March 24, 2020

Nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology. As Darwin surmised, those who survive “are not the strongest or the most intelligent, but the most adaptable to change.”

  • From a Sequoia VC to their portfolio companies

Introduction

There has been a lot of advice about how companies and startups should react to the COVID-19 pandemic, especially from people who lived through the 2001 bubble crash and 2009 financial crisis. Steve Blank, creator of the Lean Startup methodology, posted some great advice to start-ups here. While Steve’s (and Jeff’s) advice is spot-on, if your company has the government as a primary customer or sole customer, here is some additional advice you should consider.  

First - Keep your company alive

-- Take care of your people - if you lose them or their trust you will have a hard time recovering from it.  

  1. Communicate, communicate, communicate – time spent here will build and maintain employee trust and loyalty instead of losing it.
  2. Make sure your team knows that you are in control, have a plan and will be providing as much information as possible as you work with your customers and new information comes in. 
  3. Relieve situational stress on your people if you can – they are likely worried about their jobs, their significant others’ health/jobs, parents, siblings etc.
  • Account for everyone and understand their ability to work.
  • Make sure they have the tools they need to support the business. Consider compensation for temporary adjustments in a home work environment.
  • Revisit your leave policy and make accommodations if you can, especially for hourly employees.

-- Assess your financial state against every worst-case scenario you can imagine. Steve Blank’s recent post on guidance from Jeff Epstein to Bessemer’s portfolio company CFOs is sobering. While working with the government may lessen the severity of an economic impact on your company, you still need contingency plans. Here are things you should consider: 

  1. Don’t wait - take action now.
  2. What happens to your cash-flow projections if your contracts are disrupted by delayed payments or by changes in future funding as the government shifts funding to support the COVID response?  If the contracting officer or PM who approves your invoices becomes hospitalized do you know who the back-ups are? Are some government contracts more at risk than others?
  3. Do you have a plan to shift work, labor, downsize, etc., if needed?
  4. Who can approve financial transactions if key people (like your CFO/CEO) become sick and are hospitalized?  
  5. As Jeff Epstein advised his portfolio companies… now is the time to get a grip on your expenses and reduce them where you can.

-- Identify other sources of funding and start the process of pulling them in.

  1. If you are currently in a raise, close what you can sooner rather than later.
  2. If you are in contract discussions with a potential government client, push to complete the negotiation and get a final contract funded.
  3. As interest rates decline, consider taking on SBA-sponsored loans to hedge against lost income in the future. Establish a dialogue with your most trusted financial institutions sooner rather than later.  Even if you never take out a loan, knowing what banks will support you is important.
  4. Draw the maximum from any lines of credit
  5. If you are in a declared COVID-19 disaster area and are affected, consider applying to an SBA sponsored Disaster Assistance Loan.

Second - Understand & work with your Government Customer

-- Revisit your deliverables with your team and assess now whether you will be able to make your milestone deliveries on time.  If you can’t because your supply chain or workforce has been disrupted, communicate with your program manager and contracting officer to see if you can get relief on the delivery timeline and modify your milestone payments.  Make sure that you get changes in writing, especially for relief of deliverables and major changes.

  1. Review your own subcontract commitments and issue directions regarding incurred cost. Otherwise there will be equitable adjustment fights throughout the supply chain - for example issuing a temporary stop work until there is direction from contracts.
  2. Understand potential government actions
  • Government contract execution will be delayed because of inefficiencies in gaining access to information while working from home.  Also, assume that daily schedules will be disrupted by your contacts' needs to deal with their personal situations.
  • Depending on your contract vehicle, the government can terminate your contract for Potential for Force Majeure. This is something you look for if your contract is DPAS-rated and/or contains clauses such as the changes clause and the mission-essential services clause. Knowing this will help you access your risk.
  • If you cannot deliver, figure out your mitigation path and involve your customer.
  • You need to prove causation and lack of fault
  • Keep good records
  • Demonstrate that you took potentially all actions possible

-- Read your contracts and review the changes and termination clauses, looking for information about Work Stoppages and Equitable Adjustment. It might be necessary to stop work for various reasons (e.g. access to facilities not possible). You might be able to make an equitable adjustment for increased costs and delays, check your limitation of funds and limitation of lost clauses in your contacts.  There are a number of FARs associated with Contract Changes, Termination, Suspension, Delays, and Cost Reimbursement.  Depending on your contract type, the rules are different and reimbursement may be constrained by limitation of funds/limitation of cost clauses.

-- Capture all of your costs now, even if you might not be able to get reimbursed from the Government. This is not something you can do after the fact. Some of these costs will potentially be offset as a tax adjustment for the year.

--Look at ways to operate while the paperwork is in process. Contract Officers will be overwhelmed. Look to get Memos for Record (says what you are going to do and acknowledged by the CO) and Authorization to Proceed memo (drafted by you but provided/authorized by the CO). 

-- Keep an eye on your intellectual property. While rarely invoked, the Government might authorize a company to produce a product or service using your company’s IP without authorization or with limited/no compensation to you.

-- If you are a small business consider SBIR/STTR funding opportunities (see sbir.gov), you should do so while also becoming familiar with how it works.  Many of the programs have broadened their calls by making the topics more general and open-ended.

And while the pool of applicants will probably increase, those familiar with the mechanics of SBIR/STTR can leverage this by employing a broader net and applying across multiple SBIR/STTR programs. 

Third - Look for new opportunities and position yourself for a post-COVID world

-- Pay attention to the government stimulus package. There will likely be additional funding for the services to shore up small and large companies within the Defense Industrial Base.

-- Look to expand your existing contracts. Work with your customer to expand your work in other areas and accelerate execution where possible. FY20 funds are still flowing and given the late approval of the budget will need to be placed on contract in the next couple of months. Your customer might be willing to extend or increase your contract if doing so helps them obligate funds.  

-- Expand your customer access and outreach.

  • Think about new ways to reach your customers and remind them that you exist (webinars, emails, blog posts, website).
  • Working from home might make senior government officials more available - look to changing your messaging to address the new audience.
  • Your customer will have new problems to solve. Be proactive and ask how you can help.

-- Update your product to meet the new normal. Think about how your product can work in a “work from home” paradigm. Do you need a new offering, rebranding or a few new features to make your product more ideal for this environment? 

-- Revise your selling strategy to mirror your customers’ work habits.

  • Provide more opportunities to “demo from home.” Easy-to-setup remote webinars are a good option.
  • Plan for more system loaners and longer trial periods.

-- Revisit your product offering. Make sure your product addresses hybrid work environments with more devices, potentially different support models, etc.

-- Read every new contract carefully.  Given the rushed nature that might occur, be extra diligent as the contract language might be more template than crafted and could contain clauses that are problematic for your business.

-- Look for opportunities to sole source. Agencies have the ability to use sole source more frequently when requiring urgent capabilities or times of emergency.

Summary

These are tough times; don’t wait to make the hard decisions. You need to understand your company's health and critical decisions that need to be made, and be ready to move quickly based on changes in your contracts. Lead the discussion with your customers to attempt to control redirection because of COVID-19 issues.  

We wish you all well and please be safe.