CEOs weigh in on the coming year-end spending spree

Government IT and professional services contractors see another fiscal year-end spending spree on the horizon led by a fast pick up in defense and intelligence awards with civilian agencies slated to lag a bit.

Here is one part of that backdrop. The omnibus spending bill signed in March gives the Defense Department a funding increase of 8 percent for fiscal 2018 over fiscal 2017. And the 2018 budget request for intelligence agencies and programs is 7 percent higher at $78 billion.

During this week’s round of quarterly earnings calls, chief executives have welcomed the defense funding increase for this year and the next. They also have signaled in near-unison: those funds will go out fast as agencies rush to get them on contract.

But the pace won’t be as strong for civilian agencies, they have said.

“We’ve seen the logjam of significant [defense] awards, and I'm talking three-digit millions, finally get awarded and we're hoping that that pace will continue,” Leidos CEO Roger Krone said in his company’s first quarter call Thursday. “I see no reason why it won't (in) the conversations that we have with customers.”

Awards that have been in evaluation for months and sometimes longer are starting to get awarded, he said.

It was around this time last year that contractors were voicing complaints about award delays and other disruptions in the market amid the transition to the Trump administration and large numbers of political appointments in key defense procurement positions being unfilled. The constant churn of continuing resolutions was another sore spot for industry before an omnibus appropriations bill was passed for FY 2017.

During that time of disruption and uncertainty, many agencies opted to extend current contracts instead of recompeting them or moving forward on a new procurement. Defense agencies could still opt to use existing contracts for their funding increases, CACI International CEO Ken Asbury said Thursday.

“I think we’ll see some return to normalcy but I think there’s going to be pressure here in the near term on getting that money placed onto current contracts and we may see more bridging activity,” Asbury said. “It will take us a while to get back to a normal flow of acquisition activity where we’re not reliant on bridging as we’ve seen in the last couple of years.”

But now with a budget in place and more of those appointment slots filled, defense agencies are poised to rush their added funds out the door before the current fiscal year ends Sept. 30. Another stopgap funding measure is a very real possibility before the midterm elections in November. But that headwind does not appear to be dampening the optimism from industry.

“Customers are focused on rapidly obligating these additional funds against their mission requirements before the end of the fiscal year,” ManTech CEO Kevin Phillips said Wednesday. “Customers have clear visibility into their funding levels and the technologies required for their missions.”

That also includes the newfound focus on readiness and a need to support increases in troop levels, according to Engility CEO Lynn Dugle. She said Wednesday that “GPS, missile warnings, classified space and launch programs, all received budget plus-ups” and space is due for an increase of $8 billion.

“We also anticipate additional funding to flow into data analytics, secure systems, systems engineering, mission assurance, increased intelligence and tradecraft and training,” Dugle said. “As we look forward, we certainly have more insight than we did three months ago on where DOD investments will be made.”

Civilian agencies have gotten what is often referred to as a “plus-up” to the tune of roughly 9 percent instead of the $54 billion cut proposed in the White House’s budget blueprint for 2018. But because that lift was unexpected, those funds may take longer to get onto contracts.

Krone said the Defense Department has a “more mature process for moving money quickly” and getting it obligated to contracts, while intelligence agencies will also be able to spend their funds faster.

Civilian agencies “had perhaps not as much advanced planning to spend that money quickly,” Krone said.

Asbury’s comments to investors in particular highlight the contrast between both sides of the budget table. The Pentagon was hoping for an increase and had planned for it. Civilian agencies were planning for cuts and got funds they did not expect.

“If you went back to the earlier discussions about the FY 18 budget there were going to be bill payers amongst the federal civilian agencies in order to fund the defense upgrades,” Asbury said. “So how that plays out, it could be that we may see a bit of a lag in the uptick of fed civil spending as they adjust to an increase in budget that they may not have been expecting originally.”

And thus, the vibe from this week is that defense spending will pick up fast before the fiscal year’s end. Just like last year, and many of the years before that.