Report shows the struggle of mid-tier federal contractors

CSIS finds medium size companies saw their market share shrink by 11 percent

By Jason Miller
Executive Editor

The growth in contracting for professional services by agencies over the past 13 years isn’t so surprising: services now account for more than 50 percent of all federal procurement or about $233 billion as of fiscal 2007.

But what is surprising is the first real evidence of just how mid-tier firms are being squeezed out of the federal market thus affecting competition and innovation.

The Center for Strategic and International Studies found in a report issued Feb. 12 that large businesses with revenues of more than $1 billion hold 46 percent of the professional services market, up from 37 percent in 1995. Small businesses continued to hold 19-to-22 percent of the market. Mid-tier firms which are classified as not small or large saw their market share fall by 11 percent to 33 percent.

Guy Ben-Ari, a research fellow with CSIS and co-author of the report, says mid-size companies are facing this pressure because agencies are issuing procurements that focus on small or large firms, but not releasing solicitations that are suitable to medium size firms.

“Over the 13 year period, there is a very steady and worrying trend,” Ben-Ari says. “Mid-tier companies have traditionally served as conduits for new ideas and improved business practices. You do get a lot of very important innovation from these mid-tier companies especially in professional services.”

He adds that these trends should be addressed by policy makers as agencies are feeling the impact of not having enough of these mid-tier firms.

The survey, which looked at data from the Federal Procurement Data System and from agencies themselves, found that contracting for professional services increased by 7 percent a year between 1995 and 2007. This was the third version of the study, Ben-Ari says.

CSIS classified professional services under five categories:

  • Information technology and communications
  • Administrative and management support
  • Research and development support
  • Equipment operations and maintenance
  • Facilities operations and maintenance

“Professional administrative and management services and information and communication services have a compounded 11 percent annual growth rate,” says Ben-Ari about the two categories that grew the most over the past 13 years.

“What is interesting is when you compare the two categories over last five years, professional services continue to grow at stronger rate of 14 percent, but information and communication services dropped to about a 4 percent annual growth rate.”

Ben-Ari says the drop off in IT and communication services can partly be attributed to agencies needing help with Year 2000 challenges. After about 2001 or 2002, he says the need for these services hit a plateau.

CSIS says professional services will continue to grow over the next few years.

“We believe the past few years which have included military operations in Iraq and Afghanistan, and growth in other agencies because of hurricane Katrina and an increased homeland security operation have driven procurements and requirements for professional services,” Ben-Ari says. “We believe this area one to look out for in coming years. The military operations aren’t going away for next few years and the homeland security agenda will not change. So we believe that will drive the professional services industry.”

The study found some positive news. Competition among large professional services contracts is strong. CSIS says awards that had at least two bidders account for the greatest dollar amounts and largest average awards.

“The number of awards without competition has risen significantly in the past five years, but the total dollar amount of these no-competition awards has grown less than the overall annual growth rate of 9 percent,” the report states.

Ben-Ari says for awards greater than $500 million, full competition accounted for less than 20 percent of the contracts awarded. But, he says, for contracts worth between $25 million and $100 million, 30-to-40 percent of those were bid on by at least two companies.

“It makes sense for the larger contracts to have reduced competition because there are only so many companies that can bid or seriously be considered to undertake these types of contracts,” he says. “We found that competition is limited by the size of the contract.”

The report offers several areas Congress and the administration should consider addressing.

Ben-Ari says one of the most important recommendations is the need to address the squeeze on mid-tier firms is stopping important competition and innovation.

“Recently, several scientific, engineering and technical assistance contractors have been acquired,” he says. “This is of concern because there is the potential for organizational conflict of interest. These contractors oversee the execution of service contracts are now part of the company actually doing the execution of the programs.”

He adds that mergers and acquisitions may need more regulations.

Another area that needs to be addressed is the volume of contracts has increased, but the acquisition workforce has not.

“The number of contracts awarded is growing at a faster pace than the dollars awarded so average award size is dropping,” he says. But when you are contracting out so much business are you really saving money?”

A third area that Congress and the administration need to consider is whether the Federal Acquisition Regulations need to be changed.

“There is a different set of issues when you looking at services and this are not reflected in the current acquisition regulations,” Ben-Ari says. “There should be a long and hard look at the current acquisition regulations to think about whether they are indeed optimize for service acquisitions and if not, maybe we need a different set of acquisition regulations for services.”

CSIS plans to present the data to different federal entities, including possibly Congress, the Government Accountability Office, the Defense Department, the General Services Administration and the Small Business Administration.


On the Web:

CSIS – Report on Professional Services contracting in the federal government

FederalNewsRadio – New rules for certain types of service contracts

FederalNewsRadio – Mid-sized firms feeling squeezed in federal market

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