Big contracts mean big pressure for contractors

For several years, we’ve published a listing of the largest contracts coming to the market. We used to call it the pre-request for proposals report because we focused on upcoming procurements that were still in the pre-solicitation stage.

I remember when the first large task-order contracts began hitting the market nearly 15 years ago. At the time, the ceilings on these contracts seemed enormous because many broke the $1 billion barrier.

But the flexibility of those early task-order contracts such as the series of Desktop contracts and the Defense Enterprise Information Systems contracts made those vehicles very popular and helped foster the proliferation of the current crop of task-order vehicles that dominates our 2010 contract roundup.

The popularity led agencies to put ever-increasing ceilings on these contracts. The two top opportunities on the 2010 contract roundup each top $30 billion. The Enhanced Army Global Logistics Enterprise and Strategic Services Sourcing 2nd Generation contracts are both Army vehicles. Their ceilings are mind-boggling but actually are down from the high of $50 billion that the Alliant contracts came out with a couple of years ago. But keep in mind no reasonable person expects the business under these contracts to get anywhere near their ceilings.

We're still likely to see a lot of business flow through these vehicles, and don’t be surprised if we see task orders with billion-dollar price tags on them. A good example is the $2.6 billion task order awarded to Northrop Grumman under the Alliant contract to build the infrastructure for the Homeland Security Department’s new headquarters. By the way, the loser bidders have protested that award.

For the agencies these vehicles are easy to use and extremely flexible because the winning bidders have been vetted. All that hard work of qualifying the contractors has already been done, so the agency doesn’t have to repeat that work all over again.

For contractors, the challenge is a bit different. It is still an expensive proposition, costing in the millions of dollars to bid. And none of that automatically translates into revenue.

These contracts really are just channels to reaching customers, which brings up a second challenge we often hear about. The pressure is on contractors to pick the right vehicles to pursue. Only a handful of companies have the wherewithal to bid on everything, so it is paramount for companies to make the right choices.

And that brings up a third challenge: What happens when you don’t win the contract destined to be the procurement vehicle of choice for one of your best customers?

That is a nightmare scenario for many companies. It often can mean being relegated to a subcontractor role, where the company is beholden to the prime contractor. Companies with the financial backing may choose to buy one of the winning contractors as a way of regaining access to that customer.

As the story that accompanies our contract round explains, the trend among these upcoming procurements is a new tougher environment where companies will face more margin pressure and more competition. The potential payoff is still there, but getting it is going to get tougher.

The question you have to ask is, Am I ready?