How Government Contracts Work
Updated April 2026 · Federal procurement explained
The federal government is the world's largest buyer. In FY2024, the US government obligated $525.3B through contracts with private companies — buying everything from fighter jets and satellites to IT consulting and office supplies. Here's how the procurement process works from start to finish.
The Federal Procurement Process
Government contracting follows a structured process governed by the Federal Acquisition Regulation (FAR), a 2,000-page rulebook that ensures fair competition, transparency, and accountability.
Step 1: Requirements Definition
An agency identifies a need — new IT systems, building maintenance, research support, military equipment. The contracting officer works with program managers to define requirements, estimate costs, and determine the appropriate acquisition strategy.
Step 2: Market Research
Before soliciting bids, agencies research the market to understand available solutions, typical pricing, and the industrial base. This may include Requests for Information (RFIs) posted on SAM.gov.
Step 3: Solicitation
The agency posts a formal solicitation — either a Request for Proposal (RFP) for negotiated procurements or an Invitation for Bid (IFB) for sealed bidding. Solicitations are published on SAM.gov and include the statement of work, evaluation criteria, and contract terms.
Step 4: Proposal Submission
Companies submit proposals responding to the solicitation requirements. Proposals typically include a technical volume (how they'll do the work), a management volume (who will do it), a past performance volume (what they've done before), and a cost/price volume.
Step 5: Evaluation and Award
Government evaluators score proposals against published criteria. The award goes to the offeror providing the “best value” to the government — which may or may not be the lowest price. Losing companies can file protests with the Government Accountability Office (GAO).
Step 6: Performance and Oversight
Once awarded, the contractor performs the work under government oversight. Contracting Officer Representatives (CORs) monitor performance, approve invoices, and manage modifications. Contract data is reported to the Federal Procurement Data System (FPDS) and published on USASpending.gov.
Award Methods
The government uses several methods to award contracts:
- Full and Open Competition — Any qualified company can compete. This is the default method and accounts for the majority of contract dollars.
- Set-Aside — Competition restricted to specific categories (small business, 8(a), HUBZone, veteran-owned). About 26% of federal contracts go to small businesses.
- Sole Source — Awarded to a single company without competition. Allowed only when justified (unique capability, urgency, brand-name). Often scrutinized for potential waste.
- Task Orders — Work awarded under pre-competed contract vehicles like GSA Schedule, GWACs (Government-Wide Acquisition Contracts), or IDIQs (Indefinite Delivery/Indefinite Quantity). Faster than full competition.
Who Gets Government Contracts?
Federal contracting is highly concentrated. The top 10 federal contractors receive roughly 25% of all contract dollars, with defense contractors like Lockheed Martin, Raytheon, and Boeing dominating the list. However, thousands of small and mid-size companies also participate — search our database of 1,999 federal contractors.
Key Dollar Thresholds
| Threshold | Amount | What It Means |
|---|---|---|
| Micro-Purchase | $10,000 | Can be purchased with government credit card, no competition required |
| Simplified Acquisition | $250,000 | Streamlined procedures, fewer regulatory requirements |
| Small Business Set-Aside | $250,000 | Must be set aside for small businesses if two or more can compete |
| Cost Accounting Standards | $2 million | Full cost accounting system required for contractors |
| Certified Cost or Pricing | $2 million | Must submit certified cost data for negotiated contracts |
Frequently Asked Questions
How do government contracts work?
Federal government contracts are legally binding agreements between the US government and private companies to provide goods or services. The process starts when an agency identifies a need and posts a solicitation on SAM.gov. Companies submit proposals, which are evaluated on technical merit, past performance, and price. The government awarded $525.3B in contracts in FY2024 across 93 agencies.
How long does it take to get a government contract?
The government procurement process typically takes 6-18 months from solicitation to award for competitive contracts. Simplified acquisitions under $250,000 can move faster. Sole-source awards and task orders under existing vehicles (like GSA Schedule or GWACs) can be awarded in weeks.
What is the minimum size of a government contract?
There is no minimum size, but the micro-purchase threshold is $10,000 — purchases below this amount can be made with a government purchase card without competitive bidding. The simplified acquisition threshold is $250,000, below which streamlined procedures apply. Most tracked contracts on USASpending.gov exceed these thresholds.
Can small businesses get government contracts?
Yes. The federal government has a goal of awarding 23% of all contract dollars to small businesses. Set-aside programs include 8(a) Business Development, HUBZone, Service-Disabled Veteran-Owned Small Business (SDVOSB), and Women-Owned Small Business (WOSB). The SBA certifies small businesses for these programs.
What is the difference between a contract and a grant?
A contract is for the acquisition of goods or services — the government is buying something specific. A grant is financial assistance to support a public purpose (research, education, social services) without the government receiving goods or services in return. Both are tracked on USASpending.gov.
Explore Federal Spending Data
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