Bailout may increase pressure on contractors

As the U.S. government edges closer to a $700 billion bailout of financial services companies suffering from bad mortgage loans, federal agency heads are likely to feel more pressure to cut spending on contractors, according to a market research analyst.

"There will be budget constraints and pressure to do more with less," said John Slye, a principal analyst at Input Inc. in Reston, Va. Taking on additional mandatory spending will reduce what is available for federal discretionary programs overall, and that includes most contracting, he said.

Those trends could be beneficial in directing more work to long-standing contractors with the best track records, he added. "It could help trusted partners," Slye said.

At the same time, federal procurement officers might look for ways to reduce risk by changing the format or terms of their contracts, possibly by tweaking the delivery or financing arrangements, he added.

As the government takes on more risk in the financial arena, it might want to reduce its exposure to risk in contracting, Slye said. That could result in off-loading a larger portion of the contracting-related risks to contractors through measures such as increased use of performance-based contracts, he said.

"There could be a 'shared risks, shared returns' mentality that may impact contracting," Slye said. But he added that those prospective outcomes are uncertain, and it is too early to know if those trends will materialize.

Slye added that the bailout could lead to a spike in government employment in one area: The Treasury Department might need more workers to oversee it.