According to a report by Ray Bjorklund of FedSources, contractors will get less government work in fiscal 2011. (RICK KOZACK)
Contractors will get less government work in fiscal 2011 and government spending on contracts won't rebound anytime soon, a new report says.
President Obama's fiscal 2011 budget request includes $36 billion less for contractors, a 5 percent decline from $756 billion this year, according to a study by the McLean, Va., market research firm FedSources. It also appears to represent a clear leveling-off point to the federal contracting boom that has occurred since 9/11. Contract spending has more than doubled in that time.
The report's author, Ray Bjorklund, cites three primary factors driving the decline: Obama's freeze on discretionary spending, a greater emphasis on measuring agencies' performance in spending, and insourcing to federal employees on work previously done by contractors.
Bjorklund said he reached his conclusions after poring over more than 3,000 pages of budget documents that detail how the government plans to spend $3.8 trillion next year.
Budget constraints — driven by the rising cost of items such as Social Security, Medicare, energy and health care — aren't going away, nor are their impact on contractors. FedSources projects that government spending on contractors will remain relatively flat through fiscal 2014. The report shows spending dipping be low $700 billion in fiscal 2012, then hitting $727 billion by fiscal 2014.
"I think this administration is taking it a bit more seriously," said Bjorklund, FedSources' chief knowledge officer.
"They're more diligent about trying to keep a lid on [spending]."
The Office of Management and Bud get said in a statement to Federal Times that it couldn't comment on the numbers in the FedSources report, but that the trend away from contract spending is real.
"Our contracting spend was on an unsustainable path," the OMB statement said. "This administration has taken steps to restrain spending, including terminating and reducing programs, buying smarter, and reducing the use of sole-source and other noncompetitive contracts."
This philosophical shift will mean fiercer competition for the contracts that are available, Bjorklund predicts. Contractors will have to carefully align their offerings with federal spending priorities and consider strategic partnerships with other companies that may previously have been considered competitors.
At a conference in April, Coalition for Government Procurement president Larry Allen also said contractors will have to be on their game. "It is a time when you're doing business with the government that you need to stay focused," Allen said. "This is a marketplace that will favor people who are experienced."
Big hits at DHS, Energy About $10 billion of the $36 billion in contract-spending cuts projected for 2011 comes from the Homeland Security and Energy departments.
Bjorklund said the DHS cuts are largely due to planned insourcing at Customs and Border Protection, the Transportation Security Administration and other DHS agencies.
DHS spokesman Larry Orluskie couldn't confirm the department's planned spending on contracts, but said it's true that DHS is making an insourcing push.
Immigration enforcement and in formation technology are two areas where DHS intends to shift work from contractors to federal workers.
DHS officials also said in April that they are considering insourcing the jobs of 15,000 contractor security guards hired by the Federal Protective Service to provide security at federal buildings.
"We plan to look at our contracting workforce and move it more toward federal," Orluskie said.
"We're looking at the dollars spent to do that kind of work."
Bjorklund expects the Energy Department will slash its spending on contracts by 20 percent, from $35.6 billion in fiscal 2010 to $28.8 billion next year. The department is moving a lot of spending to research grants for colleges and universities, rather than con tracts to private companies, Bjorklund said.
"There's growth in DOE but not for contractors," Bjorklund said.
Meanwhile, some agencies are projected to spend more money on contracting. The Housing and Urban Development Department is boosting its spending 31 percent, largely for stimulus-funded housing programs, according to Bjorklund.
Contractors who deal in professional services and real property will see the largest decline in demand for their products and services, according to the report.
Spending on professional services, which covers areas such as IT consulting that require specific expertise and advanced academic credentials, will fall by 15 percent to $110 billion in fiscal 2011, Bjorklund found. Real property spending — buying or renovating land and structures — will drop 22 per cent to $33 billion in fiscal 2011.
Some categories will increase The largest increase is seen in "blue collar operations and maintenance," projected to rise 11 percent to $106 billion in fiscal 2011.
Possible areas of opportunity for contractors include oversight of the financial industry, support for active-duty troops and veterans, and infrastructure security in the cyber and physical realms, the report states.
Another reason for the overall decline in contract spending is that the administration's focus on areas such as renewable energy, education and health care is not translating into business for private companies. Much of the money for energy and education takes the form of grants or aid to state and local governments, and contract spending on health care is not particularly strong at the federal level, the report explains.
Lou Crenshaw, an executive director at the consulting firm Grant Thornton LLP, said "there are going to be winners and losers" as the government changes the way it does business with contractors.
Crenshaw, a retired vice admiral who served as the Navy's deputy chief of naval operations for resources, requirements and assessments, highlighted professional services as an area that could be cut further.
"If you are in the staff augmentation business … I think you're going to have to rethink your business model here," Crenshaw said.
"Those are clearly spots ripe for bringing back into the government."