Government Purchase: Definition, Types, Keynes Theory & Opportunities

Government Purchase is the formal process public sector organizations use to acquire goods, services, and works from private companies. Globally, this activity represents a colossal market, with government procurement accounting for an estimated 15% of the world's Gross Domestic Product (GDP). This article will explore the definition, different types of purchases, and the immense opportunities available for businesses.

This article explains the key concepts of government purchase. We specialize in company formation in Vietnam and not in procurement consulting. For technical guidance on government purchasing procedures, please consult a qualified expert.

What is a government purchase?

At its core, government purchase, is sometimes used interchangeably with public procurement, is the process through which public authorities, such as government agencies or state-owned enterprises, buy the inputs needed to provide goods and services for public needs. Since governments cannot produce everything they need on their own - from military equipment and infrastructure projects to healthcare services and office supplies - they rely on the private sector's efficiency and innovation. This creates a competitive marketplace where private companies participate in bidding processes to win government contracts, driving economic growth and delivering value for taxpayers.

The economic impact of government purchases

Government purchases are a significant component of a nation's GDP and a powerful tool for economic stimulation. When a government invests in a new highway, for instance, it hires construction firms, buys materials from suppliers, and creates employment opportunities through contractors and suppliers, injecting money into the economy and creating jobs. This spending has a ripple effect, supporting not just the primary contractors but also their entire supply chains. This ripple effect is optimized through effective supply chain management for businesses involved in public projects. During economic downturns, strategic government spending can create demand when private sector investment is low, helping to stabilize and boost economic activity.

The role of government procurement in achieving policy objectives

Beyond simple acquisition, government purchasing is a strategic lever to achieve broader societal goals. Public procurement is often designed to fulfill several key policy objectives, such as promoting innovation, supporting small and minority-owned businesses, ensuring national security, and advancing environmental sustainability. For example, contracts may include clauses that encourage working with women-owned businesses or specify the use of eco-friendly materials like green tech. By setting specific standards and priorities in their purchasing decisions, governments can shape markets and encourage responsible corporate behavior.

It is important to distinguish this from a business grant. While a government purchase is a commercial transaction where the government buys a product or service, a grant is financial assistance provided to support a public purpose without an exchange of goods or services.

The distinction between public procurement and government contracting

While often used synonymously, there is a subtle distinction between the terms. Public procurement is a broad term that refers to the purchasing activities of any public sector organization, including state, and local governments. Government contracting, on the other hand, more specifically refers to the process of national governments purchasing goods and services for particular programs or projects, governed by a detailed legal framework like the Federal Acquisition Regulation (FAR) in the United States.

Types of government purchase

Governments employ various methods to acquire goods and services, each tailored to the size and complexity of the purchase. These methods are governed by strict legal frameworks to ensure fairness, transparency, and competition. Understanding these business activities is crucial for any business looking to enter the public sector market.

Micro-purchases

For small, routine purchases, government agencies use a highly simplified method known as micro-purchasing. As of October 1, 2025, the threshold for this method is $10,000 (up to $15,000 for certain qualified suppliers). These purchases can often be made without soliciting competitive quotations, allowing agencies to acquire necessary low-cost items quickly and efficiently, often using a government-issued purchase card.

Simplified acquisition procedures

For purchases that exceed the micro-purchase threshold but are below the Simplified Acquisition Threshold (SAT) of $250,000 (effective October 1, 2025), agencies use Simplified Acquisition Procedures (SAP). This method is designed to be less burdensome than formal contracting processes, typically requiring agencies to obtain quotes from an adequate number of qualified sources to ensure a competitive price.

Sealed bidding

When the government's requirements are clear, specific, and complete, it often uses sealed bidding. In this formal process, agencies issue an Invitation for Bids (IFB), and interested companies submit confidential, sealed bids. All bids are opened publicly at a designated time, and the contract is awarded to the responsible bidder with the lowest price that conforms to the IFB's requirements. This method is heavily focused on price and is common for construction projects or standard commodity purchases.

Consolidated purchasing

Consolidated purchasing involves bundling the requirements of multiple agencies or departments into a single, large procurement. This strategy, often executed through strategic sourcing agreements or Government-Wide Acquisition Contracts (GWACs), allows the government to leverage its immense buying power to achieve significant cost savings through economies of scale.

Solicitation types (RFQ, RFI, RFP)

• Request for quotation (RFQ): Used for simplified acquisitions, an RFQ is a request for a price quote on specific goods or services.
• Request for information (RFI): An RFI is a market research tool. The government uses it to gather information from potential suppliers about their capabilities before issuing a formal solicitation.
• Request for proposal (RFP): An RFP is used for complex procurements where technical approach, qualifications, and past performance are as important as price. It solicits a detailed proposal from potential contractors, which the government evaluates to determine the "best value."

The legal frameworks governing these purchases

In the United States, government purchasing is primarily governed by the Federal Acquisition Regulation (FAR). The FAR is a comprehensive set of rules that dictates the entire federal procurement process, from acquisition planning and contract formation to administration and closeout. It ensures that all government purchases are conducted in a manner that is fair, transparent, and in the best interest of the taxpayer.

06 types of government purchase

Common types of government contracts

Once a procurement method is chosen and a vendor is selected, a formal contract is established. The type of contract used depends on factors like the clarity of the requirements and the level of risk involved. Government contracts generally fall into four main categories.

Fixed-price contracts (FFP, FPEPA)

This is the most common type of government contract. The contractor agrees to deliver the specified goods or services for a set price that does not change. This places the maximum risk on the contractor, who must control costs to ensure profitability. It is used when the requirements are well-defined.

• Firm-fixed-price (FFP): The price is set and not subject to any adjustment.
• Fixed-price with economic price adjustment (FPEPA): This variation allows for the contract price to be adjusted based on a formula relating total allowable costs to a target cost. This incentivizes the contractor to manage costs effectively.

Cost-reimbursement contracts (CPFF, CPIF)

Used when costs cannot be estimated with sufficient accuracy, cost-reimbursement contracts pay the contractor for all allowable and reasonable costs incurred, plus a fee. This type of contract places more risk on the government.

• Cost-plus-fixed-fee (CPFF): The contractor is reimbursed for costs and receives a predetermined fee that was negotiated at the outset and does not change regardless of the actual costs.
• Cost-plus-incentive-fee (CPIF): The contractor receives a fee that is adjusted based on a formula relating total allowable costs to a target cost. This incentivizes the contractor to manage costs effectively.

Time and materials (T&M) contracts

T&M contracts are used when it's not possible to accurately estimate the extent or duration of the work required. The government pays the contractor based on a fixed hourly rate that includes wages, overhead, and profit, as well as the actual cost of materials.

Indefinite delivery/indefinite quantity (IDIQ) contracts

IDIQ contracts provide for an indefinite quantity of services or supplies during a fixed period. They are used when the government can't predetermine the precise quantities it will need. The government issues "task orders" for services or "delivery orders" for supplies against the main IDIQ contract as needs arise. This streamlines the procurement process for recurring needs.

Incentive contracts, GWACs, and BPAs

• Incentive contracts: These contracts, which can be fixed-price or cost-reimbursement, include special incentive fees to motivate the contractor's performance in areas like cost control or timely delivery.
• Government-wide acquisition contracts (GWACs): A GWAC is a pre-competed, multiple-award IDIQ contract that agencies across the government can use to buy IT solutions. They are designed to streamline the procurement of technology.
• Blanket purchase agreements (BPAs): A BPA is a simplified method for filling anticipated, repetitive needs for supplies or services. It establishes "charge accounts" with qualified vendors, simplifying the ordering process for recurring purchases.

05 common types of government contracts

What opportunities are there for foreign-invested enterprises?

The government procurement market is not limited to domestic companies. Many countries have opened their public sector markets to international competition, creating significant opportunities for Foreign-Invested Enterprises (FIEs). This openness is often a key component of a nation's broader fiscal policy, aiming to enhance efficiency and quality in public spending.

International agreements like the WTO's GPA

A key driver for international opportunity is the World Trade Organization's Agreement on Government Procurement (GPA). The GPA is a plurilateral agreement, meaning it includes a subset of WTO members, that requires its parties to treat suppliers from other signatory countries no less favorably than domestic suppliers for covered procurement activities. This principle of non-discrimination promotes free trade and opens up vast government markets to international bidders.

National policies encouraging foreign participation

Many nations have policies that, while prioritizing local economic benefits, also recognize the value of foreign investment and expertise. These policies often encourage foreign companies to establish a local presence, partner with domestic firms, or bring innovative technologies that are not available locally. This can lead to a more competitive and dynamic marketplace.

Types of opportunities (direct bidding, subcontracting)

FIEs can pursue government contracts in several ways:

• Direct bidding: FIEs registered in SAM.gov and from a GPA signatory country can often bid directly on GPA-covered contracts in other member countries.
• Subcontracting: A common and effective market-entry strategy is to partner with a domestic prime contractor. This allows the FIE to contribute its specialized skills or products to a larger project while navigating the procurement landscape with an experienced local partner.

How to navigate the market and find resources

To succeed, FIEs must understand the specific rules and procedures of the target country. Key steps include:

• Researching opportunities: Utilize official government procurement portals, such as SAM.gov in the U.S., to find open solicitations.
• Understanding regulations: Thoroughly study the relevant procurement laws and regulations, like the FAR.
• Building relationships: Network with government agencies and potential domestic partners to build trust and gain market intelligence.

Challenges such as "Buy national" provisions

Despite international agreements, FIEs can face challenges. Many countries have "Buy American" (U.S.) or "Buy National" / "Buy Local" provisions with exceptions for GPA-covered procurements or national security waivers, which give preference to domestic goods or suppliers, particularly for contracts not covered by the GPA or for reasons of national security. Navigating these protectionist measures requires a clear understanding of the legal exceptions and a strong value proposition that can overcome domestic preferences.

The world of government purchasing is a vast and intricate landscape filled with immense opportunity. From the local to the federal level, public sector organizations represent one of the largest and most stable customer bases in the world. By understanding the core definitions, the various purchasing methods, the different types of contracts, and the avenues for international participation, businesses can strategically position themselves to win lucrative contracts.