Photographer: Akos Stiller/Bloomberg

Five trends shaping federal contracts in fiscal 2017

October 11, 2016 Duncan Amos

After years of decline, government contracting may increase in fiscal 2017. Relatively flat spending decreases in recent years and increased budgets may translate into a reversal of a years-long slide. While it’s too soon to look at Pentagon spending, preliminary numbers for fiscal 2016 show that civilian agencies increased obligations.

Bloomberg Government has identified some key trends that will define fiscal 2017 contracting. Business development and strategy professionals should be aware of these as they plan for the year.

1. Continued contract consolidation through category management

Fiscal 2015 introduced category management concepts, fiscal 2016 set the procedural foundation, and fiscal 2017 will identify which contracts are the preferred sources for acquiring common goods and services.

As shown with desktops and laptops, which shifted acquisitions to a small number of existing multiple-award contracts (MACs), additional markets will be susceptible to similar standards, and will begin relying on a few MACs (or as the government calls them, best-in-class vehicles) as category management continues to take shape.

Contractors should expect a decrease in the number of MACs and more fierce competition at the order level, as agencies seek to curb the administrative burden associated with managing duplicative contracts.

2. Increased compliance and accountability

Contractors and government officials will grapple with new compliance standards. Contractors are required to submit various data points to the government on a monthly basis as a result of the new transactional data reporting rule. Agencies must standardize their spending reports to comply with the Digital Accountability and Transparency Act, or DATA Act, by May 2017.

3. Increased agency use of simplified procedures

Simplified Acquisition Procedures (SAP) spending has grown — even though the federal market has shrunk. Rule changes have revised the threshold amount, and agencies are relying on the SAP competition procedure to avoid protest delays. Contractors should encourage the use of SAPs, which limit their workload and reduce the chance of losing orders.

4. Agencies will pay for innovative technologies and information technology support in unconventional ways

In fiscal 2016, agencies increased their use of unconventional methods to engage private-sector innovators and technology startups in pursuit of solutions to government problems.

The Homeland Security Department opened an office in Silicon Valley and released itsInnovation Other Transaction Solicitation (OTS), which has reduced some requirements of typical procurement contracts to make it easier and faster to submit proposals and award contracts. Proposals have included shorter applications, in-person pitches, and video demonstrations.

The Defense Department created a “Hack the Pentagon” program in which the agency paid friendly hackers to find and report DOD network vulnerabilities. The program cost DOD $150,000; it would have cost an estimated $1 million if they had hired a contractor to do it.

The White House hosted a hackathon to motivate technology companies to find solutions to the gender pay gap.

The programs have been successful in involving technology startups, saving government money, and shortening the time to get solutions. Moving into fiscal 2017, we’ll probably see an increase in creative methods for involving the technology sector.

5. Contractors will continue to divest, merge and restructure

As Bloomberg Government highlighted last year, industry will have to continue to change to protect profits amid 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 continue to 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.

Other trends we’re watching:

— The share of DOD contracts being competed has been declining.

The mid-tier market is shrinking. While the share of spending captured by mid-tier companies has remained steady, average company size is decreasing.

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