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16 Wednesday, Apr 2014

Going from Subcontractor to Prime Contractor


Small businesses frequently wrestle with the question of how and when to become a prime contractor.  This challenge faces any small business experiencing growth and development.  Successfully meeting the challenge opens doors to a new career of expanded scope and revenue.  Failing in the attempt wastes precious resources and may consign a smaller company to a perpetual role as a second-tier provider.

We realize any management consultant could write a book on the subject of becoming a prime contractor. However, our present purpose is to address it briefly, attempting only to highlight the main considerations.

Many companies experience a lot of anguish and wasted motion while trying to make this transition.  There is a natural (if unrealistic) desire to attempt the shift simply, easily and directly. Significant forethought and realistic cost evaluations are usually missing.  Unfortunately, the transition happens effectively when based on due deliberation and careful planning.

There are six overarching factors that need to be considered when planning a transition from subcontractor to prime:

Performance is the litmus test of knowing when a perennial subcontractor is ready to become a prime contractor. While working as a subcontractor, has the company been an A-level performer in executing its work in one or more subcontracts? Has it provided consistently on-schedule delivery of products?  Have the products met quality standards? Has it staffed services contracts with qualified personnel in a timely manner? Have its program and project managers been strong and resourceful personnel who take responsibility and solve problems? 

Business development capability is a second test of readiness to become a prime contractor. Whether the company can field dedicated business development personnel or not, it must have gone through the business development process with at least one prospective customer – preferably several more. This may be an existing customer where the company is serving as a subcontractor, or it may be other organizations.  The process includes getting to know the decision-makers in the prospect organizations; introducing your company capabilities; and doing whatever is necessary to qualify your firm to be a prime contractor. This doesn’t happen quickly but, instead, takes place over months, quarters and years. If you don’t have full-time business development personnel, your on-site program managers or your executives may have been handling these tasks. 

A subset of business development capability is your overall performance in proposal development. As a subcontractor, you probably had to provide only limited input to your prime contractor to help develop the contract proposals. As the prime, you must be prepared to step up to the cost and rigors of leading in proposal development. Typically this can mean having to provide several person-months of effort in preparing each proposal rather than a fraction of that level of effort, which is usually necessary to perform as a subcontractor.  It is safe to estimate that the cost of preparing a proposal as a prime will exceed the cost of preparing a subcontractor proposal by a factor of ten.  When getting started, companies can use proposal consultants if it is not yet feasible to staff with permanent personnel.

Capital is the third test to determine a company's readiness to be a prime. Preparing to become – and being – a prime contractor is more expensive than being a subcontractor. Therefore, the company that would successfully make the transition has to have sufficient capital to pay for the added costs of the business development and other new efforts required to successfully execute the duties of a prime contractor. This capital can come from retained earnings, from new investment, or from a bank loan / line of credit.  Many small businesses also rely on “sweat equity,” such as requiring overtime from program managers and other key executives to help support the costs of making the transition.   Traditionally, sweat equity is required from the personnel without an ownership stake in the business.  (However, some believe those companies that provide for employee ownership can count on receiving a more willing sacrifice on the part of the personnel.)

Organizational development is the fourth test of readiness. As the company prepares for and makes the transition to being a prime contractor, the organizational capability must become more robust.  The company must mount a significant independent business development operation.  The recruiting and staffing operation usually must become stronger and more responsive in services companies.  Greater development in capital plant and manufacturing capability – or better sourcing capabilities -- may likely be needed in product-oriented companies.  Standard and repeatable processes must be developed for the range of company activities. 

Planning capability is the fifth test of readiness, and planning for the transition to prime contractor is the pre-eminent challenge. For example, the plan addresses what, when, and how much the company must do to get into the business of prime contracting. How will the company go about developing prime business? What will the company do to develop prime business? And how much of it will the company do? The same type of planning must address activities needed to enhance recruiting, improve the manufacturing plant, produce the necessary capital and guide organizational development.

Consultant support is the sixth test and nearly always a necessary resource. Since most small business owners have not previously made the transition from sub to prime, they often lack the judgment necessary to guide this transition without outside assistance. Typically, small business owners and executives don’t have a "feel" for the type of activities that are necessary to produce the desired result. They don’t have the experience to know either the schedule or the sequence of events, and – importantly – HOW MUCH of everything is really needed to get from point A to point B. 

Often an effective solution is to employ a consultant who has the experience and judgment to help with the planning process. The right consultant can bring experience and judgment as to what activities to consider, what schedule to follow, what sequence of events, and how much of everything is truly needed to achieve the desired result. Good expert guidance can greatly increase the probability of success and help companies avoid disaster. 

Getting consultant assistance does NOT have to be exorbitant. This is because the company usually doesn’t have to use a lot of consultant time. A qualified consultant typically can help formulate the initial plan within two to four weeks. Then the consultant goes to an advisory role, reviewing and commenting on progress reports at periodic intervals as the plan proceeds.

In summary, here are some practical suggestions companies will want to consider when planning the transition to prime contracting:

  • Start small.  Make the first prime transition on a relatively small contract rather than a large multi-million dollar program.
  • Do the business development homework sufficiently to have the government prospect ready to hire you upon receiving a quality proposal.
  • Plan ahead to meet necessary technical and contractual qualifications, such as the following:
    • If you are interested in a GSA opportunity, be sure your ongoing GSA schedule contract contains the necessary labor categories.
    • If the program has a requirement for a specialized capability such as an Earned Value Management System (EVMS), then have one in place, with the software as well as personnel who know how to administer it.
    • If you will be bidding for a contract that requires specific certifications or validated processes such as a CMMI software development certification or ANSI standard, then you will have to get started early, since such a capability takes months to implement.
  • Develop a more robust management plan / management capability, sufficient to reliably direct the personnel, as well as any subcontractors, vendors, and suppliers.

We believe this will help explain, at a high level, how a smaller company can approach the problem of transitioning from being a subcontractor to being a prime contractor. It is recognized that the thoughts presented here are neither deep nor conclusive. However, we hope this article will provide food for thought for those of you thirsting to scale the higher peak, climb the forbidding mountain, and enter a new prime contractor career with potential rewards of a higher scope and scale.

 

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