Agencies adjust contracting approach for coming fiscal clampdown

Companies doing business with the federal government are feeling the effects of a confluence of economic and spending trends, and with no reversal expected in the foreseeable future, leaders will need to learn to adapt.

A lagging economy, the impending fiscal cliff and resultant uncertainty in Washington are having ripple effects on industry – and in turn, government officials must reevaluate their approach to contracting, according to a panel of acquisition insiders who spoke Dec. 14 at an AFFIRM event in Washington.

“We certainly are in a different economic time than we have been in many, many years, so that’s a reflection in terms of the contracts, the budget and the changes we’re making in terms of how we spend our money. It has to mirror that environment,” said Mary Davie, acting commissioner of the Federal Acquisition Service at the General Services Administration. “There are a lot of things happening that are forcing changes that probably all together are sort of this perfect storm of how we need to think about and address this.”

According to Lou Crenshaw, principal with Grant Thornton, companies interviewed for his organization’s annual government contractor industry study reported less revenue from government business, and drops in overall federal contract revenue – down 9 percent from last year in the civilian space and 16 percent in Defense Department business.

“This is the first time we’ve seen this. I’m sure there are budgetary influences here, uncertainty about what’s going to happen with sequestration and the fiscal cliff, maybe some of it insourcing to some extent,” Crenshaw said. “I think we’re seeing defense contractors diversifying their portfolios, moving more into the commercial sector. I think we’ve seen decreasing revenues coming in and certainly the margins seem be decreasing.”

That impact comes amid shrinking budgets as well as longstanding ambiguity in federal spending that has been perpetuated by continuing resolutions, the panelists noted. As a result, the government has no choice but to shift buying practices.

“I think what you’re seeing, at least at DOD, is our behavior is changing. If our behavior doesn’t change, then our warfighters should see it. And we are pledged that they don’t see anything; to them a fiscal cliff is just a story in an overseas newspaper,” said Vice Adm. Mark Skinner, principal military deputy to the assistant secretary of the Navy (research, development and acquisition). “We have to become more disciplined as a department. Our behavior has to change if we’re going to deliver the same amount of goods and services, or a measureable amount of goods and services, to our warfighters as we enter this fiscal environment.”

At DOD, that may mean making do with current goods and services where necessary, Skinner noted. Davie said that GSA is looking at ways to take advantage of different ways of contracting, including the use of shared services.

“We might talk about some of the things we’re doing in the network services area, where we’re really trying to figure out if there are ways to build common infrastructure across government so that each agency isn’t having to repeat a basic infrastructure for data and voice networks,” Davie said. “Those are the kinds of things we’re at least looking at right now…how to reduce the duplication in contracting or solutions. How share more and how to leverage those things.”

The panelists acknowledged that some may argue these are the types of changes the government needs to be making anyway – a swing of the pendulum that is not unheard of in the enduring cycles of the way agencies carry out their missions.

“When you step back, government is still spending hundreds of billions of dollars on government contracting. We just have to do it differently. Where GSA sits, working with the agencies, there is a lot of thought about how to do it differently,” Davie said.

According to the speakers, officials are looking to keep industry in the loop, asking for feedback and maintaining open lines of communication in order to make the changes in the best way possible.

“The fact that we’re changing should not surprise you. But we have to be very open about how we do it and let you know exactly what we’re doing,” Skinner said. “We want to enter into dialog. If there are thorny issues, let’s talk about them.”

And as Crenshaw noted, it is not all bad news – despite the budget cuts and uncertainty in spending, it is still a robust market.

“I still believe doing business with the federal government is a great place to be…not only are you doing a great service, but all things being equal they’re a great customer. It’s not like on the commercial side everything is just ducky and we don’t have these problems,” he said. “Even though it may be riskier, it’s not quite as certain of an economic environment out there as it used to be.”