How Government Contracts Work

The U.S. federal government is the world's largest buyer of goods and services, spending over $700 billion annually on contracts. Understanding how government contracts work is essential for businesses looking to enter this market and for taxpayers who want to know how their money is spent.

The Federal Acquisition Process

Federal contracting follows a structured process governed by the Federal Acquisition Regulation (FAR). The FAR, codified in Title 48 of the Code of Federal Regulations, provides uniform policies and procedures for all federal executive agency acquisitions. The process typically involves five major phases.

1. Acquisition Planning

Before any solicitation is issued, the government agency identifies its need and develops an acquisition strategy. This includes market research to determine what products or services are available, establishing a budget, and determining the appropriate contract type. Agencies must also consider whether small business set-aside programs apply. The planning phase is critical because it shapes the entire procurement.

2. Solicitation

The contracting officer publishes the solicitation, which describes what the government needs and how proposals will be evaluated. Solicitations for contracts over $25,000 are posted on SAM.gov (formerly FedBizOpps). The solicitation includes the Statement of Work (SOW) or Performance Work Statement (PWS), evaluation criteria, contract terms, and the deadline for submissions.

3. Evaluation and Selection

The government evaluates proposals using the criteria stated in the solicitation. Evaluation methods include lowest price technically acceptable (LPTA), best value trade-off, and highest technically rated with a fair and reasonable price. A source selection board may be convened for complex acquisitions. The contracting officer makes the final award decision.

4. Contract Award

Once a contractor is selected, the contracting officer issues the contract. Award information is reported to the Federal Procurement Data System (FPDS) and published on USAspending.gov. Unsuccessful offerors may request a debriefing to understand why they were not selected and may file protests with the Government Accountability Office (GAO) if they believe the process was unfair.

5. Contract Administration

After award, the government monitors contractor performance, processes invoices, and manages modifications. The Contracting Officer's Representative (COR) provides day-to-day oversight. Contracts may be modified to add funding, extend the period of performance, or change the scope. Performance is documented and reported through the Contractor Performance Assessment Reporting System (CPARS).

Key Participants

Several roles are central to the federal contracting process. The Contracting Officer (CO) is the only person authorized to obligate the government. The COR acts as the technical representative monitoring performance. Program managers define requirements. Small Business Specialists ensure compliance with socioeconomic goals.

Where the Money Goes

Federal contract spending spans every sector of the economy. The Department of Defense accounts for roughly two-thirds of all contract spending, with the remaining third split among civilian agencies. You can explore detailed spending data on our agencies page and see the top recipients on our rankings page.

Getting Started

Businesses interested in federal contracting should start by registering in the System for Award Management (SAM.gov), obtaining a Unique Entity Identifier (UEI), and identifying their NAICS codes. Our guide on finding contract opportunities provides detailed steps.