Government contracting has a reputation for being a slow burn — long sales cycles, thick compliance requirements, and mountains of paperwork before a dollar changes hands. So is it actually worth it?
The short answer: yes, for most service businesses. The margins are real, the revenue is stable, and once you build past performance, winning follow-on work gets easier. But the path is not what most people expect.
What Are Typical Profit Margins?
For professional services — IT, management consulting, staffing, training — gross margins on government contracts typically run 10–20%. Net margins after overhead and G&A (general and administrative costs) land around 8–15% for established contractors.
For products and manufacturing, margins are thinner. The Buy American Act and competitive bidding environments push net margins down to 5–10% in most categories. Construction sits somewhere in between: 8–12% net is achievable on design-build work, less on lowest-price-technically-acceptable (LPTA) bids.
Revenue Ranges for Small Businesses
The federal government awarded over $700 billion in contracts in FY2025. Of that, roughly 27% — about $189 billion — went to small businesses. That is a lot of money flowing to companies with fewer than 500 employees.
A realistic first-year revenue target for a new small business doing subcontract work: $200,000–$500,000. Prime contractors in their second or third year with one or two set-aside wins: $1–3 million. Established small businesses on IDIQ vehicles (like GSA Schedules or MACs): $5–20 million annually.
None of these numbers are guaranteed. They depend heavily on your NAICS code, certifications, and whether you are targeting the right agencies for your capabilities.
Government vs Commercial: The Real Trade-offs
Commercial business often has higher margins but less predictable revenue. Government work is the opposite — lower margins but more stable. Federal contracts are typically multi-year (base year plus options), and once you are the incumbent, renewal rates are high.
The other difference: payment. The government pays slowly but reliably. Net 30 is standard; Net 60 is common on large agencies. You will not get stiffed, but you will need working capital to bridge the gap between delivery and payment.
Where First-Time Contractors Leave Money Behind
The biggest mistakes that hurt profitability:
Underpricing the proposal. New contractors underprice to win, then discover the true cost of compliance and delivery. Build a full wrap rate before you bid — include fringe benefits, overhead, G&A, and profit. A 10% profit target means pricing at roughly 1.1x your fully loaded costs.
Ignoring indirect costs. G&A costs (accounting, HR, BD, facilities) are real and often underestimated. They typically run 15–25% of revenue for small businesses.
Skipping certifications. SDVOSB, 8(a), HUBZone, and WOSB set-asides have dramatically less competition. A contractor competing in a full-and-open procurement faces hundreds of bidders. A set-aside might have 3–10. Same work, much better odds.
The Bottom Line
Government contracting is profitable for businesses that approach it strategically. It rewards patience, preparation, and compliance discipline. It punishes undercapitalized businesses that win more than they can deliver.
If you have a real capability that federal agencies need, the opportunity is there. The question is whether you are willing to invest the 6–18 months it takes to build the foundation before the revenue flows.