Federal spending on a wide range of services has until lately steadily risen the past decade but that growth has been outpaced by the number of separate contract actions undertaken to secure those services, meaning contractors are having to work harder to obtain a share of the federal service dollars, according to a new report by the Center for Strategic and International Studies (CSIS).
“If you’re looking at it from the industry perspective, your average contract action has really decreased,” Guy Ben-Ari, deputy director of the Defense Industrial Initiatives Group at CSIS, said on Wednesday.
Between 2000 and 2010, federal services contract spending has grown at a 7.6 percent compound annual growth rate, going from $159 billion up to $343 billion in 2009 before dipping to $333 billion in 2010, according to the report, U.S. Federal Services Industrial Base Report. The drop in 2010 is consistent with the Obama Administration’s emphasis on insourcing more service work that is inherently governmental.
During the same period, contracting actions have grown at a rate nearly twice as high than the growth in spending on services–14.5 percent–going from just over 150,000 actions in 2000 to over 1.3 million actions in 2009 and 2010, the report shows.
For federal services contractors, in recent years, “you’re having to run fast just to stay in one place,” Ben-Ari said. “In order to make the same number of revenue from services contracts, you have to land a larger amount of those contract actions.”
The report also shows a steady increase in the number of contractors taking on contracts worth less than $25,000, particularly since the wars in Afghanistan and Iraq began. The CSIS analysts responsible for the report said that some of the increase in contractors has to do with changes in reporting requirements, but they also said that a lot of smaller companies were able to get more work because of the need to get more work done.
The report is based primarily on data obtained from the Federal Procurement Data System and is based on prime contracts and unclassified data.
The Defense Department dominates the federal landscape for spending on services in all six categories that make up the market: information technology; professional services; research and development (R&D); equipment related; facility and construction related; and medical, which is a new category. The department accounts for about 60 percent of overall federal spending on services annually, Ben-Ari said. Much of the growth in services spending over the years can attributed to the wars in Afghanistan and Iraq, he added.
The two largest categories are the professional, and facility and construction-related services, which accounted for $96 billion and $94 billion in spending respectively in 2010. However, professional services are by far the fastest growing category of the two, averaging nearly 11 percent annual growth the past decade versus just over 5 percent for facility-related services.
Large contractors have been getting an increasing share of the professional services work at the expense of medium-size firms while smaller firms have been maintaining their share, Ben-Ari said.
Medical services are the fastest growing category, averaging nearly 15 percent growth the past 10 years, although it is also the smallest at $16 billion in 2010. Ben-Ari said the growth in medical services is due largely to the ongoing war efforts. And while no traditional defense contractors are in the top 10 medical services suppliers, these companies are making “inroads” in this category through acquisitions, he said.
Competition in federal contract actions has steadily increased over the past decade, particularly with full and open competitions, while non-competitive work has declined, the report shows. Also, contracts that are negotiated firm-fixed price have increased steadily the past decade, and have gone from 37 percent of contract actions in 2006 to 43 percent in 2010.
Growth of firm-fixed price and fixed-price contracts picked up also in 2010 in part due to the Obama administration’s emphasis on these contracts to limit the government’s risk but Ben-Ari said there had already been a trend toward these contracts.
Lockheed Martin [LMT] remains the top services contractor, garnering $10.5 billion of the obligations in 2000 and $19.4 billion in 2010. Northrop Grumman [NOC] was a distant second last year with $11 billion. A new twist in the top 20 services contractors in 2010 versus 2000 is the addition of three medical services companies, HealthNet [HTN] Humana [HUM] and TriWest Healthcare.