New tariffs spark industry shake-up for GovCon
Gettyimages.com/Chip Somodevilla / Staff
By
Jeremy Doochin
Jeremy Doochin of GovSignals, lays out these three choices government contractors face: hold steady, retreat, or look for opportunities to seize.
Trump’s once-in-a-century tariffs last week triggered retaliatory measures from major economies and sent global stock markets in freefall.
At the same time, sweeping budget cuts from Elon Musk’s Department of Government Efficiency have disrupted the federal contracting landscape.
The collision of trade shocks and fiscal austerity has created a perfect storm. Government contractors now face a stark choice: should they retreat, hold steady, or seize disruption as opportunity?
While historical parallels exist, today’s environment is a unique convergence of fiscal austerity and a multi-front trade war. The last time America saw a tariff-heavy strategy of this scale was with the Smoot-Hawley Tariff Act of 1930, which worsened the Great Depression by triggering retaliatory tariffs and strangling international trade.
Then, as now, government austerity has come into conflict with economic instability.
Trump’s government agency cuts appear modeled after Reagan-era reforms, particularly the Omnibus Budget Reconciliation Act of 1981, which slashed social programs in favor of defense spending.
While Federal Reserve Chairman Paul Volcker’s 20% interest rates to combat runaway inflation played a major role in the ensuing recession, Reagan’s budget cuts deepened the pain for social services contractors. Defense contractors, on the other hand, thrived.
Today’s inflation, while not insignificant, is far below 1981 levels. Yet Trump’s tariffs last week have put the Federal Reserve, which had initially planned to lower rates in 2025, on hold indefinitely. Last week’s sweeping tariffs will cause higher prices on everyday goods, and in the short-term suppress economic productivity.
Meanwhile, Trump’s administration has already eliminated tens of thousands of government jobs. Entire agencies, including USAID and the Department of Education, are on the chopping block, with FEMA potentially next.
According to recent data, the administration plans to lay off:
- 18,000 employees (up to 65%) of the EPA
- 7,000 employees (12%) of the Social Security Administration
- Up to 50,000 employees (50%) of the IRS
- 80,000 employees (16%) from Veterans Affairs
Even the Pentagon is trimming its workforce, shedding 6,000 employees per month (60,000 in total) by leaving vacancies unfilled.
In fiscal 2024, Biden’s budget allocated $773.7 billion directly to government contractors and another $1.1 trillion to state and local governments — much of which flows into contractor hands. While it’s easy to assume Trump’s recent federal cuts will decimate government contracting, history suggests otherwise.
Even Reagan, despite his austerity measures, didn’t significantly reduce the total federal budget — he simply reallocated it. If Trump follows the same conservative playbook, agency layoffs will be offset by increased funding to contractors in areas he prioritizes, such as defense and infrastructure.
Winners and Losers: Where Contractors Stand
For contractors, the stakes are clear. Those in education, environmental services, and public health — the sectors squarely in Trump’s crosshairs — face severe risks. Similarly, companies providing general consulting services or delivering ambiguous, non-essential outcomes are vulnerable.
On the other hand, contractors delivering essential services or offering tangible, measurable outcomes — such as building construction, defense manufacturing, and infrastructure projects — are better positioned. Contracts with clear deliverables are less likely to face the axe.
Across our industry, we’ve spoken with hundreds of government contractors over the past couple months and have seen three primary strategies emerging in government contracting:
- Sheltering in place: Some companies are holding steady, hoping to weather the storm with minimal disruption.
- Preemptive cuts: Others are slashing headcount in anticipation of reduced funding, especially if they’ve already seen existing contracts frozen.
- Opportunistic expansion: The most ambitious contractors are moving aggressively, leveraging advanced software to increase the volume and quality of their proposals, pivot into growth sectors, and expand their partner networks.
Contractors in the third category — those who are investing in software tools, diversifying their bids, and forming new alliances — are better positioned to capture market share. Companies offering physical products and critical services in defense, infrastructure, and manufacturing are doubling down. Many are using technology to rapidly increase their contract eligibility by expanding capabilities and entering state and local contracting markets.
Strategic Adaptation: The Path Forward
For contractors in consulting, general services, or vulnerable industries, adaptation is essential. Companies must swiftly identify and repackage parts of their offerings as essential services that align with Trump’s budget priorities.
The boldest contractors are:
- Shifting bidding strategies: They’re retooling their proposal teams, refining their targeting, and leveraging AI to maximize bid volume and precision.
- Expanding their portfolios: Many federal contractors are aggressively seeking state and local government contracts to diversify their revenue streams.
- Increasing efficiency: With fewer government employees to manage programs, agencies are more likely to outsource services — a boon for contractors who are ready to step in.
The Road Ahead: Economic Forecast, Privatization, and Opportunity
With tariffs escalating, inflation will rise and consumer sentiment will likely falter. JP Morgan now pegs the probability of a U.S. and global recession at 60% by year’s end. This will likely push Trump to release additional federal funds to create an economic stimulus. It won’t go to the agencies now being gutted. It will flow to defense, infrastructure, manufacturing, and other favored sectors.
Today’s federal cuts do not signal a contraction in government contracting. Instead, they herald a realignment. Fewer federal employees means more opportunities for privatization.
The multi-billion-dollar giants of government contracting, long reliant on entrenched relationships, may struggle to pivot quickly enough to capture new funding flowing across agencies. This opens the door for enterprising small and mid-size enterprises leveraging AI to disrupt the industry, potentially seizing market share from longtime incumbents. This means a dramatic shakeup of government contracting is likely in the early innings.
For contractors, the temptation to hit pause — like many consumers and businesses — will be strong. That would be the wrong course of action. The lesson of history is clear: fortune favors the bold. Those who stand still may be swept away in the storm.
Those who invest in the right technology, expand alliances, and pursue contracts aggressively will capture the lion’s share of the opportunity.
Jeremy Doochin is co-founder of GovSignals, a platform that helps government contractors with AI-powered capture and winning proposal automation. He has founded several successful companies, served as a special adviser at the U.S. Department of Energy, and holds an MBA from Harvard Business School.