Contractors buoyant about fiscal 2015

Federal government contractors are expecting a frothy 14 percent uptick in revenue, according to respondents to the latest Clarity GovCon industry survey from Deltek.

The improved mood comes from the stable near-term fiscal outlook, more predictable thanks to topline budget deals that all but eliminate the possibility of a government shutdown or substantial spending cuts through fiscal 2015.

"The pressure is kind of off a little bit because the economy has improved and tax revenues have improved," said Kevin Plexico, vice president of Information solutions at Deltek. While federal spending on contracts will continue on its typical roller-coaster path, with a rapid uptick in year-spending as agencies look to empty their coffers, overall Plexico sees some stability in the top-line numbers, "even if we have some haggling over the individual appropriations bills," he said.

Spending numbers give contractors reasons for optimism, with spending on federal contracts in the second quarter of 2014 up 58 percent over the same quarter of last year. Solicitations and task orders are climbing, up 54 percent in 2014. The Bipartisan Budget Act, hashed out by Rep. Paul Ryan (R-Wis.) and Sen. Patty Murray (D-Wash.), allows for a slight increase in fiscal 2015 discretionary spending . President Barack Obama’s proposed $55 billion Opportunity, Growth, and Security Initiative would boost spending on infrastructure, education, research and development – but its chances of becoming law remain slight.

Civilian side IT spending will be largely flat, but Plexico expects defense IT spending to take a hit in 2015. This will be most keenly felt by contractors looking to help the military modernize legacy systems. With cybersecurity and intelligence increasingly a priority, Plexico said, there is more pressure for the Department of Defense to extract savings from consolidation, especially in data centers. The Pentagon is going to face some hard choices when it comes to the large up-front investments required for IT modernization.

The Deltek survey found that despite the rosy fiscal outlook, contractors of all sizes are worried about their ability to attract top talent, match them with the right opportunities, and pay competitive wages. Contractors are also worried about the capacity of their project management staff, and their ability to measure risk.

The budget deal signed last December included a $487,000 per year cap on what government will pay for in terms of contractor salaries. There are misconceptions inside industry about the contractor caps. You can pay people more than the maximum rate, Plexico said, "you just can't ask the government to reimburse you for higher levels, so you're in effect eating margin for those positions." He said contractors who see their employee talent as a key differentiator will continue to pay above the rate of reimbursement.

And despite the budgetary certainty, contractors said in the Deltek survey that competition is getting tighter.

As the growth of the federal budget shrinks, the federal market is increasingly dominated by incumbent players, who are forced to compete on price. The selling points contractors used to distinguish themselves such as expertise, customer service, and advanced technology, are often less attractive to cash-strapped agencies than price. "It makes it a much more price competitive market than we've seen in the past," Plexico said.

This lowest-price buying policy may be set to change, however. "As we see the budgets start to climb back again, I think you'll see companies and agencies being smarter about the decisions they're making, and the competition over price not being quite so acute," Plexico said.