Federal contract work has held the title of big business in Washington, D.C. for many years, particularly during the last decade. However, private companies awarded lucrative contracts in the past are seeing a rapid decrease in the value of current contracts. By the end of September 2013 – the end of the fiscal year for the federal government – total number of contracts had fallen close to 11 percent. While this seems like a small percentage, it represents the steepest decline in the last 10 years.
Although there has been a decline, the federal government is still awarding billions of dollars in contracts. Yet, many private companies are feeling the pinch from receiving fewer contracts. This is especially true for small businesses that rely on lucrative contract work for a large portion of their revenues. Some attribute the decline to the seemingly perpetual budget battles in Washington. While political rancor over government spending has subsided a little, the expectation is that contract work for the current fiscal year may extend the decline in awards.
Generally, small businesses are the ones feeling reductions the most. The result is to terminate part of their workforce when contracts slow down. Some employees may have to take furloughs while small businesses endure the loss in revenue. This can cause a ripple effect in a weak economy. When people are out of work, they will spend less.
For the most part, cuts in military spending is the cause of the most recent decline in federal contract work. According to some reports, contracts related to military spending have been on a steady decline since the start of the Obama administration. These numbers are in contrast with the high number of federal contracts during the Bush administration. Of course, this was largely due to the start of wars in Iraq and Afghanistan. As the war in Afghanistan comes to a close, so will federal contracts associated with that war.
When the White House and Congress reached a budget deal last October, the government shutdown ended and private companies that relied on payments from the government were hopeful again. While politicians were able to come to an agreement, very little was done to end what many consider wasteful spending by the government. This is unfortunate for those in the private sector that depend on federal contracts to operate their business who will suffer the most from the slightest cuts.
At the same time, large corporations in theory are supposed to save taxpayer money. Their size suggests an efficient, bottom line oriented operation. In reality, however, some contracts to larger corporations can cost twice as much. Politicians respond by slashing federal contract dollars without considering how some businesses are affected.
Taxpayer money goes to large and small contracting firms that do relatively little work compared to the amounts of their contracts. The new budget deal did very little to reform this spendthrift system that costs taxpayers millions of dollars each year. For instance, the top contractor salary that firms are allowed to charge to the federal government is projected to fall to $487,000 in the coming year. That is more than the $400,000 that taxpayers pay to the president.
Not only are for-profit contractors allowed to charge salaries, but they can also bill the government for management pay, the cost of renting space, overhead and various perks. An example of this is during a congressional hearing, it was revealed that out of the $31.5 billion in invoices the U.S. Army received, more than half – a whopping $16.6 billion – was for the cost of overhead.
Even as the federal government misses the marks on some contract decisions, some agencies are moving towards smarter buying techniques. The government’s procurement office is working to ensure that cost-saving measures are employed by all government agencies. Even something as simple as bulk purchasing can result in strategic buying decisions that saves money. Every dollar saved is an opportunity for private companies that can really benefit from a lucrative, and justifiable, government contract.
While reductions in some areas are warranted, some believe that reducing government spending levels can hurt an already fragile economy. Nevertheless, government spending is expected to continue to decline over the next few years. By some estimates, government spending could drop by 10 percent or higher in 2014.
This new reality in federal contracts will be trying for small businesses. Before the cutbacks, businesses across the country could depend on receiving good money for their products or services. To survive, small businesses will need to look for other opportunities to replace lost federal contract work. Some might even need to change their business model to remain relevant in the business community. If 60 to 90 percent of a business’s revenue was in federal contracts, they will struggle to survive when the work dries up.
Depending on the types of products and/or services, some businesses could see an increase in the amount of federal contract work they receive. Innovation is key to winning more contracts from the government even as less money is being allocated. To be able to deliver innovation at reduced prices improves their chances even more.
Also feeling the pinch are major corporations with awards declining in recent years. Like smaller businesses, contracted military services from large corporations are the ones most affected. There is a regular ebb and flow to government contracting, which could make drawing conclusions from yearly data futile. Some cutbacks could represent normal fluctuations.
Still, total contract dollars awarded to some major corporations have declined. Others – again, based on their product or service – were less affected. Even for large companies, a $7 billion decrease is felt throughout the organization.
The decline in federal contract dollars has not deterred small businesses from trying to win some contracts. Many have increased efforts to securing these business opportunities, if for no other reason than to have a customer that is not expected to go out of business.
Most are minority and women-owned businesses that are investing more time and money on bidding activities. As the federal government decreases its contract spending, these businesses are expending more resources towards opportunities to do business with the government. Since there are fewer bidding opportunities, businesses are bidding smarter.
On average, the number of prime contracting bids submitted by these groups decreased to 5.5 during 2010 through 2012. This is compared to 19.5 for 2007-2009 for minority and women-owned businesses. In dollar amount, this comes to approximately $128,638 in time and resources to obtain government contracting opportunities. Of those numbers, small businesses experienced a 55 percent success rate for prime contracts.
Even as there are fewer federal contracts from which small business can choose, opportunity is available in some areas. The total impact to small businesses that either lose contracts or fail to be awarded on a new bid is not always easy to determine. Most small businesses work on government contracts as subcontractors to larger corporations. However, the numbers show that large corporations are not exempt from losing some federal dollars.
When large corporations feel the squeeze, they are less likely to hire subcontractors. They are inclined to keep the money for their own benefit. At the same time, some small businesses are left to vie for relatively small projects. Others may submit extremely low bids in hopes of winning a project. Fulfilling a federal contract simply for survival is not profitable. But for some small businesses, it is a way to keep the doors open.