With continuing resolutions and fiscal showdowns running rampant the last few years, government contractors have gotten used to near perpetual budget uncertainty clouding the marketplace.
And the automatic, across-the-board budget cuts that kicked in March 1 only complicated contractors’ efforts to manage their bottom lines.
“It’s been a roller-coaster year for federal agencies and for the contracting community,” said Cameron Leuthy, senior budget analyst with Bloomberg Government, during a panel discussion about how contractors are managing sequestration on the Federal Drive with Tom Temin and Emily Kopp.
“Agencies started the year with a continuing resolution and the specter of sequester hanging over their heads, then the fiscal cliff deal sort of put off the pain until March. During that time period, you had some agencies spending like crazy in the first quarter, then putting the brakes on in the second quarter, and then, trying to ramp back up again. So, it’s going to be a bumpy ride from here till the end of the year.”
Contractors have already had to adapt to a post-sequestration environment.
“You’re starting to see a lot of the systems integrators becoming more lean, focusing on specific lines of business and not varying from that at all,” said Scott Lewis, president and CEO of PS Partnerships, which brings together products vendors and systems integrators.
“There’s not a lot of new money,” he said. “There’s existing money — and the money’s pretty stable — but it’s not allowing for new opportunities. Most of the effort is [on] the contract that you have and trying to work task orders off of that. The competition’s getting a lot harder out there, especially on recompetes.”
There are also broader, industry-wide changes afoot, with company restructurings and spinoffs.
But, overall, there are not too many companies outright exiting the federal space just yet, Leuthy said.
Instead, he said he sees companies engaging in what he called “bet-hedging” strategies.
“If you have a marginal dollar to invest and you do business with both the commercial sector and the government, you might put that marginal dollar on the commercial side,” Leuthy said.
“Back in March and April, I think things got a little bit hairy with delayed awards,” said Tim Larkins, manager of market intelligence at the immixGroup, which represents technology vendors on GSA schedules and other contract vehicles.
The Army, alone, had about $20 billion in delayed procurements, Larkins said, which he attributed to contracting offices waiting to see how sequestration would play out.
So far this year, that delay in awarding contracts will likely drive an exaggerated fourth-quarter spending spree that will end the fiscal year, many experts say.
“So, if the government was holding back, now it’s going to be full-throttle between now and Sept. 30,” Leuthy said. “And if the contracting shops do their normal yeoman work, they’re going to be working long and hard to try and get this done, so they don’t end the year with money left over.”
The potential for a fourth-quarter acquisition rebound underscores a more optimistic message than previous sky-is-falling sequestration scenarios predicted earlier this year.
“I’m not one to give in to the whole gloom and doom idea that sequestration’s bringing the tent down over our heads … We still have an $80 billion IT budget that we’re dealing with here,” Larkins said. And that number rises to as much as $150 billion if IT spending from other budget accounts, such as intelligence and research-and-development, is included.
“There’s still a lot of money to be made,” Leuthy said. “And there will be some companies that are smarter, and more nimble, and more agile and will adapt — and some that won’t.”