Some government contractors choose visible growth signals over operational foundations. They lease prominent office space in Virginia or Washington, D.C. They purchase equipment that impresses potential clients during facility tours. They invest in marketing collateral that projects scale and sophistication.
Margarita Howard rejected this playbook when she founded HX5 in 2004. Instead of fancy furniture or impressive offices, she directed her limited startup capital toward an accounting system purpose-built for government contractors. The decision would determine the types of partners HX5 could attract and the contracts it could compete for during its critical early years.
“That’s something HX5 did very early on rather than buying big fancy furniture or offices or anything like that,” Howard said. “It was more important for us that we invest in things like a high-end accounting system that was built and developed specifically for companies who work with the government, and was government reviewed and approved.”
The accounting system decision
The Small Business Administration encourages new government contractors to maintain accounting systems that can meet federal compliance standards, but it does not require contractors to purchase specific software or systems. In practice, accounting system adequacy is governed by federal acquisition regulations, which apply only to certain contract types. As a result, many small contractors begin with simpler setups, pursuing fixed-price work first and delaying investment in more sophisticated, compliant systems until revenue grows or contract requirements demand it.
Howard made the purchase immediately. She chose a specialized system familiar to both government auditors and large prime contractors. The software cost more than most small businesses would allocate to back-office systems during startup phases.
The immediate benefit came not necessarily from HX5’s internal use of the system but from how prime contractors perceived the company. Large defense firms seeking small business subcontractors faced a common problem: many qualified small businesses lacked the administrative infrastructure to handle complex billing, maintain proper cost segregation, or pass the audits that government contracts required.
“This is what we used to bill the government,” Howard said. “So, that was also very attractive to large businesses, that we were very small at the time, and that we already had this government accounting system in place, which those large businesses had.”
Prime contractors could partner with HX5 without worrying about billing disputes, failed audits, or administrative overhead from hand-holding an inexperienced subcontractor through compliance requirements. The accounting system served as proof that HX5 understood government contracting’s operational realities before winning its first major contract.
The broader infrastructure philosophy
The accounting system purchase reflected a broader philosophy about where to allocate limited capital. Howard prioritized investments that would enable HX5 to compete and win work, not investments that would make the company look successful before it had earned that status.
The company invested in qualified personnel rather than premium office locations. It purchased compliance tools rather than marketing materials. It built financial reserves rather than expanding headcount prematurely.
“We knew the investments that we had to make to be successful, to compete and not wait on those sole sources, and be attractive to the government and large businesses to work with us,” Howard said. “And both highly paid off.”
“If you don’t have the competitive edge and understand what it takes to compete for government work, then it’s a daunting task,” she continued. “You have to know and understand the industry first, then build a good team, have the right infrastructure in place, and ultimately be able to meet all the obligations and requirements that come with government contracting.”
Infrastructure as competitive moat
The accounting system investment created a form of competitive protection that compounded over time. Each contract HX5 executed generated performance history. Each successful audit added to the company’s track record. Each teaming arrangement with a major prime contractor expanded HX5’s network and reputation.
Howard noted that many small businesses take a different path. “A lot of small businesses usually wait many years before making such an investment, but we found tremendous benefit from having it in place early on,” she said. “That was one aspect that made HX5 very attractive to large businesses who were looking to partner with small businesses to meet their small business goals that are often required in large government contracts.”
Accounting systems designed for government contracting cost more than general business software. Implementation requires training and process changes. Ongoing maintenance demands expertise that small businesses may lack.
But waiting creates opportunity costs. Without proper infrastructure, small contractors limit themselves to simpler contract types, smaller dollar values, and fewer partnership opportunities. They cannot compete for the contracts that would accelerate growth. They miss the window when prime contractors are actively seeking capable small business partners for upcoming opportunities.
From infrastructure to scale
HX5’s early infrastructure investments enabled the company to grow from a single employee in 2004 to more than 1,000 employees across more than 20 states and 70 government locations today. The accounting system that seemed expensive for a startup became essential infrastructure for a mid-sized contractor operating across multiple states and managing diverse contract types.
The company now operates as both prime contractor and subcontractor, depending on the opportunity. It has won large prime contracts uncommon for firms of its size. It maintains subcontracting relationships with major defense primes. It has received recognition as Prime Subcontractor of the Year for its performance.
“We have won some very large prime contracts,” Howard said. “And we have large businesses as our subcontractors. And then we’re a very good subcontractor as well.”
The result: a company that built competitive advantages through infrastructure investments that most startups would consider premature. Howard’s willingness to prioritize operational foundations over visible growth signals created the capabilities that have enabled HX5 to compete for work that newly formed contractors typically cannot access—and to win that work when given the opportunity to compete.
