Uncle Sam becomes a tougher customer for small businesses

Uncle Sam isn’t as easy a customer to land as he used to be.

Even before $85 billion in federal budget cuts went into effect this spring, small business owners who contract with the government were finding that the cost of going after federal contracts had spiked. On average, small businesses spent more than $128,000 in labor costs and other expenses in 2012 to pursue government contracts, according to a survey by American Express. That’s up 49 percent from 2010.

Now that many of the budget cuts are in place, it’s become even harder and more expensive for small businesses to compete for contracts, which they often count on to generate a significant portion of their revenue.

Ken Anderson usually goes to 20 or more trade shows a year to meet with hundreds of Department of Defense employees who are interested in buying the technology made by his company, Universal Synaptics. But federal agencies’ travel budgets were slashed in the so-called sequestration cuts that took effect March 1, so many of the shows were canceled. Now Anderson is spending more time and money flying to meetings at government facilities. Instead of going to one show, he has to make as many as 10 trips.

“One might be in Warner Robbins, Ga.; Cherry Point, N.C.; Patuxent River, Md., or Jacksonville, Fla.,” said Anderson, vice president of business development at Universal Synaptics, which makes diagnostic equipment for military aircraft. “Instead of one trip to a show in Atlanta, now I’ve got to go all over the place.”

Anderson said the extra trips he’s making aren’t guaranteed to result in a new contract for his Roy, Utah-based company. Meanwhile, his travel costs are up between 25 percent and 30 percent this year.

“You spend more time and money and energy in your business development and the process takes longer,” he said. “As a taxpayer, I say this is really fantastic. But as a business owner, I say this is tough and I have to figure out a way through it.”

The cost of bidding on a federal contract can exceed 3 percent of the total amount of the contract, according to the House Small Business Committee. So on a contract worth $100,000, a business might spend more than $3,000 during the bidding process. Companies seeking federal contracts typically lay out costs for travel, product development and writing up proposals. That’s money spent up front, with no guarantee that a bid will be successful.

The extra trips that Shep Brown and his staffers are making to meet with defense employees translate into an enormous time and monetary expense, said Brown, CEO of Howell Instruments, a Fort Worth, Texas, maker of testing and monitoring equipment for airplanes. They too used to attend trade shows where they could meet with a lot of people at once.

“It takes a month to do what I did in three days,” said Brown, “Our manpower costs go up 200 percent.”

The Small Business Administration, the government agency that advocates for small companies in other parts of the government, said it had anticipated that small businesses would get fewer contracts and fewer contract dollars because of the budget cuts.

“From the beginning, we have been clear that sequestration would have severe impacts across the government and for small business,” said Emily Cain, a spokeswoman for the SBA. “We know that the economic uncertainty created by sequestration prevents small businesses from moving forward and pursuing new orders or opportunities to expand.”

The Commerce Department’s report on second-quarter economic growth might offer some hope to small businesses. The report said federal spending fell only 1.5 percent between April and June, compared with an 8.4 percent drop in the first three months of the year. If spending stabilizes, contracts might be easier to get.

In the meantime, though, small businesses that rely on federal contracts for revenue continue to spend more time and money to get and keep business with the government. And there’s another hurdle: contracts are taking longer to be approved, forcing them to look elsewhere for revenue.

“The time that it takes from submitting a bid or a proposal to the award is strung out,” said Bob Mander, owner of Ryan & Co., a Washington, D.C.-based company that writes technical documents for the government and nonprofit organizations.

Mander said he’s seeking more business from non-government customers, including advocacy groups that represent health care and real estate interests.