Understanding Government Contracts Part 3
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you invest in companies that earn their income as government contractors, you need to understand the basics of federal contracting. In part one of this three part series, we looked at Fixed Price, Cost Reimbursement, and Time & Materials contracts. In part two, we got a little more complicated with Indefinite Delivery Indefinite Quantity contracts and modification announcements. Now, in part three, we will wrap things up with an explanation of multiple awards, GWACs, and other more complicated contract types
Multiple Awards & Task Orders
One more thing to watch for with government contractors is when they announce that they have won a multiple award contract. This means that the government has awarded the same contract to several vendors, usually giving everyone an IDIQ contract with no minimums. This means that a needed product or service has been identified (usually a commodity product or non-specialized service), a cost for that service has been determined, and several different contractors have been lined up who can all provide that product or service at that cost. When the need arises for the product or service, the government may choose to order from any of the pre-awarded vendors. This later order within a multiple award is called a task order.
Let's look at a multiple award contract won by Cubic Corporation (NYSE: CUB) earlier this year to provide professional and technical support services to the U.S. Air Force. Here, Cubic was one of 29 companies who were included in the award, with a pot of up to $4.7 billion to split between them. But how much revenue Cubic will actually see from this is unknown. Sure, they put that $4.7 billion number in the first line of the press release, but there is no way they will earn anywhere close to that amount. Once they are assigned one or more specific task orders under this umbrella contract, Cubic will probably issue a new press release announcing the actual amount of money they are earning.
Even Bigger: Multiple Award Schedules and GWACs
General Services Administration (GSA) Multiple Award Schedules and Government-Wide Acquisition Contracts (GWACs) are a bigger type of multiple award. In a GSA Schedule or GWAC, a generic contract for an area (such as IT services or office supplies) is awarded to a large pool of companies who are judged to be reliable contractors with reasonable prices. When a government agency needs a product or service, rather than going through the long, complicated work of preparing a unique contract, they can quickly select a vendor from the pre-selected list and pay the pre-negotiated prices. A government-wide contract created by one government agency (like GSA, NASA, or NIH) can be used by any other federal agency. Here is a list of GSA Schedules and GWACs currently in use.
Consider this breath-taking press release from CACI International (NYSE: CACI) from last month: they announced that they will be a prime contractor on a $20 billion, ten year contract with the National Institutes of Health (NIH). Sounds great! $20 billion! Ten years! Prime Contractor! But what did they really win? They're one of 54 companies selected as "prime contractors" for the new CIO-SP3 GWAC for IT services which is being managed for the federal government by NIH. It's a positive development for the company for sure, since the bulk of many contracting companies' revenue comes from being included in large GWACs or GSA Schedules. But when you see an exciting press release like this, remember that they are not actually receiving $20 billion from NIH; they have just won the opportunity to further compete for a small piece of this pot of money over the next ten years.
(Sorry to pick on you, CACI. Many of the other 53 companies had similar press releases, but yours was the best example I found of being vague about the existence of other awardees.)
It Can Always Be More Complicated
Think you're understanding all the terms now? Do not underestimate the government's ability to complicate matters. Read this press release from SAIC (NYSE: SAI) regarding the $144 million "multiple-award, indefinite-delivery/indefinite-quantity (IDIQ), cost-plus-fixed-fee (CPFF) with firm-fixed-price provisions contract" they just won from the US Space and Naval Warfare Systems Center for command and control systems services. I think that example hits on topics from all three parts of my series. Federal contracts can combine award types and have a variety of other complexities, such as incentives, inflation adjustments, cost sharing, subcontractors, and so on.
Looking for more detail? I found the GovWin site to have well written, detailed yet plain-English explanations of Fixed Price Contracts, Cost Reimbursement Contracts, Time & Materials Contracts, IDIQ Contracts, Multiple Award Contracts, Task Orders, GWACs, and much, much more in their knowledge base.
If you're not interested in plain-English explanations and want all the legalese detail, you can head straight to the source: the Federal Acquisitions Regulations (FAR).
Wikipedia has an interesting list of the top 100 federal contract companies, showing the past three years of contracting history. Wikipedia also has a very long, detailed, yet still fairly plain-English explanation of the federal procurement process and rules.
There are lots more ins and outs in the federal contracting world, but I have covered the basic terms you need to know when reading news stories or press releases about government contract awards. This should give you a better understanding as an investor of how to cut through the hype of the press release to figure out what your company has actually won and what performance risks are involved with the contract type.
Gordogato owns shares of Cubic. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cubic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.