Differences Between a Commercial Contract and a Federal Contract

If you’re comparing commercial contracts to federal contracts at a fairly basic level, you’ll see plenty of similarities. Once you start looking more closely, however, you’ll see that there are perhaps more differences than similarities. Being a commercial contractor has much different requirements compared to being a federal contractor, no matter what size your business is, or what industry you’re in.

Any organization that’s considering making a change from commercial to federal contracts (or vice versa) could potentially benefit from the decision, but first they’d have to learn what to expect. They’d have to change the way they bid for contracts, how they prepared for audits, and so on. As long as they knew the differences between these two types of contracts, they’d be better able to make the best decision for their organization. And what would those differences be?

Here are the highlights.

How proposals are formulated

If an organization is contacted about potentially fulfilling a commercial contract, it’s already obvious that the client thinks they can meet some of their business needs. However, the prospective client may not specify what those particular needs are. When drafting a proposal, the contractor may essentially have to guess what the client’s decision criteria are, rather than directly tailoring their proposal to the project at hand.

For a federal contract, the process is much more straightforward. It starts when the government contracting body issues either an RFI (request for information), an RFP (request for proposal), or an RFQ (request for quotation). These are essentially three levels of requests, requiring different degrees of detail in the response. The RFI is how the contracting authority gathers information on solutions offered by competing vendors. The RFI is formulated with the express purpose of obtaining information from contractors. On the other end of the scale, an RFQ is what’s issued when the contracting authority already knows exactly what they want, and simply need to gather quotes from different vendors.

How the contract winner is determined

The winner of a commercial contract will have to meet several criteria, but those criteria will be set by the organization issuing the contract. They usually include considerations like the reputation/experience level of the contractor, the price, etc.

Awarding a federal contract comes with similar criteria, but that isn’t all – the issuing government authority has to choose the option that represents the best use of taxpayer money. There’s also the fact that federal agencies are supposed to award 23% of all government purchases to small businesses, which can also influence their decision.

Accountability to federal law

Commercial contracts generally follow a standardized structure, from preliminary drafting, to negotiation, to contract approval and beyond. Breaches of contract can have legal consequences, but before taking legal action, it’s more common to pursue some form of private mediation first. If that doesn’t produce the desired results, one or both companies may decide to take the matter to court.

For a federal contract, however, the entire process must follow much stricter regulations. All federal contracts operate under federal regulations codes known as FAR (Federal Acquisitions Regulations), which outline the rules for each type of federal contract in detail. While some details of federal contracts are up for negotiation, complying with the FAR system is mandatory.

Average contract award timeline

Commercial contracts can follow a fast-paced cycle, with some contracts being awarded within days to weeks of receiving proposals. Of course, this will depend on the scale and nature of the contracts, but the fact remains that the decision-making process for commercial contracts tends to be pretty efficient. This means that contractors must be agile and flexible when they’re bidding on contracts, as they’ll likely be expected to spring into action if they’re awarded a contract.

In contrast, federal contracts can take months to years before they’re awarded. Contracting authorities have to take the time to weigh all the different approaches and bids, and those wheels tend to turn slowly.

This often necessitates more careful planning on the contractor’s part. On the one hand, they have to plan ahead for the fact that federal contracts won’t bring in quick money, so they can’t depend on winning certain contracts to keep them afloat. On the other hand, they have to be ready to perform the work at whatever point a contract is awarded, even if that means suddenly scaling up to meet demand. On the plus side, though, contractors can usually depend on timely payments with federal contracts.

Flexibility in altering the contract

If both parties want to include the possibility of future amendments in a commercial contract, they have the option to do so. If any amendments were proposed, they would have to be agreed upon by everyone involved.

The dynamic is quite a bit different with a federal contract. If the government contracting authority decides to make changes to the contract, they have the ability to do so – with or without the agreement of the contractor. This includes terminating the contract early or making changes to the scope of the contract. The contractor will always be adequately compensated according to whatever changes are made (including getting paid more if the contract is expanded), but this can also add an element of instability for contractors.

Possibility of audits

Including provisions for audits isn’t uncommon for commercial contracts; it’s an effective way to ensure that contractual obligations are being fulfilled. While there are standard auditing procedures that many contracts follow, it’s also up to both parties to decide on the extent and frequency of the audits.

Auditing practices for federal contracts are generally much more rigorous. Since not only the contract itself, but also the FAR system must be complied with, audits are generally more thorough and more frequent compared to commercial contracts. Areas that may be scrutinized include timekeeping practices, compliance with accounting regulations, and record-keeping/documentation practices.

Socioeconomic obligations for the contractor

Commercial contracts don’t necessarily include stipulations regarding various issues such as affirmative action or minimum wage. They can certainly be outlined in a commercial contract if both parties agree that they should be a priority, but it’s their choice to hammer out the details themselves.

Federal contracts, however, automatically include certain stipulations related to socioeconomic issues. For example, they require that the contractor maintain a drug-free workplace, observe affirmative action, and observe minimum wage laws. These requirements have to be followed carefully, since non-compliance can result in mandatory audits, suspension of the contractor, or termination of the contract. Not only do federal contractors have to follow these requirements, but they also have to document that they’re following the requirements; without clear documentation, an audit wouldn’t be able to establish that the regulations are being followed.

Opportunities for small businesses

Competing for commercial contracts is tough, especially for small businesses that don’t have the same resources as larger organizations. If a disadvantaged business is consistently fighting against higher odds than their competitors to secure contracts, it’s likely that they’ll have a disproportionately harder time winning contracts.

Thanks to the government mandating that 23% of federal contracts go to small businesses, though, small businesses have a greater chance of successfully competing for set-aside federal contracts. Some of these contracts are for small businesses in general, while others are for socioeconomic set-asides such as SDVOSB, WOSB, HUBZone, and 8(a).

Small businesses can also participate in the MPP (Mentor-Protégé Program), through which they partner with larger businesses to access financial and developmental assistance. This program not only helps small businesses succeed in winning larger federal contracts, but also sets them up for future successes with federal contracts after graduating from the MPP.

How other organizations view past contracts

When deciding which contractor will be awarded a commercial contract, an organization will always consider the contractor’s past performance. They’ll ask whether the contractor’s past projects are relevant to their own needs, and they’ll consider whether the contractor has demonstrated that they can handle something of a similar scope. Since past performance is used as an indicator of future success, a contractor’s level of experience can make or break their chances of winning contracts.

Success with commercial contracts will definitely add to a contractor’s qualifications, but this is even more true for federal contracts. Given how intense the vetting process is for federal contracts, any contractor who’s already won a federal contract (or several) inspires credibility in the eyes of someone who’s considering them as potential contractors. Whether a contractor is competing for a federal contract or a commercial contract, a past record of winning federal contracts will certainly strengthen their proposal.

The takeaway

These are just a few of the differences between commercial and federal contracts; the deeper you look into them, the more you’ll find. Whether an organization’s main experience is with commercial or federal contracts, it’s crucial that they know the unique requirements of both types of contracts before switching from one to the other.