Why the heck would a government prime bring on a solo 1099 sub-contractor?
WHY DO COMPANIES HIRE 1099S OR SUBCONTRACTORS?
If you’re going to become a 1099 federal sub-contractor, it is helpful to know why a prime would ever bring on a sub when it means their profits will decrease. Why don’t they do everything with their own employees?
Generally speaking, they try to. But there are a number of situations and reasons that come up where it is advantageous to use a sub.
» The prime doesn’t have the expertise
It’s not uncommon in federal contracting for a company that specializes in one area to win work that requires a totally different skill set. For example, on my last project, the prime, Leidos, was given a task order to supply workforce analysts to the National Geo-Spatial Intelligence Agency (NGA). They were only given this task order because Booz Allen wasn’t contractually permitted to win that task order.
Leidos didn’t have a pool of employees with this expertise to perform this work so they were open to sub-contracting. In this case, they sub-contracted to me, someone who has NGA workforce analytics experience.
» The prime wants to sub out the low value work
The counterpart to the expertise reason above is that the prime wants to sub-contract work it perceives to be of low value. Occasionally, a prime who specializes in something of high value will agree to provide certain commoditized services.
For example, due to contracting convenience for the government, Leidos may agree to provide a number of administrative assistants.
Instead of building out an administrative practice, they can just hire a firm that provides administrative personnel at a lower cost. Because it is not core to the business but will make the customer happy, it is a good candidate for sub-contracting.
» The prime doesn’t have the client relationship
You primarily encounter this situation when a company wants to win a contract with a customer they don’t have a clear relationship with.
A few years back Deloitte won a large 5-year contract with NGA’s Human Resources directorate (HD). HD wanted to consolidate all of their contract work that was previously spread out across multiple contracts into a single mega contract with one supplier.
Deloitte had performed some work with HD, but not all the work, so they formed teaming agreements with the incumbent companies that had been working for HD on the contracts that were being consolidated. Those companies were much smaller than Deloitte so they agreed to be subcontractors if/when Deloitte won the contract. They did not have the ability to win the contract on their own because it was too big for a small business to perform on their own.
Deloitte strengthened their position on the bid by claiming their teammates had significant histories of performing the exact work HD needed. Because incumbents have a significant advantage in the government contracting world, this helped Deloitte win the contract.
I’ll also note that a sub-contractor or 1099 can leverage an existing client relationship to get work on an existing contract. If a sub-contractor has worked with a particular client in the past and has a positive relationship with them, a prime may bring them on as a sub-contractor to make the client happy.
» The prime can’t hire enough people
Recruiting qualified people is difficult. When a prime is on the hook for hundreds, or even thousands of positions across their portfolio, it is a near certainty that they won’t be able to fill all the positions with their own employees.
If positions have been sitting vacant and the client is getting antsy about filling those positions, it is sometimes easier for a prime to go to a sub-contractor who can supply a few people to fill those positions. The prime will make less money but it is better than no money.
» The prime wants to manage their risk
Hiring employees brings on a certain amount of risk and potential liabilities. At minimum, you need to pay the employees’ salaries, even if you have nothing for them to do and they aren’t making you money!
Sure you could lay them off or fire them (and companies do that) if they aren’t profitable, but that may hurt internal morale and damage their reputation.
When a prime brings on a sub-contractor on the other hand, in exchange for reduced profits, the prime passes along some of the risks. If the contract ends, the prime can end the relationship with the sub-contractor and be off the hook for the costs.
Let’s say a prime has an open, very specialized position with six months left on the contract. If the prime hires an employee, they’ll have to find other work for the employee after 6 months when the contract ends. If they don’t have any work for the employee, the prime will lose money.
However, if they sub-contract that to a 1099 contractor, they will only pay the 1099 for the 6 months he or she is working on the project. The prime reduces their profit margin in exchange for eliminating the risk of losing money.
» The prime is required to pass on work to a small business
To encourage participation in federal contracting by small businesses, the government sometimes mandates that a certain percentage of government contracts be allocated to small business. These are called “small business set asides.”
This is sometimes implemented by awarding contracts directly to a small business, making the small business a prime contractor. However, on larger value contracts, the government can “encourage” the prime contractor to sub-contract a certain percentage of the contract to small businesses. If Deloitte is awarded a $10 million dollar contract, then the government can suggest they allocate 10%, or $1 million, of the work to small business subcontractors.
In practice, I have found large primes don’t care that much about these small business provisions as they can simply make up an excuse (after winning of course) as to why it’s not feasible.
That being said, it doesn’t hurt any potential 1099s or small business sub-contractors to have this requirement in place.
» The prime wants to avoid organizational conflict of interest (OCI)
Large primes in the course of the work with their government will often be in a position to learn or attain privileged information that would give them an unfair advantage in competing for a different contract.
This is called organizational conflict of interest (OCI) and primes are required to disclose OCI and come up with a mitigation plan.
One mitigation technique is to prevent certain employees who have privileged information from participating in bidding on future contracts or sharing information with those who are bidding on contracts when that information could be used to gain an unfair advantage over a competitor. They would be “behind an OCI firewall.”
On a recent project, one of the reasons the prime wanted to bring on a 1099 is because they wanted to make sure they could use another employee in the bidding process for another project. I had the right skill set for the project, and if the prime brought me on, their other employee would be able to help them win other work since they wouldn’t have access to privileged information.
The more you know about WHY a prime contractor would sub-contract out work, the more comfortable you will be with the whole idea of it. In addition, if you know the specific reason why a particular prime needs to sub-contract, you can leverage that reason in negotiations.
If you have questions feel free to reach out to me directly at email@example.com. I can also add you to my informal mailing list in case I have updates or news or whatever.
This article is a adapted from Chapter 2 (Understanding 1099 Federal Sub-contracting and Why It Exists) of my book.
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