Photographer: Andrew Harrer/Bloomberg

Number of new U.S. government vendors drops to 10-year low

January 24, 2017 Paul Murphy

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An 8 percent bounce in fiscal 2016 contract spending couldn’t keep the number of first-time federal vendors from falling to a 10-year low.

Despite a $34 billion, year-over-year spending jump to $475 billion in fiscal 2016, agencies signed contracts with only 15,925 first-time sellers in 2016, according to Bloomberg data. This was just 13 percent of the government’s 124,000-vendor pool, and the second-lowest new vendor share in at least a decade.

The dramatic decline in new vendors since fiscal 2007 raises concerns about the health of the federal government’s industrial base and its ability to fulfill critical national security, scientific, health and environmental missions that depend on a steady flow of private-sector innovation and competitiveness.

It’s not only the declining number of new vendors that is concerning but also their declining share of all active vendors. From fiscal 2007 through 2016, the overall number of active vendors fell 23 percent, to 124,000 from 161,000. Over this period, the share of new vendors fell by nearly half, to 13 percent from 24 percent. Yet the overall fiscal 2016 spending level was 0.9 percent higher than it was in fiscal 2007.

More spending on fewer contracts with fewer companies has created more-prosperous vendors. On average, an incumbent received $3.76 million in fiscal 2007 and $4.3 million, or 15 percent more, in fiscal 2016. This is the highest incumbent contract revenue average in at least a decade. An average new company had revenue of just $178,000 in fiscal 2007, but grew 69 percent to capture $301,000 in contract revenue by fiscal 2016, its third-highest level in the last 10 years.

Efficiency and Past Performance Requirements

A number of converging policies appear to be driving this trend. In recent years agencies have become much choosier about the companies they do business with. New vendors, defined as companies reported to have been awarded a contract of any amount or type for the first time, are subject to intense scrutiny during the solicitation process over issues of security, capability, commerciality and competitiveness, not to mention their fundamental alignment with agency goals and missions.

Vendors seeking to sell cutting-edge cloud technology are subject to the FEDRAMP certification process before they are authorized to offer cloud solutions to agencies. They may also be subject to minimum industrial and management certifications issued by the International Standards Organization (ISO) and the CMMI Institute. All of this adds significant barriers to entry for companies looking to do business with the federal government.

An emphasis on acquisition efficiency has led to a sustained reliance on large multiple-award contracts (MACs) that limit the number of task-order bidders to a preselected number of vendors. The GSA-administered Category Management initiative intensifies the competition even further by pitting MAC awardees against one another. Contract officers now use online dashboards to compare contract terms and conditions side-by-side to select best-in-class vehicles that maximize an agency’s investment. While this increases efficiency, it also serves to limit the number of contract holders.

The federal government’s ability to attract new vendors is a key indicator of the general health of the federal marketplace. Agencies depend on new suppliers to guarantee competition and supply a steady flow of innovative ideas and new technology. But the decreasing share of new vendors raises questions about the government’s ability to improve productivity and cut costs.

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