Government Contracting and the Federal Budget

How does the federal budget influence contracting?

The federal budget sets the financial parameters for contracting activities and reflects the priorities of the government and its agencies. For example, in FY20 and FY21, health-related procurement skyrocketed in response to the COVID-19 pandemic. By FY22, total spending in that arena dropped below what it had been at the beginning of the pandemic, but spending on government laboratory facilities, R&D, defense logistics, and veterans’ health drove overall contract spending to a new high.

Contract spending typically represents a consistent percentage of an agency’s overall budget. As agency budgets move up or down to fund mission priorities, this sends a signal to contractors about the potential size of an agency’s opportunities in the coming fiscal year, which kinds of contracts are likely to be used, and what the competitive landscape will look like.

For example, an agency’s request for an IT funding increase will likely lead at least in part to an increase in spending on existing governmentwide indefinite delivery contracts held by pre-selected vendors that would compete among one another for each new task. Knowing which contract vehicles agencies would likely use in turn helps a company decide whether to pursue opportunities as a prime vendors, a teaming partner, or a subcontractor.

What impacts federal procurement opportunities?

In addition to budget funding, what qualifies an opportunity as actionable is determined by a host of policy and administrative and financial decisions, many of which are made at the highest levels of government.

Agency missions goals and objectives

When considering new opportunities in a specific market, look at an agency’s internal mission, goals, and objectives as well as how they’re responding to real-world conditions. For example, sustainability has become a growing priority in recent years. In FY21, the Biden administration directed major agencies to create agency-wide as well as installation-specific climate adaptation and resilience plans. Knowing the status of these plans, which initiatives have been proposed for near- and long-term funding, and which funded programs will likely lead to future solicitations presents a significant competitive advantage. And if you’ve previously worked with one agency component, considering its overall mission and goals can help you understand how to serve other components’ procurement requirements.

Laws, policies, and executive orders

A presidential policy directive, new law, or executive order can have a significant effect on the contracting landscape. For example, the Biden administration launched the Made in America Council in January 2022 to help maximize the domestic content of federal purchases as agencies implement administration initiatives.

Specialized funding vehicles

Some federal markets are served by unique kinds of contracts. For example:

• Other Transaction Authority (OTA) agreements are used increasingly for early-stage R&D and prototyping, particularly by the Defense Department.
• The Technology Modernization Fund offers support for innovative new federal IT investments.
• Governmentwide Acquisition Contracts (GWACs) like Alliant 2, CIO-SP3, and SEWP V are used extensively in large and customized IT product and services procurement.

Additionally, the departments of Defense, Energy, and Health and Human Services use large facilities management contracts to provide support for major research installations like Sandia National Laboratory in New Mexico and Frederick National Lab in Maryland.

How have external factors affected budget proposals and procurement?

External factors have a strong influence on federal budget allocation and spending, and the past few years have been rife with unique world events that shape the way federal government agencies operate and spend money.

War in Ukraine

The U.S. has been sending more Defense employees to Europe since February 2022 as part of the NATO response to Russia’s invasion of Ukraine. The deployment of troops and civilians requires logistics, material training, and facilities support, which has increased federal spending on both IT and professional services.

Medical spending

After two years of bolstering federal contract spending, COVID-related procurement has declined dramatically. Yet with months of FY23 contract data still to be reported, medical services spending exceeds pre-pandemic levels, primarily the result of increased spending for active duty soldiers and veterans.

Weather-related disaster response

The cost of responding to climate and weather disasters has increased decade-over-decade since 1980. At $177 billion, 2022 was the third-costliest year on record for this kind of disaster response.

Inflation

Despite signs that inflation is moderating overall, goods and materials still cost more than they did five years ago; the result of commercial market trends and lingering supply chain issues. For example, Department of Defense fuel costs more than doubled between FY21 and FY22, and restrictions on trade with Russia continue to put upward pressure on prices. Rising fuel costs drive up transportation costs throughout the economy, increasing costs for parts and supplies.

What are the top markets to watch in FY24?

Many factors impact federal procurement and contracting markets, from changing laws and political agendas to agency-level priorities or completely external factors.

Bloomberg Government has identified these markets as sources of contracting opportunities ahead:

1. 1. Cloud computing: Spending forecasted to climb 27% from FY23 to FY24.
   2. Defense base logistics and supply chain: This market is dominated by the Department of Defense. With a general five-year upward trend, the small spending decline in FY21 should recover with an Asia expansion.
   3. Financial services: Accounts for one of every nine federal contract dollars. The five-year spending trend is up; civilian agencies accounted for 70% of contracting dollars spent in FY22.
   4. Facilities services: Spending has averaged 11% of total contract obligations since FY18. Modernization and consolidation initiatives underway could significantly increase spending.
   5. Digital services: This market grew by almost two-thirds between FY18 and FY22. Civilian agencies, particularly those with large client-facing missions, dominate spending.

What are the discretionary funding priorities for FY24?

After months of negotiations and four stopgap measures, President Biden signed the final “minibus” agreement on March 23, 2024, which provides $1.2 trillion to fund key agencies for the rest of the fiscal year. Defense received $842 billon – a 3.2% increase from FY23 enacted levels – to strengthen deterrence in the Indo-Pacific, support Ukraine and European allies, advance cybersecurity, counter persistent threats, and invest in the care of service members and the civilian workforce. $668 billion – or a 7% increase from FY23 – is designated for non-defense initiatives, such as cancer and Alzheimer’s research, childcare, K-12 education, low-incoming housing, clean energy infrastructure, and mental health services.