The Homeland Security Marketplace: Selling to the Federal Government
November 17, 2003

By Edward Correia and David Hazelton
Reprinted by permission of Latham & Watkins

The nation's need for increased protection from terrorist threats has led to an explosion in the demand for security-related products. Selling products and services in this diverse marketplace has prompted thousands of companies to develop new products or to focus marketing efforts for established products on customers who are interested in increased security. Selling to the federal government offers the potential for substantial purchases, but it also raises particular challenges. This article discusses these challenges and provides recommendations for clients who are interested in selling homeland security-related products to one of the world's biggest customers.

Recommendation 1 - Identify Your Customers and Their Procurement Needs

An essential first step in selling to the federal government is to identify the customer. Procurement decisions are generally made at the agency level, not at the level of the federal government as a whole.1 Within cabinet-level departments, the decision-making process usually occurs at the level of agencies within the department. The Department of Defense (DOD) is the most obvious example, but other large departments, including the Department of Homeland Security (DHS), the Justice Department, and others, make procurement decisions below the department level. An effective sales strategy requires assessing agency needs and deciding where to target marketing efforts.

There are a variety of ways to assess agencies' procurement needs. The agencies themselves post notices on their individual Web site, which inform vendors of current contracting opportunities and the kinds of products and services that the agencies regularly purchase.2 In addition, agencies often publish a forecast of contracting opportunities. Because the government's need for homeland security products is new and evolving quickly, however, it is not sufficient to rely simply on what the agencies have purchased before or even what the agencies' own planners think they need in the future. The agencies may be unaware of new technologies or simply may not appreciate what is already available in the market. Consequently, it is important to evaluate the agencies' mission, not just their procurement history, to identify products that meet the needs of that mission and to convince the agencies that their mission is served best by purchasing your products.

While this article deals with selling to the federal government, it is important to recognize that even though funding for many homeland security products will come from the federal government, the actual customers will often be state and local governments. In some cases, it is useful to contact the agencies making federal grants to state and local governments to ensure that the scope of a particular grant covers a company's products.

State and local governments have their own procurement procedures and most are far simpler than those for federal procurement. Senior officials are often more accessible and procurement decisions may be more "political" than purchases at the federal level. While the recommendations below are drafted with the federal government in mind, many of the recommendations below also apply to dealing with state and local governments.

Recommendation 2 - Decide to Be a Prime Contractor or a Subcontractor

One aspect of identifying your customer is deciding whether you want to sell directly to the federal government or whether your customer should be a large prime contractor dealing with the federal government. Most small companies that provide products to the federal government actually do so as subcontractors, not as prime contractors. If companies want to be subcontractors, they need to identify the possible prime contractors that might purchase their products or services.3 As an alternative to serving as a subcontractor, it may be possible to team with a larger established contractor to sell products as a joint venture. The advantages of the subcontractor or teaming relationship is that a vendor can take advantage of the expertise, established relationships and reputation that its larger partner has developed over the years with the agencies. In addition, the larger partner has dealt with complex federal procurement regulations and can steer a new company through the process.

On the other hand, the federal government does not, as a general matter, regulate the contractual relationship between a prime contractor and a subcontractor. There are no regulations requiring that a prime contractor choose the lowest priced subcontractor or conduct competitions for subcontractors in a particular way. The process for selling to prime contractors is therefore like selling in the private marketplace. The key is to identify opportunities and to market directly to the prime contractor. In some cases, subcontractors can qualify for federal programs that may benefit the prime contractor (e.g., designation as a Small Disadvantaged Business). In those cases, it may be worth qualifying for these programs and stressing that advantage in the marketing plan.

Recommendation 3 - Obtain Validation of Your Technology

The federal government has been overwhelmed by thousands of product proposals aimed at homeland security. Most of these proposals are accompanied by claims that the products can perform better than competing technologies at lower cost. (One article reported that the Department of Defense received 12,500 proposals in the months after 9/11.) Before agencies are willing to buy anything-particularly new technology with no established track record of use-they need validation that the products can do what their proponents say they can do. There are a variety of ways to obtain such validation, including internal testing by the developer, evaluation and certification by an independent laboratory and certification by a government-sponsored testing program. Obviously, validation by an independent source is more credible than validation only by in-house testing.

Federal agencies operate a number of testing laboratories around the country. In some cases, these testing centers will absorb the costs of testing. In others, the company must pay the costs. In addition, qualifying under the Safety Act (discussed below) will serve to validate the effectiveness of products. Companies should consult with potential customers to determine whether testing is required and, if so, what kind of testing and certification is advisable.

Recommendation 4 - Develop Good Marketing Materials

Companies that want to sell in the homeland security market must develop marketing materials that are readable, easy to understand and that clearly explain how the product responds to a security-related need. The materials can be prepared "in house" but they must be well-written and well-designed. The materials should explain the advantages of the technology, the scientific basis of the technology and the validation that the company has received through testing. It is advisable to prepare a one-page "bullet point" handout, a short (3 to 5 page) overview document, and a longer, more detailed paper explaining the product for use with a variety of audiences.

The role of the product in preventing or responding to terrorist attacks should be stated clearly, preferably in the context of plausible terrorist scenarios. Relevant prior testing and certification should be discussed along with a description of existing customers and the uses to which the product is now put. Materials should also include information of interest to procurement officers, such as whether the product can be purchased through a pre-existing contracting vehicle (discussed below), whether the company qualifies for any special procurement programs (e.g., the SBA 8(a) or HubZone programs) and pricing information.

Recommendation 5 - Register Your Company as a Vendor

There are a variety of places to register as a vendor to the federal government. In general, registering is easy and can be done over the Internet. Take the time to register on any of these sites that are relevant:

• www.fedbizopps.gov: entitles a vendor to receive notices of government requirements for a particular NAICS code;
• www.fedbid.com: allows participation in online bidding;
• www.mbda.gov (Phoenix database): provides information and business opportunities (such as free contract referrals) through the minority business development agency;
• pro-net.sba.gov (SBA pronet): provides SBA's database of vendors for contracting officers at all agencies;
• sbs.dnd.com: allows for the creation of a Dun & Bradstreet number, which is required by some agencies; also, provides access to the NAICS database of business leads;
• www.ccr.gov: the Federal Agency Registration Web site; also, a database for collecting procurement and financial transaction information;
• www.dss.mil/isec/index.htm: describes the process of applying for security clearances, required by DOD and certain other agencies under some circumstances.

Recommendation 6 - Take Advantage of "Preexisting Contract Vehicles"

When a contracting officer is deciding how to purchase a product, he or she has two choices. She can use open market procedures, which means soliciting a new contract, or she can rely on "preexisting contract vehicles," i.e., contractual arrangements that the agencies have already entered into with various vendors. The simplest form of the latter is a Federal Supply Schedule, which includes vendors willing to selling products to the government at a designated price, typically a discount from their list price. In some cases, homeland security products may be included on Federal Supply Schedules. If so, vendors should be sure that they are listed on the schedule. Other more complex, preexisting vehicles are Government-wide Acquisition Contracts (GWACs) and agency-wide contracts. Participation in one of these preexisting vehicles is an important selling point with the agencies.

Recommendation 7 - Talk to the Right People

The time to begin selling the product is long before the government formally announces that it wants to make a purchase. Federal procurement regulations put significant limitations on how products can be marketed to the federal government. For example, once a solicitation for proposals has been formally issued, federal rules generally prohibit vendors from contacting individuals within the agencies except under very limited circumstances. However, before a formal solicitation is issued, it is possible to explain your product to procurement officials as well as to senior policy-level officials within an agency. This is particularly important for companies selling a new technology that has no established track record. The agencies must know that the technology is available and must understand its potential before the agency considers making a purchase.

It can be very helpful to make contacts with DHS for a couple reasons. First, DHS purchases homeland security products. As discussed above, purchases are made at the agency level; therefore, it is important to identify which of this far-flung agency's components are likely to be a customer. In addition to its own purchases, DHS plays an important role in validating technology for other agencies and in addressing procurement needs through its participation in interagency working groups. One of the most important groups is the Technical Support Working Group (TSWG). TSWG works in partnership with the DHS, the State Department and DOD. TSWG coordinates interagency research and development requirements for combating terrorism. The TSWG Web site (http://www.tswg.gov/tswg/home/home.htm) also provides information about commercial opportunities.

There is no particular formula for identifying the right people to contact. Sometimes high level meetings appear valuable because of the seniority and political connections of the officials involved. However, the actual procurement decisions are usually made by lower level employees who are required to reach their decision through formal procurement procedures. Nevertheless, presentations to senior officials can be valuable in order to introduce new products to an agency and to convince senior officials in the agency that a new technology should be considered. Also, contacts with Congressional offices to solicit support can be helpful. Ultimately, the contract still has to be won using the appropriate federal procurement procedures, but the contract may be awarded on a sole source basis or the form of the solicitation for competitive bids may be heavily influenced by the vendor's presentation.

Recommendation 8 - Be Aware of the Procurement Procedures

The federal procurement procedures are found in the Federal Acquisition Regulations, commonly known as the "FAR rules."4 Additionally, there are acquisition procedures unique to DOD-the Defense Federal Acquisition Supplement (DFARS).5 These rules are complex and a complete explanation is beyond the scope of this article. The discussion below summarizes some basic principles. Procurement procedures grow more complex as purchase size increases. In general, agencies can make "micro-purchases" (less than $2500) simply by using a credit card and choosing a vendor from the Federal Supply Schedule. Medium-sized purchases ($2500 to $100,000) can be done through Simplified Acquisition Procedures (SAP). The SAP allows contracting officers to use informal quoting and competition procedures, accept oral quotes, and compare quoted prices rather than conduct negotiations. Large purchases (over $100,000) require formal contracting procedures. The FAR Rules allow an exception for "commercial items," which can be purchased under SAP for up to $5 million. Most federal procurements are subject to statutes that are intended to ensure fairness in contracting and to protect taxpayers, including the Competition in Contracting Act (CICA), the Truth in Negotiations Act (TINA), the Cost Accounting Standards Act (CAS), the Bayh-Dole Act (which deals with government rights to patentable inventions) and others.

In general, homeland security purchases are subject to the same FAR rules that apply to other agencies. However, there are important exceptions. First, under the Homeland Security Act, DHS can use "other transaction" procedures (i.e., procedures for transactions other than standard procurement contracts that trigger the statutes listed above). These "other transactions" include agreements for R&D and prototype projects. In addition, the Act provides that DHS, upon the proper finding, can use streamline procedures in several cases:

• micro-purchase procedures for purchases between $2,500 and $7500;
• SAP procedures up to $200,000 for contracts to be performed in the U.S. and $300,000 for contracts to be performed outside the US;
• the purchase of any good or service using SAP for purchases up to $7.5 million as if they were commercial items.

In addition to the greater flexibility provided to DHS, the Act provides all executive branch agencies the authority to use streamlined procedures very similar to those available to DHS if the head of the agency makes the required certification.

Recommendation 9 - Be Aware of Special Opportunities for Small and Disadvantaged Businesses

The federal government provides a number of special business opportunities for small and disadvantaged businesses. These include:

• the HubZone programs for businesses in economically disadvantaged areas;
• the SBA 8(a) program for minority-owned businesses;
• the mentor-protégé program for small businesses teaming up with larger ones;
• the Small Disadvantaged Business program for minority owned businesses in areas affected by discrimination;
• the Disadvantaged Business Enterprise program administered by the Department of Transportation.

Any company that believes it may qualify for one of these programs should consider becoming eligible.

Recommendation 10 - Take Advantage of the SAFETY Act.

The Homeland Security Act includes provisions limiting the liability of companies who sell anti-terrorism technology when DHS determines that they qualify for such treatment. Sellers of qualified technology are eligible for a cap on liability equivalent to the seller's liability insurance of claims arising from acts of terrorism. In addition, upon the proper showing, sellers are eligible to claim the benefits of the government contractors' defense whether claims arise from sales to the government or other buyers. Vendors should consider applying to DHS for qualification of their products as soon as possible once the final rules are issued, probably sometime in September 2003. (For more details on the Safety Act, see Latham & Watkins Client Alert No. 254, Jan. 2003).

A number of Latham & Watkins attorneys have special areas of expertise relating to homeland security and can advise clients on new federal statutes and regulations that address terrorism and other risks to national security. We can assist clients in evaluating the SAFETY Act as well as other provisions in the Homeland Security Act. If your company wishes to consider developing a proposal for consideration by the Secretary under the SAFETY Act, we can advise you on how to proceed.

Endnotes

1. In some cases, the General Services Administration (GSA) makes purchases for many federal agencies.
2. See, for example, www.fpdc.gov for a listing of agencies that buy products by NAICS code.
3. For a list of major DOD prime contractors by state and a point of contact for each company, see http://www.acq.osd.mil/sadbu/publications/subdir/index.html. As an additional resource, see the Small Business Association Web site, http://web.sba.gov/subnet, where prime contractors post subcontracting opportunities.
4. See www.arnet.gov/far.
5. See www.acq.osd.mil/dp/dars/.

If you have any questions about this article, please contact David R. Hazelton or Edward W. Correia in our Washington, D.C. office at (202) 637-2200. Edward Correia (edward.correia@lw.com), is co-chair of the Homeland and Trade Security Group at Latham & Watkins. David Hazelton (david.hazelton@lw.com), also with Latham & Watkins, advises and represents both small and large companies in connection with a variety of government contracts matters.

Latham & Watkins LLP is a global, full-service law firm with over 1,500 lawyers in offices throughout North America, Europe and Asia. We have a premier venture and technology practice with attorneys who assist clients in the high technology space with virtually any transactional and litigation legal needs, and we have a tremendous amount of experience working with startup companies, Fortune 500 corporations and everything in between.