An analysis by FedSources finds that government contracting will shrink through 2011 as the administration tries to get a handle on spending and brings more work in-house.
The boom years are over for federal contractors as budget and deficit pressures restrict the growth rate of business opportunities in the market.
The total amount of contract spending, which goes beyond information technology opportunities, is expected to shrink by $36 billion through 2011, according to an analysis of the federal budget proposal by the market research firm FedSources.
Insourcing of previously contracted work also will reduce the amount of money flowing to contractors, said Ray Bjorklund, FedSources' senior vice president and chief knowledge officer. An increasing percentage of money is also going out through grants rather than contracts, he added.
“It is still a big market and there are plenty of opportunities, but things are changing,” Bjorklund said today at FedSources’ Annual Federal Outlook Conference.
FedSources pegs the total amount spent with contractors in 2009 at $715.2 billion. This fiscal year, the amount will reach $756.4 billion, but fiscal 2011 will see $720.1 billion spent with contractors. The total is expected to reach $698.5 billion in 2012 before ticking back up to $709.8 billion in 2013 and $727.4 billion in 2014. The compound annual growth rate from 2009 through 2014 is negative 1 percent.
The IT portion of the contracted-out budget is a bit brighter, with a compound annual growth rate of 2.9 percent expected from 2009 through 2014, Bjorklund said. Contracted IT spending should rise from $73.4 billion in 2009 to $80.4 billion in 2014, he said.
The budget picture will change the competitive environment, Bjorklund said, and companies need to think about how their corporate goals and strategies align with the Obama administration’s priorities.
The fiscal 2011 budget proposal puts more emphasis on job creation, working families and the so-called Main Street economy, he said.
“There is a new calculus,” Bjorklund said. “If your company is going to get in line with the administration, you might want to talk about how jobs are affected and how Main Street is affected.”
The Obama administration demonstrated its persistence in getting health care reform legislation passed, so industry should expect similar persistence in areas such as keeping a lid on spending increases, managing for performance and building the federal workforce, he said.
For contractors, particularly publicly traded companies, winning recompetes is more important than ever, Bjorklund said.
“You can expect much more aggressive competition,” he said. “You need to be able to knock your competitor off the stage.”