Trends arise in report on largest federal contractors

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In some ways, Bloomberg Government’s annual report on the 200 largest federal contractors contains few surprises. But a deeper reading reveals a few trends you might not be aware of. For some insight, Federal Drive with Tom Temin turned to B-GOV director of government contracts, Dan Snyder.

Interview transcript:

Tom Temin: Dan, good to have you back.

Dan Snyder: Always a pleasure to be with you Tom.

Tom Temin: So the top contractors rated by revenue, Lockheed Martin, I guess no real surprise there. Were there any major shifts in the rankings of the gross dollar revenues that we should note of? And we’re talking between 2018 and 2019, correct?

Dan Snyder: So the biggest surprise is the accelerated spending. So we’re seeing a lot of the spending bills that have been passed and recent IRS shining through in many of the results among the contractor. So in terms of rankings, we did not have a tremendous amount of churn. But now in fiscal 2019, we have our fourth year of year over year growth, which is very good news for contractors. Total contract spending from 2018 to 2019. Alone increased 36 billion or about 6%. And we expect that to continue once those numbers are finalized here at the end of September.

Tom Temin: Wow. So that is again mostly DoD or is it across the board in terms of agencies?

Dan Snyder: Absolutely. All through DoD is really where the majority of those increases lie. In total, it’s about 120 billion that we’ve seen at the Pentagon increase from about 2015 to 2019, which is what these results are analyzing. So if we look at many of the top contractors, as you mentioned, Lockheed, Boeing, Raytheon, all maintained their relative positions of dominance, but we’re certainly seeing an uptick in the spending obligations that organizations are obtaining.

Tom Temin: Okay, and looking at it by category of types of money, facilities and construction. and professional services and IT, rank above the weapon systems and platforms. I guess that’s probably something we’ve known for a while, but it always looks like a surprise.

Dan Snyder: That’s right. So the facilities category is getting the majority of their growth with actually some of the the management of the energy labs. One category that stuck out to me the most was research and development. And that increased at a pace of about 16.5%, that grew by 8.8 billion over 2018 to 2019. So a lot more of R&D efforts concentrated throughout these agencies, certainly, with the weapon systems that you mentioned, require a lot of those R&D efforts. In addition to R&D, one of the categories that we take a little bit closer and examination on are professional services and information technology, and both of those in terms of relative percentage had similar amount of growth, right about six and a half percent, which is in lockstep with that year over year increases that we see government wide. So for the category of professional services, which is always among the top, it is increase from about 79 billion to 84 billion or about 5.4 billion year over year. Similar storyline with information technology, no surprise there, we’ve consistently seen these agencies with increased demand to meet their modernization efforts. And the category of information technology increased year over year by about 4.4 billion. And in total, we’ve been doing this big report for about nine years. When we look at the IT category, it is increased every year for the past six. So certainly, agencies are starting to take those modernization efforts seriously and putting some dollars on contract to do so.

Tom Temin: And I want us to back up for just a moment to the R&D number which also grew you said around 6%, 58 billion, just a little bit behind the acquisition of weapons platforms at 68 billion. It would seem logical given the stated desire of the DoD to modernize to a new type of military conflict that is more projected, less person intensive, more autonomous and all of those other things that are R&D would rise.

Dan Snyder: Absolutely. And again, that number is 16% growth. So I certainly think they’re prioritizing tremendous amounts of those activities that you mentioned at a higher level. In addition to the weapon systems. I also think some of the OT dollars might be in there as well, that’s another transaction, in the prototyping for research and development is probably making up a sliver of that 53 billion that we’re seeing in R&D itself.

Tom Temin: And another question about medical, which is a big ticket item in all of this at $46 billion. Is that rising? Is it steady? What’s going on with that one? And again, civilian versus DoD?

Dan Snyder: Yes. So for 2018 to 2019, we had pretty much stable conditions, it raised about half a percent. I think that’s going to look tremendously different given the pandemic circumstances with the medical category. We were tracking spending around coronavirus the government is identifying and we’re already seeing levels exceeding 17 billion. So that’s going to mix up the medical category once we come out with our rankings next year, certainly a lot more medical supplies and services will be concentrated in those efforts, which I would anticipate a strong boost in that category in next year’s report.

Tom Temin: Cause I was going to ask you what contractors should look for in this report to kind of guide as they think about their plans for the rest of 2020 and into 2021. But since these numbers occurred, the world kind of shifted on its axis a little bit because of the pandemic. So I would think that’s a pretty difficult exercise to do at this point.

Dan Snyder: That is very accurate. So we’re going to be looking at fourth quarter spending in the coming weeks. It’s not a business as usual in fourth quarter, so we always can identify the fourth quarter as the highest buying season for the government agencies, but I think that’s going to be really the case as we see appropriated funds not only being absorbed, but then also the CARES Act and stimulus dollars that are going to be punched into the existing appropriations. And not all of that has to be spent in fiscal 2020 — but I think agencies are going to be anxious to put that dollars on contract and use it sooner rather than later.

Tom Temin: Because it is a difficult thing to track all of those appropriations under the CARES Act and the bills proceeding that, trillions of course for the grants that the government was giving out to businesses and so forth, but hundreds of billions to the agencies for their own administration.

Dan Snyder: That’s exactly right. And you made a very important distinction there between the coronavirus dollars, which are being tracked with a disaster label, we’re able to identify that with a little bit more precision. As it relates to the CARES Act, that’s not necessarily always coronavirus, that’s going to be a number of areas and we don’t yet have a tracking mechanism that we can use for that purpose, but we’re starting to see more transparency around those dollars. The end of last month on June 20, the Pandemic Response Accountability Committee released a report from the inspector generals that identified, one, some of the disbursements that are occurring throughout these agencies which are concentrated on making more telework conditions more seamless — and then two, it identified some of the challenges that these agencies are facing as they dispersed. So don’t have a clear vision, but it’s coming.

Tom Temin: Got it. And I just wanted to return to one of the numbers that is high up there, and that is professional services. That has been a growing category relative to stuff for a long time, even though some of those stuff suppliers like CDW, you know, major major reseller of computer components and parts, is in the top 10 IT contractors — professional services seems to be just going gangbusters.

Dan Snyder: It is. I think that tends to follow the trend line as I said with some of the government spending. So as you’re managing more programs, you’re dispersing more funds, there’s going to be more of a concentrate on professional services, which as you said encompasses the huge variety of different services. We have management, consulting, financial services, marketing, engineering. So it’s really a catch all bucket that comprises of $84 billion that the government disperses all year. But I think you’re exactly right if we relate it to how we’re seeing some of these funds distributed for the stimulus. HUD is coming out with ways they can manage their housing and looking for management consultants to come in. There’s different agencies, HHS of course, is looking for help with their marketing efforts and outreach campaigns. So as more funds are being distributed, there’s more oversight needed their management required, and that’s always going to fall into the professional services category.

Tom Temin: And I guess it’s safe to say no matter what business you’re in, you never know what can happen. I’m looking at a contractor number 198, which is Norfolk Dredging Company, and they went from like 818 in the rankings at some point off the 200 through 211 now to 198. I don’t know what Norfolk Dredging Company does exactly, I can guess from the name, but it sounds like whatever they do the government needed it.

Dan Snyder: Some increase their success by way of multiple award contracts portfolio that covers a full spectrum. Others have a single award contract that they rely on to carry the water and bring them into the rankings. But the biggest storyline that we saw with this year’s report is the majority of companies not only are increasing revenue, but they’re improving the rankings. We had 120 overall of the top 200 improve their rankings, whereas 69 fell relative to their positions in 2018.

Tom Temin: Dan Snyder is director of government contracts at Bloomberg government. Thanks so much as always.

Dan Snyder: Thank you Tom.

Read the report here.