Recently Deltek, released their Government Contracting Industry Study. Clearance Jobs broke down the findings related to Information and Technology and Cyber Security, but Deltek also highlighted business development and financial strength of the contracting industry. In spite of the fact that 25% of respondents indicated the number of federal contracts in place declined over the course of 2020, companies remain optimistic for the future with 70% of respondents expecting government contracts to increase.
COVID-19 Response and Appropriations Bumped up Federal Spending
Federal spending was kept afloat in 2020 through record discretionary appropriations, along with the government response to the COVID-19 pandemic. Civilian spending increased 19% and defense spending rose 10%. Over half the increased were directly connected to COVID-19. This allowed industry to remain strong despite market dynamics and disruptions. Depending on a company’s operations this change either helped or slowed down their funding opportunities.
In 2020, businesses lost the opportunity to meet in person due to the COVID-19 pandemic. Market-generated leads offset the decrease, while more professionals took advantage of market intelligence databases like GovWin IQ to uncover new opportunities. Going forward, a hybrid of both in person and virtual meetings will continue. Some companies may decide the cost in both time and money to reprise an actual face-to-face meeting will not be the best use of resources and may change how businesses do business going forward.
Key Challenges Ahead
The top three challenges were increasing profitability, achieving organic top-line growth, and predictability of financial performance. And while the challenges companies faced pre-pandemic had a lot of similarities, the predictability of financial performance rose sharply in importance. Companies seem to be increasing their focus on driving greater diversification. With an emphasis on driving market penetration, achieving greater product line breadth, and building an increasingly diverse customer base.
Profit margins declined significantly. Both large and small companies reported lower profits but small businesses were particularly affected with margins decreasing 32% year over year. Small businesses were also disproportionally affected in average, unallowable cost rates, where costs increased threefold. For small companies, the cost of biding and proposals jumped 43% while both medium and large businesses reported no material changes.
Recovery and a return to a “more normal” operations will be a focus specifically for small businesses who found additional challenges with the new work environment due to the COVID-19 pandemic. There is also a hope that there will be a bounce back in revenue for these companies. The focus is on profitability through efficiency and stability for all businesses as we continue to move forward.
The clarity outlook highlights a return from a year of disruption. But the world continues forward and new issues, like supply chain challenges, inflation increases, and the struggle to keep and maintain the workforce bubble up to the surface. Scarce resources were already highlighted, and now these issues have intensified in some areas. While many thought the pandemic would be over by the summer, it continues to linger on and issues that were not planned are emerging in new ways. As always, the federal contractor will need to stay agile and respond accordingly.