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Government Contracting and the Federal Budget
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Pressures on the federal budget in recent years have included: modernizing infrastructure, IT systems, and cybersecurity; developing secure, next-generation information platforms; containing the COVID-19 pandemic; incentivizing domestic manufacturing; responding to intensifying climate change-driven crises; and supporting Ukraine.
And every year following extended debate, Congress allocates funds to agencies, which, in turn, hire contractors to provide the products and services that address these ongoing issues and keep the government running smoothly.
Contracting with the federal government can open new opportunities for businesses. Building your government business development plan and contracting pipeline requires a firm grasp on critical markets and aligning your organization’s capabilities with federal agencies’ missions and procurement needs. This article details market trends, contracting considerations, budgetary influences, and more.
What is the influence of the federal budget on contracting?
The federal budget sets the financial parameters for contracting activities and reflects priorities of the government and its agencies. For example, in FY20 and FY21, health-related procurement skyrocketed to curb 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 companies about the potential size of an agency’s markets in the new 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 contracts 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?
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, including:
- Agency missions goals and objectives: When considering new openings in a specific market, look at an agency’s internal missions, goals and objectives and how they are responding to real-world conditions. For example, sustainability has become a growing priority in recent years. In Fiscal 2021, 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, 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 markets are served by unique kinds of contracts. Examples include Other Transaction Authority (OTA) agreements, used increasingly for early-stage R&D and prototyping, particularly by the Defense Department; the Technology Modernization Fund, which offers support for innovative new federal IT investments; Governmentwide Acquisition Contracts (GWACs), like Alliant 2, CIO-SP3 and SEWP V, used extensively large and customized IT product and services procurement. Additionally, DOD, DOE and HHS 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 DOD 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 created a rise in federal government IT spending, as well as spending on professional services.
- Medical spending: After two years of bolstering federal contract spending, COVID-related procurement has declined dramatically. Yet with months of FY 2023 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 crisis 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, DOD fuel costs more than doubled from fiscal 2021 to fiscal 2022, 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 FY23 and FY24?
Key takeaways are that many factors impact federal procurement and markets, from laws and policies to agency-level missions, to completely external factors.
Bloomberg Government has identified these markets as sources of contracting opportunities ahead:
- Cloud Computing: Spending forecast to climb 27% from FY 2023 to FY 2024.
- Defense Base Logistics & Supply Chain: Market is dominated by Department of Defense, with five-year trend up, small FY2021 spending decline should recover with Asia expansion.
- Financial Services: Accounts for one of every 9 federal contract dollars, five-year trend is up. Civilian agencies accounted for 70% of contract dollars in FY 2022.
- Facilities Services: Spending has averaged 11% of total contract obligations since FY 2018. Modernization, consolidated initiatives underway that could significantly raise spending.
- Digital Services: Market grew by almost two-thirds from FY 2018 – FY 2022. Civilian agencies, particularly ones with large client-facing missions, dominate spending.
What are the proposed mandatory funding priorities for FY24?
Under the proposed FY24 budget, mandatory funding priorities include improving health care, education, and childcare, which opens up a host of opportunities for contractors. The President intends to raise Medicare tax rates to 5% for persons making above $400k to extend Medicare’s trust fund solvency by 25 years. To further bring down Medicare spending, Biden proposes to expand drug pricing changes that were included in the IRA. Additionally, he hopes to expand access to childcare and universal preschool as well as provide free community college and paid family and medical leave.
What are the proposed discretionary funding priorities for FY24?
Under the proposed FY24 budget, defense spending would rise 3.3% and nondefense spending 6.5%. Within the $886 billion budgeted for defense, DOD will again be the largest recipient of discretionary funds; however, monies would also be allocated to other agencies, like the DOE. Biden’s FY24 proposes to allocate $1.7 trillion among cabinet-level departments. Education would get a 13.6% increase, HHS would get a 11.4% increase, Treasury would get a 15% increase, the EPA would get a 19.2% increase, and the National Science Foundation would get an 18.6% increase.
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