Despite Biden Administration rhetoric to the contrary, the year-end federal market is shaping up to be one that is dominated by larger, experienced government contractors.  There are several reasons why this is the case, but these three should be on anyone’s list:

1.  A Slew of New Rules:  This newsletter highlights the addition of new acquisition rules and focus areas nearly every week.  Whether it’s a new rule on cybersecurity, environmental preference policies, increased Buy American standards, or vaccination requirements, the fact is that government contractors today are saddled with more burdens than they were two years ago.  Is it any wonder, therefore, that small businesses have left the market and are turning out to be tougher to attract?  While established contractors may not like new burdens, they are better able to adopt and adapt than small or new market entries.

2.  Established Contractors Are the Only Ones That Can Meet the Rules:  It’s not just that rules are costly for industry to implement, they limit the options available to federal buyers.  Buyers must ensure that contractors comply with Section 889 Part A & B telecommunications restrictions, have proper supply chain security mechanisms, source from approved countries, have approved affirmative action plans, and meet myriad other government-only requirements.  Risk-averse buyers routinely turn to companies that have experience in meeting specialized government mandates.  Innovation may have its place in parts of the market, but most buying is conducted with low-risk contractors that already have experience in adapting to government-only rules.

3. A Compressed Fiscal Year:  Congress did federal agencies no favors this year by essentially cutting the fiscal year in half.  A shortened fiscal year means that agencies must commit a sizeable amount of money quickly.  To whom do they turn?  Established companies who they know have the contracts and experience to respond quickly to RFP’s and RFQ’s.  There is little time this year to coach a new market entry on how to do business with the government.  Real missions have to be supported and critical new projects must be launched by the end of September.  Reliable, experienced partners are an obvious choice when time is tight.  While there will no doubt be small business success stories this year, as there are every year, market conditions this year undeniably favor larger, traditional contractors.

Federal IT leaders say that they plan to allocate all of the remaining $756 million in the Technology Modernization Fund (TMF) by the end of the current fiscal year.  That provides some good opportunities for contractors and their customers to propose projects for fund money.  The administration is also asking Congress for an additional $300 million for FY’23.  TMF projects are helping to modernize a variety of federal IT functions, but contractors can be forgiven if the issue of how fund money is used and the circumstances under which it has to be paid back are confusing.  The TMF was originally established as a revolving fund to help agencies modernize outdated IT and then pay the fund back from resulting savings so that other agencies could then make use of the money.  Inevitably, however, some agencies started pressing for access to funds for projects that could not show a discernable savings that would allow for fund reimbursement.  As a result, the Biden administration relaxed TMF repayment requirements last May for projects that cut across multiple agencies or involved cybersecurity improvements.  Now, contractors and their customers who want to access TMF funds not only have to create good proposals that stand out in a crowded field, but have to either specify how savings will be created to pay back the fund or create a case on why a project meets the criteria for non-payback.  The entire TMF idea has never achieved broad Congressional support, either, and concerns are growing on how money is being spent. “While the law does give latitude to the projects eligible for funding, recent awards exhibit a focus on other priorities such as customer experience and cybersecurity. It’s not that those projects are not important, but they do point to a shift away from the savings-based model intended in the law,” said Representative Andy Biggs (R-AZ) in a recent hearing.  All of this means that contractors need to prepare carefully for any proposal that would access TMF money.  The program is highly competitive and the money can be used to do good things.  Oversight and fund restrictions, however, mandate that each contractor do their homework before pursuing this route with their customer.

Most federal workers would be happy to continue working remotely, thank you very much, according to a new survey released last week by Federal News Network (FNN).  Workers cite factors such as increased productivity and a feeling of security among their reasons.  Indeed, some say that they can minimize “disruptions” to their workday when working remotely.  Contractors can be forgiven if they feel like the last comment could apply to them sometimes.  Actually speaking with a federal employee has been a very hit or miss endeavor since the pandemic.  To be clear, many are happy to use virtual platforms to meet, but it’s getting to that point that can be difficult.  Not being in the office makes it easier to ignore emails and, unless a contractor has the right cellphone number, office voicemail boxes can easily fill up.  So much for customer experience.  Potentially worse for contractors is that the FNN survey showed that most federal workers don’t believe that their senior management team took their views into account when establishing part-time office schedules.  That could mean workers even less incentivized to the be in the office who could then be less open to speaking with industry.  Whether federal employee or contractor, however, the willingness to go into an office and/or meet in person with people really comes down to the job a person holds.  Workers on both sides can be very effective with minimal in-person interaction.  Others, though, are tired of virtual meeting platforms and are anxious to return to in-person meeting, and even larger gatherings.  All of this presents a maze for contractors to navigate as they prepare to enter the fourth quarter of the federal fiscal year.  If one potential contact has been unresponsive despite emails and calls to the official office number, it’s time to move to the next one.  Conversely, finding that prospect who’d like to meet for coffee and discuss your solution is worth getting out of bed early for and, yes, investing in a tank of inflation-grade gas.  Manage your time accordingly.

Recent analysis from Bloomberg Government finds that six federal market segments control approximately 25% of federal spending.  Knowing what those markets are, who’s buying, and how they’re buying is important information for contractors.   Cloud computing, AI and operations and logistics comprise the top three areas.  None of those should come as a surprise.  We’ve previously written about the ubiquity of government users desiring AI solutions throughout government.  Business management and financial services, facilities services and digital services round out the top six.  Business and financial services point to the importance of holding key GSA contracts, such as professional service offerings through the Schedules program and GSA’s OASIS contract.  Digital services, an area defined by Bloomberg, includes not only web applications, but the emerging emphasis on enhancing customer experience.  Despite efforts by the Biden Administration to attract new market entries, Bloomberg predicts that competition for most of the dollars in these areas will become more pointed among established contractors.  Further, the overall number of companies will decline as some merge or are acquired, while others leave the federal market generally.  A key factor included in the Bloomberg presentation, but also well known to contractors, is the increased statutory and regulatory burdens placed on contractors as the Administration tries to achieve multiple public policy goals via government contracting.  Holding critical contract vehicles is also important.  Bloomberg forecasts that up-coming vehicles such as LOGCAP V, SEWP VI, the GSA services MAC, and GSA Alliant III will be among the most desired contracts to have.  Bloomberg’s report shows that, while government priorities shift over time, the basic business blocks for contractors remain the same.

The federal government takes major cybersecurity vulnerabilities seriously.  That’s one bottom line take-away all contractors and observers can learn from the Cybersecurity and Infrastructure Security Agency’s (CISA) emergency directive mandating that all federal civilian agencies take immediate steps – by today – to patch critical vulnerabilities associated with various VMware solutions.  Contractors should resist the impulse to default to the “there but for the Grace of God Go I” response.  There are lessons here for all companies doing business with the federal government.  First, prime contractors should take this incident as a reminder that they need to manage their subs and teammates properly.  VMware’s problems aren’t just its own.  They include the primes through which they sell.  Making sure that your prime contractor business has proper protections and performance-related remedies is essential.  As a prime, it is your company that is ultimately accountable for performance issues.  Second, there is such a thing as bad publicity.  VMware will have to spend a lot of money not only to resolve the security issues but to bolster its reputation in the federal market, all only two months before federal busy season starts.  We’ve said before that your company spent a lot of time building a positive reputation.  Investing in security and compliance helps protect your company’s reputation as a reliable and safe federal partner.  Third, the government will take steps to protect itself, regardless of what the potential damage to a company’s reputation may be.  Yes, government and industry work together on a wide variety of federal missions.  Contractors should not forget, however, that the government is the senior partner that ultimately holds the high card in the relationship.  This means that companies need to ensure performance, anticipate problems, and have clear mitigation strategies developed in advance so that they can resolve issues quickly.  While contractors may be reluctant to bring up concerns or potential trouble areas, it is vitally important to remember, just like Richard Nixon, that it’s not the crime, but the cover-up that can cause real trouble.  While VMware is busy patching this weekend, all contractors should take a look at their own performance, and that of their subs, on critical contracts to ensure that they’re not the next ones in line for an emergency directive.