Photographer: John Taggart/Bloomberg

5 trends shaping federal contracts in fiscal 2016

October 14, 2015Bloomberg Government

Fiscal 2016 will be the seventh straight year of a shrinking federal market. Contractors will face fewer opportunities and fiercer competition. Industry will adapt as government buyers revamp their acquisition strategies.

Bloomberg Government has identified five key trends that will define government contracting in fiscal 2016. Every business development and strategy professional needs to keep these critical themes in mind when planning for the year, building pipelines and bidding for work.

1. Budget Caps Will Constrain Contract Spending
Under the budget caps established by the 2011 Budget Control Act, federal-discretionary spending can’t increase more than a compound annual growth rate of 1.7 percent from fiscal 2014 through fiscal 2021. Without the caps, spending would have started out $150 billion higher in fiscal 2014 and risen faster, at a 2.1 percent compound annual growth rate through fiscal 2021, according to the Congressional Research Service. Any congressional action to ease the caps will be modest at best. Contractors should expect government customers to continue belt-tightening through fiscal 2016, and into the next decade. With no end to budget constraints in sight, affordability will remain a contracting priority in 2016. Agencies will sometimes be willing to pay a premium for better service, but not a substantial premium.

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2. Agencies Will Transform Acquisition Strategies

Fiscal 2016 will be a year of heartbreak for incumbents, who will face major shifts in the ways agencies buy goods and services. Gone are the days of straight-on recompetes, in which agencies just dusted off the last request for proposal and changed a few words. In the name of efficiency, agencies will shake up the status quo, albeit in seemingly contradictory ways. They’ll break up single-award contracts into task orders on multiple-award contracts (MACs), while recompeting other task orders as single-award deals. They’ll slice and dice big systems-integration programs into many smaller RFPs, while consolidating other requirements into single contracts. To top it off,incumbent win rates are likely to remain lower than in past years.

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3. Small-Business Set-Asides Will Boom

The small-business set-aside boom will continue in fiscal 2016. The unprecedented increase in set-asides began in fiscal 2014, as contracts awarded before passage of the 2010 Small Business Jobs Act started coming up for recompete. Small businesses on MACs, especially in the technology services and knowledge-based services markets, can expect banner years in fiscal 2016. Billions of dollars in prime contract awards will shift to small businesses, and mid-sized companies will be squeezed as they struggle to compete with bigger companies and are shut out of set-asides.

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4. Contractors Will Divest, Merge and Restructure

Industry, particularly mid-sized and large companies, will have to economize in fiscal 2016 to protect profit margins in the face of declining revenue and margin-squeezing initiatives. These include strategic sourcing, aggressive small-business utilization strategies and use of lowest-price, technically acceptable (LPTA) bid-evaluation methods. Large, diversified prime contractors will separate lower-margin technical services units from higher-margin units working on weapons systems. Large and mid-sized services companies will merge. Companies will restructure their internal segments as a way to reduce costs.

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5. No Major Acquisition Reforms Will Pass

Ignore the noise around acquisition reform. The federal acquisition system you have today is the acquisition system you will have throughout fiscal 2016. Category management — the Office of Management and Budget-led effort to manage and centralize contract spending across government — is still in its infancy. However, some small consolidation of contract vehicles may happen in 2016, particularly on governmentwide acquisition contracts for information-technology purchases. Congress has no appetite for a major reform of federal procurement in the final full fiscal year of the Obama administration, so you can discount talk of major changes to procurement law. A few significant Small Business Administration rules governing small-business teaming and women-owned small businesses will take effect. Congress and the Defense Department will tinker with some procurement regulations, including rules on commercial-item designation. Big changes are still a few years away.

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