can help, contact our team.

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