Fourth quarter spending spree also brings warnings about fiscal 2019

The market is poised for plenty of positive activity through end of this fiscal year. But executives and other market leaders see reasons to worry as we head into FY 2019.

The federal government will essentially have to compress its full fiscal year contracting spend into a few months as agencies are poised to rush funds out the door before Sept. 30 -- when another continuing resolution appears likely ahead of the midterm elections.

That bodes well for another “Fourth Quarter Spending Spree” that has become the norm over the large part of this decade.

But beyond that period and perhaps within that there are headwinds government contractors must watch out for, according to speakers and panelists at investment bank Houlihan Lokey’s annual “Market Meets Market” conference Tuesday in Tysons, Virginia.

One of those headwinds comes up for fiscal year 2020 because of how the Budget Control Act with its language on sequestration is written. It is possible Congress could put in place a continuing resolution that appropriates spending levels above the BCA spending caps.

“Sequestration kicks in that day” if that happens,” Professional Services Council CEO David Berteau said. “You’d better be talking to your customers about what happens on October 1, 2019.”

As for what is to come this year, Berteau said agencies essentially have to squeeze 12 months of work into four months after the late passage of fiscal year 2018 appropriations in March. That followed a series of four continuing resolutions, a trend agencies have long gotten used to.

“They’ve become accustomed to the idea that we know how to manage under a (continuing resolution),” Berteau said. “They basically punt everything for the first three months.

“They’ve built that into the process now. The problem is that it squeezes 12 months into nine. If we then have a second and a third CR as we’ve had the last couple of years into March, that squeezes 12 months of work into six months.”

But why only four months for agencies to do business this year versus six months? Agencies have some constraints on what they can do in the final two months of the fiscal year, Berteau told attendees.

“This is hard. It’s great if you win the business, it’s hard if the solicitations are hung up, if the evaluations are hung up and if the awards are hung up. And that dynamic I’m afraid may be prepared to repeat itself going forward,” he said.

Berteau is not the only market observer in recent times to highlight potential headwinds for contractors despite the prospects of rising budgets in the short term and an overall perception of an upturn in the sector after years of funding declines.

In May, analysts at Credit Suisse highlighted in an investor research note that another two-year budget agreement similar to the one passed in March is needed to ward off sequestration cuts for FY 2020. A flip of the House to the Democrats in this year's midterm elections raises the level of discord and lowers the likelihood of such a deal, the analysts pointed out.

That dynamic has not stopped industry from preparing for a busy summer and September, CEOs of government services contractors said at the Houlihan Lokey event.

KeyW CEO Bill Weber told attendees more solicitations and requests for information are coming out of agencies but the actual flow of dollars still has some uncertainties. Awards also started to come out after the March appropriations package was signed after they were held up.

“The actual spend, while there is some flow, is still a party everyone is waiting to get invited to,” Weber said. “We’ve all kind of figured out it’s going to happen, just not sure when.”

The collision of a larger budget to allocate in a short amount of time and a less-experienced acquisition workforce than in previous years all “create a choke point” ahead of the busy summer, he added.

ManTech CEO Kevin Phillips also noted a pickup in award activity in recent years just as his company has concurrently ramped up its bidding efforts. The company bid for $7 billion in awards last year and will bid for $12 billion this year, he said.

“There’s more certainty and more budget… and (agencies) will be in a really big hurry,” Phillips said. “And I’m not sure how it will all get done.”

Companies with key programs of record -- essentially line items in the budget -- that are getting big spending increases also create an additional pressure, according to Parsons CEO Chuck Harrington.

“That window of spend just gets shorter and shorter where your teams basically have to work 24 hours a day, seven days a week,” Harrington said.

Parsons has “a couple of programs that fall under that umbrella and the work level is “pretty darn close” to that around-the-clock schedule, Harrington said.