Government Contracts: Trends in Federal & State Government Contracting

Ongoing supply chain issues, surging inflation and new rules on cyber security are challenging government contractors
But a push for advanced defense systems, infrastructure and green products and services offer opportunities for continued growth
Productive, cooperative communications with contracting officers can add flexibility and open the door to new business

Government contractors today must navigate a challenging landscape of volatility and change. While the lingering effects of the pandemic, geopolitical tensions and other events require attention and resources, they also inevitably lead to expanded opportunities. Companies can set themselves apart by helping guide the agencies they serve in fulfilling their evolving missions and dealing with supply chain bottlenecks, inflation and other hurdles. For these government contractors, ongoing success requires recognizing and staying ahead of changes as they occur across all areas of business, including these six trends.

Even as defense contractors were working to comply with the original Cybersecurity Maturity Model Certification (CMMC) rules, which took effect November 30, 2020, the Department of Defense in November 2021 announced what has been dubbed CMMC 2.0.¹ Rulemaking for the new standards is still in progress, but contractors must now look ahead to requirements that will consolidate five compliance levels to three—foundational (level 1), advanced (level 2) and expert (level 3).

Depending on the sensitivity of the work they do, many small- and medium-sized companies may be subject to level 1 rules that lay out 17 basic “controls,” including implementing multifactor authentication for system users and not using the same passwords for different accounts. The new level 1 standards—based on National Institute of Standards and Technology (NIST) 800-171—allow for self-assessment, simplifying the compliance process for contractors. Yet missteps could be costly. A new Department of Justice Civil Cyber-Fraud Initiative allows civil actions to punish knowing misrepresentation of cyber security practices and protocols and rewards whistleblowers with some of the money the government recovers in suits against contractors.² Contractors must also consider how to pay for needed upgrades to their security systems. Investing profits could help them reduce tax liability while becoming compliant.

Russia’s deployment of advanced weapons in Ukraine has placed new emphasis on United States investment in next-generation defense technologies. For example, the United States has signed a joint agreement with the United Kingdom and Australia to develop hypersonic missiles, which travel at five times the speed of sound.³ Other priorities include directed energy—high-energy lasers that can defend against enemy attacks⁴ —as well as small, low-orbiting satellites that can aid battlefield communication when ground-based infrastructure is destroyed.⁵ These priorities are creating opportunities for contractors that provide design services and components for advanced systems.

Meanwhile, the government’s broader technology initiatives, driven by the Modernizing Government Technology Act of 2017, are creating additional opportunities for contractors able to help agencies increase data storage, move it to the cloud, enhance data security and make greater use of artificial intelligence.

Inflation and rising interest rates are hitting contractors across their supply chains, adding to costs for shipping, energy, labor and materials. Many are locked into firm-fixed-price contracts that don’t reflect current realities. Normally, those prices might be adjusted annually. But today, as some companies withdraw from money-losing contracts, government agencies are necessarily becoming more flexible. For example, the General Services Administration (GSA), which provides centralized procurement for federal agencies, recently made it easier for contracting officers to discuss and obtain approval for inflation-related interim cost adjustments.

Inflation and rising interest rates are hitting contractors across their supply chains, adding to costs for shipping, energy, labor and materials."

Likewise, agencies and contractors are working together to reassess key supply chains. They are looking to source components and raw materials close to home where possible, especially on projects related to technology, defense and other areas vital to national security. In some cases, contractors may even partner with competitors to ensure they can deliver essential goods and services.

The demand for technology and defense-related products and services, in particular, has spurred a raft of acquisitions of small government contractors, driving up prices in some cases to several times standard earnings multiples. In that environment, buyers must consider not only an acquisition target’s past performance but whether its capabilities truly complement the buyer’s existing business and create expansion opportunities. Acquiring a company that provides similar products or services and has relationships and contracts with different government agencies could help expand the buyer’s business without the risks and complexities of entering entirely new business areas.

Buyers should also consider whether the combined company will be too large to qualify for government contracts set aside for small businesses. One potential solution: limiting revenue of the combined company by emphasizing contracts that provide the best profit margins while foregoing less profitable work.

The U.S. government—the world’s single largest consumer—has established a goal of net-zero emissions for federal procurement by 2050.⁶ To move toward that objective, agencies are holding contractors to stricter environmental standards and giving preference to those demonstrating a reduced carbon footprint. Contractors can take several concrete steps, from determining the green purchasing requirements for their products or services⁷ to considering the specific goals of the agencies they work with. But it’s also important to look ahead, by examining each agency’s future procurement plans.⁸ Knowing what’s coming can help shape company priorities and aid future growth.

The $1.2 trillion 2021 Infrastructure Investment and Jobs Act provides $550 billion in new federal spending over the next five years.⁹ While the bulk ($284 billion) will go to transportation, the bill includes significant spending on broadband ($65 billion), energy and power ($65 billion), water ($55 billion, including $15 billion to replace lead pipes) and resiliency ($52 billion), among other priorities.

The scale of this spending may prompt companies that haven’t worked as government contractors to submit bids. There’s a steep learning curve for doing government work, however, with unfamiliar compliance requirements and special rules for communicating and negotiating. Some practices that are standard in the private sector—for example, routinely passing along increased costs—may be off-limits when dealing with government agencies. That puts a premium on getting expert guidance.

Amid today’s many uncertainties and opportunities, it’s more important than ever for government contractors to have regular conversations with contracting officers and government agencies, and to position themselves as problem-solvers. Those with special skills and knowledge could benefit from showcasing their expertise by developing and publishing white papers, for example. Instead of waiting for an agency to put out a request for information, contractors could champion their own cause by coming to it with solutions. The same may apply to reaching out to bankers, who can provide intelligence and guidance about the government’s evolving needs and requirements and help contractors chart a successful path through challenging times.