Signs point to a promising 2016

You can look back at the last year and find no shortage of factors pushing and pulling on the market. One of the overarching trends has been what can be described as a lack consistency across the market; what’s going well in one area isn’t in another.

You can have growth in some agencies or parts of agencies while others are shrinking and cutting back.

Kevin Plexico, vice president of research at Deltek , described it as a “hot and cold” market during a recent webinar reviewing the year in federal contracting.

But all that might be coming to an end.

Since 2013, the hot side of the market has primarily been among the civilian agencies, where contract spending has gone from $155 billion in 2013 to $166 billion in 2015. This is all contract spending, not just IT.

On the defense side of the market, it’s a different story: Contract spending was $309 billion in 2013. In 2015, it was down to $273 billion.

A big reason behind the drop has been the draw down in Iraq and Afghanistan. When you look at categories of spending, fuel saw the biggest drop at 28 percent, Plexico said.

That’s the coldest of the cold as far as segments in the market. According to Deltek’s research, other cold areas include professional services, which saw a 3 percent drop, architecture, engineering and construction, which saw a 9 percent drop, and most surprisingly, health services, which dropped 10 percent.

Plexico said that the health services drop is likely also tied to the drawdown and the Defense Department spending less with managed care providers.

But 2015 might finally be the bottom for defense spending, thanks in large part to the spending targets set in the latest budget agreement.

It is the first time in years that there is growth across all of the appropriation bills as the chart below shows. 

“That’s the best news,” Plexico said. “We have budget certainty.”

When you combine the increases DOD’s base budget and OCO, defense appropriations are increasing by over $30 billion.

"2016 could be the first in a series of years where we have increases in defense contract spending,” he said.

2015 also was an important year for contract awards, most notably a few very large IT GWACs such as NASA SEWP and NIH CIO-SP. The Air Force also completed, finally, the awards for NETCENTS II NetOPs Infrastructure and the TSA III award.

Combined, these contracts have an aggregate ceiling of over $73 billion and more than 200 primes.

Because the Office of Management and Budget is pushing agencies to consolidate commodity IT buying around a few vehicles, NASA SEWP and NIH CIO-SP should see a significant amount of business, Plexico said.

SEWP V, in fact, has already seen $1 billion in task order awards, he said.

But the major trends in the market aren’t all about budgets and contract awards.

Plexico said the market is seeing real dollars flow to small businesses with only the HUBzone category not reaching its goals.

There also is a significant amount of consolidation going in the market with large and small companies being active in mergers and acquisitions. There are no shortage of examples – Leidos buying Lockheed Martin’s IT business, CSC and SRA forming a new company, CSRA; CACI International acquiring L-3 National Security Solutions.

Deltek is tracking the consolidation in the market and sees a significant drop in the total number of contractors serving the federal government. In 2008 there were 180,000 contractors selling to the government. Today, the figure is 140,000.

At the same time, the average size of contracts has gone up slightly, Plexico said.

"What we are seeing are fewer prime contract positions and more money going to the ones that remain,” he said.

Companies face a critical decision: which contract vehicles, particularly IDIQs, are they going to pursue?

"Any growth-minded company needs to think about their capabilities, the customers they want to target and also what contracts they need to have so customer can reach them easily,” Plexico said. “It’s a three-pronged approach: capabilities, customers and contracts.”