Where exactly do most of federal contracting dollars actually go?

More than 25% of federal contracting dollars end up in one of six markets, according to analysis by Bloomberg Government.

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More than 25% of federal contracting dollars end up in one of six markets. That’s according to analysis by Bloomberg Government. For details and the opportunities they represent, we turn to the team lead for government contracting news and analysis, Amanda Allen joined the Federal Drive with Tom Temin.

Interview transcript:

Tom Temin: Ms. Allen, good to have you on.

Amanda Allen: It’s great to be with you, Tom.

Tom Temin: And the six markets, let’s begin with what they are.

Amanda Allen: Sure. Kind of split up into two categories, we’ve got tech oriented markets, and then we’ve got some ones that would be kind of not tech. And in the not-tech, we’ve got business and financial management services, facility services, and logistics. And then we’ve also got cloud, artificial intelligence and machine learning, and digital services.

Tom Temin: Yeah, that pretty much covers the waterfront for what they’re buying.

Amanda Allen: It really does.

Tom Temin: But it’s not a lot of hardware, like it was in days of yore.

Amanda Allen: Sure. One thing that we’re finding a lot of is that interoperability and consolidation of requirements, the idea that kind of in the business world, things need to go enterprisewide and in the government world, of course, they need to go agencywide or even governmentwide. And so the big money is finding ways to get all of what a contracting office needs or all of what an agency needs or all of what the government needs in one of those areas.

Tom Temin: Right, you hear more and more discussion anyway, at the policy level of shared services among agencies, but that hasn’t really emerged yet as a market that’s discernible?

Amanda Allen: So the Shared Services seem to be, actually, most of the same team who had done this webinar last week, we also did one in March about some particular contracts. And the way that we were framing that webinar, as well as most of our analysis, really, for the last eight or nine months has been on governmentwide acquisition contracts multiple award contracts that are either agency wide or multiple agency. And I think that there isn’t yet a market with boundaries around it. But we are seeing it. It is unignorable at this point.

Tom Temin: And that brings up a good question on the six areas that you did identify on the tech side and the nontech side. Are most of those dollars that are going through there, and it’s a couple hundred billion dollars and its 25% of contracting dollars, are they through the established GWACs or is some of its still full and open competition?

Amanda Allen: In the tech area, we’ve got major vehicles like SEWP and Schedule 70 for GSA. There are smaller, fully competitive opportunities. There are also what I would call kind of good slots to find where you can fit in. Sub contracting is a really big opportunity for folks even who might not consider themselves as subs in most settings. But so much of this work is so wide scale that I think a lot of folks who are winning on the major prime end of things are going to be looking for really experienced partners to be working with down the line, especially with the contracts that have the longer period of performance.

Tom Temin: And anyway, sub or prime it’s still revenue. And that’s all green, I suppose. And getting into the cloud question, what does the spending look like in terms of how much is going directly to the big commercial cloud suppliers services, the Googles, AWS, and so on? And how much is services related to getting agencies to the cloud? Because that seems to be, qualitatively speaking anyway, a pretty big part of the cloud market.

Amanda Allen: It very much is. What we do know is that, one way I’ll take an answer to this, I guess, is saying that the small business share of the cloud computing market, I think it’s 43%, I just actually was able to pull up the number, for the last five full fiscal years. And what that tells me, right, those are not folks who are building their own cloud platforms and trying to break into the market share for the big players. Those small businesses are going to be doing quite a lot of these services-related aspects of cloud computing for the government.

Tom Temin: That’s interesting. So small business gets almost half of the cloud dollars, meaning only half goes to the big players.

Amanda Allen: That’s what we’re seeing in the numbers and what we’re taking a look at analyzing the market.

Tom Temin: Interesting.

Amanda Allen: And the market is growing, so it’s growing in both arenas.

Tom Temin: Got it. We’re speaking with Amanda Allen, she is the team lead for government contracting news and analysis at Bloomberg Government. And that artificial intelligence/machine learning market, how big is that? Do you have the dollars there? And what does that look like in terms of large and small business?

Amanda Allen: Sure. So the AI market is one of the two smaller markets that we have. The AI/machine learning market and the digital services market are significantly smaller dollarwise than the other four. So AI is between about $1.5 billion and $2 billion right now. And we are expecting a slight dip based on our forecasting model for this full fiscal year before it goes up again in 2023 and we anticipate it continuing to go up beyond that, only because everything that we see that’s coming out that’s a solicitation, that is a policy document, that’s a forecast from an agency. Everyone in government needs to have AI-based efficiency in order to get their jobs done. We know that there are budget pressures, we know that the annual appropriations process is increasingly fraught. And the only way that agencies can get things done are by finding ways to get it done quicker. And folks seem to think that AI is the way to do that. What’s particularly interesting is that over the last five full fiscal years, the share of civilian AI market spending had gone down for a bit and is now looking to even back out the Defense Department had really kind of jumped in 2019, 2020, 2021. And what we’re anticipating moving forward is a much more even share between civilian and defense in AI, at least for the unclassified.

Tom Temin: And getting back to the nontech side here, business management, facilities and logistics, how does that look? When you say business management and financial management, what kind of dollars are there and what are the services they’re actually buying?

Amanda Allen: So what we did with that one, so four of our markets are the cloud, AI, the logistics, and the digital services are all Bloomberg Government analysts-defined markets. And the business and financial management market is one of the two that we have that is actually based on PSC codes, the standard for everyone. And what we did is we took three of those sub markets and combined them because what we’re seeing is that Management Advisory Services are super heavyweights. I don’t actually know boxing, but whatever comes after, big guys throwing big punches at each other? And we’ve got north of $60 billion in the last full fiscal year for how big this kind of subcategory combination is. And what this market does is it’s the same conversation, right? The themes of efficiency and consolidation of requirements and rationalization of what an agency or office is doing. And so rather than having government officials learn how to be, “good business people,” it’s bringing in the contractors who already know how to do that type of integration, interoperability and efficiency.

Tom Temin: So are these primarily software buys? Or are they body shop-type buys for people that do, I don’t know, accounting and whatever else they do that relates to business management?

Amanda Allen: It is absolutely, yep it is absolutely some of that accounting. It is absolutely – what did you just call it the –

Tom Temin: Body shop.

Amanda Allen: Body buys? Yeah body shop. It is anything that is technical that, inventories and who’s going where, and so there is a bit of a, we did separate out what the business management part of the accounting books would look like, from the tracking where something is going from warehouse to truck to user. But I think those two are, nicely, two sides of the same coin.

Tom Temin: And just a quick question about facilities, is that simply rent coming from GSA or the agencies that have their own rental authority? Or is there something more that is a trend here?

Amanda Allen: So what I think is the most interesting trend about the Facilities Services market is that it’s modernization is a lot of what’s happening here. So, and definitely it’s not just rent. This is the shipyard infrastructure project for the Navy. This is the Department of Energy, making sure that all of their labs are run in the way that they need to be run for safety, security, national security. This is what GSA in terms of leasing has been making decisions about future demand, because of potential telecommuting as a long-term answer for the government workforce. We’ve also got several DoD depots that have infrastructure improvement projects underway. So this is everything from really big Los Alamos, all the way to, is GSA going to need this building in the future?

Tom Temin: Right. So there’s a pretty good technological and engineering component, then, to all of the facilities work.

Amanda Allen: Absolutely. Because it is not just being a landlord somewhere, right? This is being, or I guess, the building supervisor somewhere. This is making sure that if you’re putting up a new building, that it’s going to have all of the right energy efficiency and that it’s going to have the right wiring so that it will be future-proof in terms of technology and the load that will be required based on how many people are going to be working there. And how many computers they’re going to have hooked up to all of the, all of the wires.

Tom Temin: Sure, and just adding it all up, what is a generally good strategy for these types of technology and services contractors to pursue as we move into fiscal ’23, if there is a fiscal ’23 and beyond?

Amanda Allen: I think what’s really interesting to look at is that you’ve got very few companies probably who could go out for a, let’s say $20, $30, $40 billion modernization and facilities management contract. But those companies are not going to be able to do the personnel security, they’re not going to be able to do the real basic striping the parking lot, right, as the example that everyone likes to use. So this is another one of those areas where even if it looks like it is too small of a market to get into, figure out who’s going to be getting that big prime for doing all the management and be able to offer your services.

Tom Temin: Amanda Allen is team lead for government contracting news and analysis at Bloomberg Government. Thanks so much for joining me.

Amanda Allen: Absolutely. Thanks for having me.

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