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36
GOVERNMENT CONTRACTING

The Pentagon As Partner;

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While a Star Wars contract can set a company humming, it's hardly a ticket to easy street. Dealing with the federal government invariably involves red tape, and the Strategic Defense Initiative (SDI) has it by the mile.

"It doesn't matter how good your technical work is," complains John Scott, whose Energy/Environmental Research Group (EERG), in Melbourne Fla., is working on infrared sensors for Star Wars. "If you don't have good people on the nontechnical side -- in contracting, accounting, quality assurance, security -- you may as well forget government business."

If you are intrigued by the prospect of SDI work, you might consider these factors:

* Security. A great deal of SDI work is classified, and that complicates business enormously. "We have a security-procedures manual two inches thick," says Scott. "We even have a vice-president-level director of security because it is such a major element of dealing with the government on this."

Security clearances pose other problems. "It sometimes takes six months or longer to get them for new employees," Scott says, "and you can't submit them for clearances before they are hired. In the meantime, they can't work on what they were hired to do. So it is a big payroll problem, and a morale problem as well."

* Profits. Reacting to budget pressures and criticism that defense contractors make too much money, the Pentagon reently issued new guidelines on allowable profits.

"In the past, we could set a profit margin based on the seniority and level of education of our employees," says Robert Kinney, vice-president of Sparta Inc., which is working on SDI's overall design. "No more. They are now using capital investment as a measure of what you can charge. If you manufacture airplanes and have a large investment in tooling, you are permitted a larger profit. But if you are a research operation, as we are, with little invested in capital but a lot invested in people, your allowable profits are now lower by 25%."

On one contract, for instance, Sparta had been netting an 8.3% profit before taxes. Under the new system, it has dropped to 5.6%.

The feds are getting stingier on reimbursement for expenses, too. Under new travel guidelines, for instance, contractors may claim no more than the per diem rates allowed government employees. Trouble is, federal employees get significant discounts at major hotel chains not available to corporate customers. "You wind up taking a lot of travel costs out of your hide," says Kinney.

* Penalties. In the old days, negotiations between the Pentagon and a single-source supplier were like the discussions between a rug dealer and his customers. The firm's bid came in high, the government came in low, and an agreement was reached somewhere in the middle. Stung by cases of fraud and contractor overcharges, however, the Pentagon has taken another approach.

"Things that were done 5 or 10 years ago in the spirit of negotiation the government is now calling fraud -- and sending people to jail for," complains Eugene Cavallucci, general counsel for DBA Systems Inc., parent company to EERG. "If they think you are padding your bid, they might call in the inspector general, the U.S. Attorney, or even the FBI. They do need to go after people ripping off the government, but it seems they are throwing a blanket over everyone and saying we are all suspected of fraud until proven otherwise."

* Subcontracting. As EERG searched for optical-equipment suppliers to help meet its SDI contract, it found several. That was the easy part. Then it ran up against the government's strict purchasing laws.

"The government imposes its unique purchasing system on you, the contractor," says John Scott. "You have to be fair, and you have to get the best price. If you don't take the lowest bid, you have to go through an elaborate justification. In any case, they come in and audit all your bids. You have to have them all in hand before you can submit your own bid."

Last updated: Apr 1, 1987




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