If there was ever any question about the course correction the federal contracting market has been going through over the past three years, a new survey from Grant Thornton puts it all to rest.

Government contractors say they are making less money than at any time in the last 18 years, including 56 percent of the respondents revealing they made less than 5 percent profit off their government contracts in 2012.

Grant Thornton’s 18th annual study of the government contractor industry details the impact of the changing federal procurement environment.

“I think we are seeing, probably, the government is spending less money on contracts, and that’s being reflected in the revenues and the companies are beginning to diversify,” said Lou Crenshaw, who leads Grant Thornton’s aerospace and defense industry market and is a retired Navy vice admiral. “This year, for instance, less companies received work from the federal government as an overall percentage of their revenue. So we are seeing a move of the companies to the commercial sector.”

Crenshaw, who presented the preliminary results of the survey at a luncheon sponsored by AFFIRM in Washington Friday, said vendors overall saw a 9 percent drop in revenue and a 16 percent drop for those working with DoD last year.

Additionally, 38 percent of the respondents said they saw decreased revenues — a 9 percent increase over last year — while 35 percent saw increases, a 15 percent decline over 2011.

Not only is revenue down, but profits are down too. Grant Thornton found the percentage of vendors making less than 5 percent profit or no profit grew in 2012 by 31 percent over 2011.

Federal procurement spending down $20 billion

The survey follows the Office of Federal Procurement Policy’s announcement earlier in December that overall contract spending across the government dropped by $20 billion in 2012.

Joe Jordan, the OFPP administrator, said overall the government spent $513 billion on the acquisition of goods and services last year, down from $537 billion in 2011, a 4.5 percent decrease.

OFPP’s data and the contractor survey show the impact of the administration’s efforts over the last four years to reduce high risk contracts (such as time and materials or labor hours) cut the number of management support service type contracts and pushed agencies more toward shared services and strategic sourcing.

All of these OFPP requirements are leading agencies to be more disciplined in their approach to acquisition.

Vice Adm. Mark Skinner, the Navy Department’s military deputy to the assistant secretary for research, development and acquisition, said the service is focusing more on getting better competition.

“We have discovered, perhaps, that it’s a very powerful tool for us and we just have a greater emphasis and focus on it,” he said. “In this environment and the time I’ve been in my job, we certainly have realized the value of competition and we certainly have focused our program managers. Perhaps, that is the change. Maybe we have driven the value of competition down to a much lower level and we are reaping the benefits of that.”

Skinner said competition also means using the right vehicle to buy a product or service. And, he said, knowing the true cost of what they buy becomes much more critical.

More competition needed

Skinner said a recent event around the renewal of a long-time sole source contract exemplifies this change in focus by the Navy.

“I recall one about 18 months ago after I’d been on the job for a short period of time where I brought it in. The justification for the justification and approval was the fact that this particular entity had been in a sole source contracting environment for over 50 years and it’s kind of like, ‘hmmm,'” he said. “Now, they portrayed it as a strength, strength in the contractor, strength in a vendor base. But the secretary saw it as a lack of competition.”

He said the goal is to move more of their contracts into a more competitive environment.

Crenshaw said there are two kinds of competition, one that is focused on putting out a solicitation that could indicate it’s being wired or focused on a specific company, and the other is real competition where the government wants bids. He said agencies are trying to get away from the first kind and move more toward the second type of competition.

The survey also found that as agencies move more toward competition and fixed price types of contracts, they are asking vendors to do more, even if it’s out of scope of the contract.

Crenshaw said about 85 percent of the respondents said they are frequently or often asked to perform work that is not under their contract. Of those who are asked, 10 percent said they do that work all the time and 74 percent said they do it some of the time.

“The fact the companies are actually doing the out-of-scope work is going to be a bigger issue for us particularly as the government begins to look for better value,” Crenshaw said. “I think as we see a move from the cost-based and time and materials contracts to a more fixed price arena, we are going to see more and more companies saying, ‘Well, we can’t do that in a fixed price world because you guys didn’t specifically define that when you did bid on the work, so we will have to do a modification.’ So I think next year these numbers will change a little bit because of the economics.”

A perfect storm is brewing

The survey also found 77 percent of the vendors don’t think using the earned value management concept is worthwhile and wouldn’t do it if the government didn’t require it.

Crenshaw said the move to using more fixed price contracts hasn’t fully happened yet. In the survey, vendors said 40 percent of their contracts were time and materials or cost plus and 20 percent firm fixed price.

He added those percentages likely will flip in the coming year or two as more and more agencies, including some larger DoD contracts, release firm-fixed price solicitations.

Mary Davie, the acting commissioner of the General Services Administration’s Federal Acquisition Service, said the changing acquisition environment, the fiscal pressures and need to get more work done with fewer resources is a perfect storm brewing across federal procurement.

“The government is still spending hundreds of billions of dollars in government contracting, and we just have to do it differently. Where GSA sits, working with the agencies, there is a lot of thought about how to do it differently,” Davie said.

“We are really trying to figure out if there are ways to build a common infrastructure across government so each agency isn’t having to repeat a basic infrastructure for data and voice networks. Those are the kinds of things that we are looking at, how to reduce the duplication whether it’s in contracting or solutions, how to share more and how to leverage some of those things. If we do it right, if we approach it right, it should help [vendors] as well because it’s going to mean having to bid on less contracts that we could say are similar but remain quite different in terms of what we ask for and in terms of conditions, and that’s even true within a single agency.”

Crenshaw said the full survey results will come out in early to mid-January.

RELATED STORIES:

OMB increasing the tempo of strategic sourcing

Navy sharpens acquisition pencil to find savings

Survey reveals ‘deteriorating’ relationship between feds, contractors

Copyright © 2024 Federal News Network. All rights reserved. This website is not intended for users located within the European Economic Area.