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Vendors Face Smaller Profit Margins From Government Work

Jason Miller | Executive Editor | FederalNewsRadio

You can tick off a list of federal project failures from the FBI’s Virtual Case File to the Homeland Security Department’s E-Merge program that dot the history of acquisition. Add to that the famous examples such as the $500 hammer and the $1,000 toilet seat, and you can see how the perception that the government can’t buy economically even if the product was free grew over the past three decades.

But these anecdotes only tell one side of the story. FederalNewsRadio talked to experts who have made it a career selling to the federal government, and their perspectives are quite a bit different.

“The government is a good buyer,” says Gary Barth, vice president of Canon’s government marketing division. “They certainly compete everything and are definitely going with low price. They take advantage of their size and potential they offer to any manufacturer.”

And Barth isn’t alone in his opinion. Renny DiPentima spent more than 30 years working for the government and the last 15 in the private sector running SRA International. He says the government is especially good in two areas-commodity purchases such as computers or servers, and small item purchases that can be done at the local hardware story or office supply store with a credit card.

“The government gets a better price than anyone else for straight forward and standard equipment,” DiPentima says. "It could be because of the bulk of the buy or just because of the competitive nature of the procurement.

But the one area where the government still struggles is when they buy a one of a kind or unique system, particularly software systems, he says.

“There are too many stories where the government walked away from or has not had a successful procurement,” he says. “If one looks ahead, the government is becoming more and more of a commercial off-the-shelf buyer of software. So it is more of myth than fact that they are not a good buyer. Some of it is old history that long ago has been corrected and in most areas, the government is a pretty good buyer.”

The profit margins of major federal contractors as compared to the commercial sector illustrate Barth and DiPentima’s historical views.

Jeremy Grant, chief development officer for Acquisition Solutions, which helps agencies develop requirements, says the average company in the S&P 500 earned about 8.5 percent profit margin, while most government contractors work on a five percent profit margin.

Grant, who also is a former industry analyst and worked for a large system integrator, says federal profit margins tend to be higher for specialized or high end products and services.

DiPentima adds that when the government develops software systems, for instance, the profit margin is around eight percent. But should a company develop a similar system for a commercial client the profit margin would be between 12 percent and 16 percent.

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