Federal contract spending decreases again in fiscal 2022

Federal contract spending declined by 7% in fiscal 2022, driven largely by decreases in defense spending, according to estimates released Tuesday by Deltek.

The estimates suggest a 5% increase in contract spending among civilian agencies in fiscal 2022 was more than offset by a 13% drop in contract spending among defense agencies, leading to a second consecutive year of decreased contract spending, following 2020’s high watermark of nearly $700 billion.

“We’re expecting when the dust settles on 2022 that civilian agencies will have a net 5% increase over 2021, so getting back to growth after declines we’ve seen in the prior year,” Kevin Plexico, senior vice president of research at Deltek, said at the firm’s FedFocus 2023 event Tuesday. “In the defense market, we still see a pretty significant drop based on the reported spend so far. So, barring any major surprises in terms of Q4 spending, we’re expecting agencies will report slightly less than $350 billion, which is down from nearly $400 billion in fiscal 2021.”

Though fiscal 2022 ended on Sept. 30, Plexico noted that the Defense Department’s spend in Q4—typically the largest quarter for spending—will not be fully reported until January. Thus, Deltek’s estimates for defense spending take into account the other three quarters of reported spending and estimate Q4 defense spending based on timing and spending patterns over the previous five years.

If the estimates hold, Plexico said, “That would be two years of decrease in defense contracting, and obviously there are a lot of large companies that are reliant on defense dollars for their success.”

While defense spending actually increased slightly in some categories like IT (5%), professional services (10%) and research and development (17%) in fiscal 2021, the Pentagon experienced a 16% reduction in its largest spending area: defense and aerospace products. This includes aircraft, ships, tanks and weapons systems. Plexico posited the wind down of troops from Afghanistan and “corresponding effects” may have played a role in the decreased spending in that category.   

“We’ve seen increases in IT, professional services and R&D [have] also fared well despite the decrease in overall DOD spending,” Plexico said. “If you’re in the aerospace and defense market selling weapons to DOD, it’s going to be tougher for you than other categories.”

Government contractors have faced numerous challenges in recent years, including the COVID-19 pandemic, supply chain shortages and—most recently—inflation. According to Plexico, fiscal 2023 may act in some ways as a return to normalcy, at least when it comes to government spending. The president’s budget request calls for a 7% increase in discretionary spending over fiscal 2022 levels, which represents a 15% increase over fiscal 2021, Plexico said. Whereas fiscal 2020 and 2021 were buoyed by excess government spending combatting the COVID-19 pandemic, future budgets are likely to resemble pre-COVID-19 budgets.   

“At the end of the day, it’s the [congressional] appropriators that have the say in the level of funding for discretionary budgets,” Plexico said. “But we’re expecting a reasonably good growth year coming off fiscal 2022 for appropriators, when they are all said and done in fiscal year 2023.”