Understanding Government Contracting And The Voucher System

Government contracts can be extremely lucrative and servicing public contracts can support entire industries. For most entrepreneurs, government contracting is a world that is completely foreign and shrouded with mystery. Understanding the voucher system is integral to succeeding as an entrepreneur looking to enter the public sector.

Why Use Vouchers?

The voucher system is required by statutory law at various levels, starting from the federal government to state and local governmens. Government or public agencies are required to operate on the encumbrance system of accounting. Effectively, this means that the government is required to operate on a “cash basis.” The government cannot default on its debts by law. The government is only allowed to purchase or spending public funds, when they have the cash available and budgeted. Thus, we’re always hearing about government shutdowns and budgets in the news. Whenever politicians are unable to come to an agreement on a budget they’re willing to approve, then that means that the government does not have the funds or cash available to encumber or spend.

For entrepreneurs, this is a double-edge sword that we accept at the outset of accepting a government contract. The voucher system guarantees that we’re going to get paid because it is illegal for the government to contract with you as a vendor without it having the money. Thus, your payment is guaranteed whenever you obtain a government contract. If you were to go to a bank or secondary market lender with an accounts receivable backed by any government agency, then it is accepted that it is worth 100% of the stated value without discount.

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