Is a $750B market a reason to despair?

FedSources' Ray Bjorklund reports on the state of the government market and predicts some tough times ahead. But where should you look for the bright spots?

The easy way to interpret Ray Bjorklund’s annual FedSources budget outlook presentation is that the sky is falling for government contractors.

The market is definitely in the midst of tough times, particularly when compared to the first eight years or so of this century when it seemed you could fall over and make money in the government market.

Bjorklund pulled no punches in his remarks.

First off, the market addressable by contractors stands at $819.1 billion for fiscal 2011 and will be $752.1 billion in 2012, according to the president’s budget request. Compared to 2010’s $773 billion market, the 2012 figure is about a 1 percent decline, Bjorklund said.

Remember those numbers for later.

The continuing resolution saga of 2011 has created what Bjorklund described as an “elusive” budget. “It is just really hard to get your head around some of the numbers,” he said.

That elusiveness makes 2012 a “murky” budget year, Bjorklund said. A better approach is to look at the market in two year block, comparing 2012 to 2010, he added.

The Republican-led House of Representatives pushed for cuts during the 2011 budget negotiations, and there is plenty of momentum for more cuts, Bjorklund said.

“How Congress dealt with 2011 will set the state for 2012 and beyond," he said. "Remember, [the Obama administration] is planning the 2013 budget right now."

The cuts so far have not had a significant impact on contractors as reductions came from the cancellation of poorly performing projects and the taking away of unused and unobligated funds, he said.

The downward pressure, of course, is being fed by the economy and the budget deficit. The pressure to cut also has become a bipartisan issue.

Bjorklund’s presentation on the projected 2012 included plenty of red ink:

  • 10.6 percent less for contractors at the Army.
  • 10.6 percent less at the Energy Department.
  • 9.5 percent less at the General Services Administration.
  • 5.1 percent less at Homeland Security.

The reduction at the Army is largely driven by the step-down in activities in Iraq and Afghanistan, Bjorklund said. Demand is dropping for things such as combat vehicles.

Contract spending will remain one of the first areas to get squeezed as agencies and Congress look to make cuts. The “throttling effect” is how Bjorklund put it.

So where are the bright spots?

Investments are increasing in areas such as technology and innovation, investments in job creation and support for veterans. For example, President Barack Obama has pledged to double exports, which will create an opportunity for better export and trade control systems.

The Education Department is expecting to increase spending on technology, program development and student loan processing. Those are opportunities.

The market is still adjusting. The delay in the 2011 budget created pent-up demand.

But that won’t necessarily mean a flood of dollars. According to Bjorklund, contractors need to help their customers as they reprogram dollars and restructure programs.

The rich opportunities will come to those contractors who can help their government customers become leaner and operate more efficiently, he said.

Now for my opinion. Remember, the budget numbers at the beginning. This is a huge market -- $752.1 billion. There are a lot of opportunities in there. Are you going to have to work harder for them? Sure. Is there more competition? Most definitely. Will you need to be creative and bold? Let's hope so.

A point Bjorklund conveyed several times is the need for agencies to rescope and restucture projects. To me, that's a signal for contractors to bring their best and brightest.