With the help of Moody's Investors Service, here is a primer of what to expect when the Army makes awards next year on its $82 billion LOGCAP V vehicle: one of the government services market's largest opportunities of the decade.
Come April of next year, the Army could unveil the winners for the fifth iteration of its main contract vehicle for overseas logistics support in one of the market’s biggest opportunities of the decade.
But the potential 10-year, $82 billion Logistics Civil Augmentation Program contract often dubbed “LOGCAP V” will also play out differently than the current LOGCAP IV version as the Army envisions a “more vertically integrated arrangement” next time around, credit analysts at Moody’s Investors Service wrote in a research note published Monday.
Just like its predecessors, LOGCAP V will support U.S. regional combatant commands, service component commands and other entities with a wide range of construction, supply, logistics and other services. LOGCAP IV was awarded in 2008 and later heavily used to support combat operations in Afghanistan and Iraq.
But as Moody’s hints at, LOGCAP V stands to be less dependent than the current version on combat or other contingency operations as a driver of activity.
“Each contract holder will collaborate more heavily within their assigned command(s), participating in the planning process for both anticipated and crisis actions, and in training exercises. The program office anticipates faster deployments and better cost predictability from the initiative,” the Moody’s analysts wrote.
The Army plans to award between four and six companies positions on LOGCAP V. All proposals were due in February and the award is scheduled to be announced on April 12 of next year.
Incumbents KBR, DynCorp and Fluor are bidding to retain their seats on this key vehicle.
PAE and Parsons are pursuing the vehicle through a joint venture. Vectrus is bidding as well as their largest contract for military base support in Kuwait is being rolled into LOGCAP V. AECOM is also a likely bidder, according to research from Bloomberg Intelligence analyst James Bach.
Moody’s expects the Army to make one award per regional command. An award for work in Afghanistan -- within Central Command -- will be made separately. Moody’s projects either DynCorp or Fluor will win that piece. Both companies currently divide up services in Afghanistan under LOGCAP IV.
“A range of other companies will likely bid as well, but the program's global capability requirement and other demanding performance qualifications probably confined the pool of bidders to around ten or fewer,” Moody’s analysts wrote.
The government services market’s ongoing wave of consolidation could also give some prospective bidders a stronger footing for LOGCAP V. As the Moody’s report points out, defense services companies that focus on logistics and base operational support have undertaken mergers and acquisitions that are “reducing their dependence on subcontractors and improving their qualifications” for LOGCAP V task orders.
Examples cited include KBR’s acquisition of Wyle two years ago that “broadened the company’s technical and engineering service qualifications, plus PAE’s deal for FCi Federal last year for more “administrative service capabilities such as and visa/passport processing and adjudication support services related to immigration.”
“The greatest benefit of M&A however is added scale across which a bidder can spread its fixed costs,” Moody’s lead government services analyst Bruce Herskovics told WT. “As a cost-based contract, LOGCAP bidders bill the government back for overhead (such as marketing, home office expenses, etc.) costs. The overhead cost per revenue dollar (a price the government pays the contractor) declines with greater scale.”
But while the ceiling of LOGCAP V indicates a substantial opportunity for awardees, Moody’s does caution that having more companies on board means some “may achieve only minimal activity levels, income and experience” from the contract.
Some of that can be attributed to the nature of the work. The Army set a high ceiling value on LOGCAP V as it did for LOGCAP IV to get what Moody's called "substantial financial headroom to issue task orders under the program as operational needs develop."
LOGCAP IV has a $150 billion ceiling and has seen $23 billion spent against it so far.
On the other hand, LOGCAP V's structure means significant revenue opportunities are available to companies supporting a specific region if a large number of troops get deployed there. This is what happened under LOGCAP IV, during which contractors based in Afghanistan took in most of the funding.