For the army of contractors supplying goods and services to the federal government, a spike in spending is creating opportunities. Yet, firms seeking to capitalize on this face skills shortages, a shifting competitive landscape and stricter regulations. Our latest report, 5 Trends in Government Contracting, takes a closer look.
#1. RISING DEFENSE SPENDING
Government contractors are benefiting from a sharp increase in defense spending, with around half of a 2018 $1.3 trillion budget agreement earmarked for defense.1 Businesses providing everything from research and development and construction of ships, planes and advanced weapons systems, to food and office supplies for workers are now in demand. Outlays for “future tech” could also be considerable. Contractors throughout the supply chain, including shipbuilders, drone manufacturers, and suppliers of IT hardware and sofware, stand to benefit.
#2. INFORMATION TECHNOLOGY OVERHAUL AND CYBER SECURITY
When 2017 legislation called for a comprehensive update of government IT systems, it led to opportunities in areas such as software, data analytics and agile development.3,4 A major problem that contractors will help to address is a fragmented federal technology infrastructure, which results in inefficient spending and inadequate cyber security.5 Additionally, while much of the federal IT system continues to operate with outdated technology, pockets of innovation are opening up opportunities. For example, in 2018 the Department of Health and Human Services obtained the federal government’s first “authority to operate” a service acquisition blockchain system.6
#3. A SHORTAGE OF SKILLED LABOR
In a recent survey, 25% of government contractors reported annual revenue growth of 10% or more,8 with one in four expecting to compete for more work in 2019.9 Yet, contractors that win major contracts increasingly face challenges in filling jobs, especially in welding and construction. One impediment is the need for security clearances. At the beginning of 2018, just as opportunities began to increase, there was a backlog of some 700,000 pending clearances.10 Moving all vetting to a new Defense Department agency by October 201911 could eventually make life easier for contractors.
#4. A SHIFTING COMPETITIVE LANDSCAPE
The federal government is using competition among contractors to reduce costs, and this is reflected in recent changes to procurement policies. Large contracts will no longer be awarded to a single firm but instead will require competition among multiple contractors,12 while more companies are eligible to compete for small business “set-asides” that ensure around a quarter of prime government contracts go to smaller firms.13 The government has also encouraged large commercial firms to bring their expertise to U.S. initiatives, such as modernizing IT systems or using artificial intelligence capabilities to analyze data.
#5. GROWING AUDIT AND COMPLIANCE REQUIREMENTS
Like the efforts to spur competition, the federal government’s audit and compliance requirements are a way to contain costs and curb fraud and abuse. As federal budgets have tightened, scrutiny of contractor charges has increased.14 While the Office of Federal Contract Compliance Programs has said that it will continue to conduct greater numbers of audits, it aims to shorten their duration and institute more “focused” reviews.15 In response to these increased demands, many contractors are strengthening internal controls.16
3Vertical IQ: “Government Contractors,” 12-10-2018, pages 14 and 15.
12Vertical IQ: “Government Contractors,” 12-10-2018, page 14.
14Vertical IQ: “Government Contractors,” 12-10-2018, page 14.