Federal Contracting Trends for 2023 – Part I

Jun 10, 2023

2023 is here with many challenges and opportunities for government contractors!

From new regulations to more competitive bidding environments, this year is sure to present its own unique set of hurdles. Continuing resolutions, executive orders, rule modifications, inflation, the talent war, continued support for Ukraine, and other concerns are some of the reasons behind this. To ensure success, government contractors must equip themselves with the right skills and strategies to capitalize on this year’s federal contracting trends.

Many businesses view the beginning of a new year as an opportunity to examine their commercial finances, strategies, and objectives in great detail. What better way to create a strategy for success in the federal market than to take a closer look at trends in government contracting?

This blog explores the key areas government contractors should focus on in preparation for 2023. Many of the trends in this blog are based on Deltek’s recent Federal Contracting Trends to Watch in 2023 report. We have provided in-depth insights on how government contractors can prepare to meet the challenges and opportunities posed by these trends.

1. Uncertainty in the Budget

The $1.65 trillion omnibus bill funding the government through September was recently signed into law by President Biden. Although the bill gives government agencies near-term confidence and a sense of stability, as we get closer to FY 2024, instability and uncertainty may return.

There are many reasons, including changes in the Congressional House leadership. A change in leadership often leads to changes in the priorities of the committee and, in turn, changes in the allocation of government funds, spending reductions, and increased oversight of authorized funding. Sometimes, funds may be redirected from certain programs to others. This can directly impact the funding levels of specific agencies and programs and is of interest to the industries and companies that rely on those funds.

Other reasons for budget uncertainty include the impending debt ceiling, which may result in spending reductions and increased oversight of authorized funding. Other factors, such as the time-consuming nature of the acquisition process and potential budget restraint and deficit-reducing measures following the pandemic, will also play a role in this regard. Each of these factors is likely to impact planned agency budgetary expansions.

It is essential for government contractors to be aware of these changes and to be prepared to adapt to any new priorities or funding levels.

How to Prepare
Government contractors can deal with budget uncertainty by implementing the following strategies:

  • Staying informed about changes in congressional leadership and the potential impact on funding and regulations.
  • Regularly reviewing the procurement landscape for new opportunities and staying informed about acquisition trends and changes.
  • Planning for potential spending reductions and budget restraints by diversifying your company’s customer base and building relationships with a more diverse mix of government and commercial clients.
  • Being proactive in identifying potential cost savings and efficiency measures within your operations to become more competitive in the event of budget reductions.
  • Building strong relationships with key stakeholders and decision-makers in the government to increase visibility and understanding of the value you bring to the government’s mission.
  • Being flexible and agile to adapt to changes in funding and regulations and being able to adjust your business plans as needed quickly.
  • Focusing on delivering high-quality products and services that meet or exceed customer expectations to increase the likelihood of continued funding.
  • Being proactive in identifying opportunities for collaboration and partnerships can help mitigate the impact of budget cuts and increase your chances of winning contracts.

2. A Recessionary Outlook

According to the Bloomberg Economics forecast model, there is a 100% probability of an economic recession in the United States this year. Apprehensions of an impending recession are likely to be a continuing trend. And these projections will continue to be a source of anxiety among government contractors this year.

How to Prepare
Historical data and conventional economic wisdom reveal that the government marketplace tends to be recession-proof to a considerable extent. As we move into 2023, it’s a good idea for federal contractors to have a plan in place to manage through a recession and be aware of the potential risks and opportunities that a recession may present. In this economic uncertainty, small or struggling businesses can pursue government contracts to stabilize themselves. Businesses that recognize and capitalize on government contracts won’t just survive this economic storm; they will thrive and emerge even stronger. For government contractors, the key is to stay optimistic and seek new government opportunities to create revenue in this environment. Contractors should have a diversified portfolio of work in place and a mix of commercial and government work that can buffer the impact of a recession on business.

3. Inflation – Good and Bad News

The bad news is that government contractors will continue to experience some inflationary increases in intermediate and final goods, energy, and talent. Many businesses will take time to recover from a period of heavy inflation. The good news is that things might improve in 2023. Inflation rates are expected to decline slightly per the Federal Reserve, and the Congressional Budget Office’s (CBO) estimate based on the Personal Consumption Expenditures (PCE) index.

This is expected due to reduced supply disruptions, lower energy costs, slower growth in the prices of goods, and monetary policy. While 2023 inflation rates will be higher than the norm, they continue to decline, from an overall peak of 8.3% in August 2022 to 7.7% in October 2022. Therefore, it is reasonable to expect a gradual decline in the cost of goods, but it’s also important to be cautious.

It is a difficult situation for small businesses, but with the right mitigation strategies, they can survive and weather the storm until the economy recovers from its ongoing inflationary pressures and returns to normalcy.

How to Prepare
Government contractors can deal with high inflation rates by implementing the following strategies:

  • Reviewing and renegotiating contracts with the government to ensure that prices are adjusted to reflect inflationary pressures. Economic Price Adjustment (EPA) clauses may become more common in fixed-price contracts as the government tries to alleviate the inflationary pressure faced by contractors. However, this flexibility will vary across agencies based on their respective budgets. When reviewing prospective RFPs/RFQs that do not include an EPA clause, consider asking the government to include them during the Q&A process. EPA clauses can account for unexpected cost increases due to inflation and allow a government contractor to seek an adjustment. DoD’s willingness to use EPA clauses to address the current inflationary period is a welcome development for defense contractors. At the same time, contractors should know that EPAs bring special regulatory burdens and should be prepared for those burdens before accepting an EPA clause.
  • Contractors should consider rethinking their mix of contracts and focus on those with reasonable risks and incentives for better performance. In these circumstances, cost-type contracts, rather than FFP contracts, may offer the greatest protection. In the past, companies normally desired a larger percentage of fixed-price work and were willing to absorb the risks due to the potential upsides of such contracts. Since savings from such contracts went back to the government, cost-plus contracts were less favored. However, in this inflationary environment, companies with FFP work are experiencing the opposite.
  • Utilizing cost-saving measures such as automation, process improvements, and outsourcing to maintain profitability.
  • Proactively identifying and mitigating supply chain risks to avoid unexpected cost increases due to shortages or disruptions.
  • Building long-term relationships with suppliers to negotiate better prices and terms and to minimize the impact of inflation on inputs.
  • Diversifying their product and service offerings to reduce reliance on any single product or service and to mitigate the impact of inflation on any one area of the business. Contractors with limited eligibility for relief need to find ways to shift growing costs into non-government areas that allow for easier use of price levers (such as the commercial or consumer markets).
  • Reviewing and adjusting pricing strategies to ensure they remain competitive in the market and maintain profitability. With rising costs and increased competition, contractors must look closely at pricing strategies and ensure they use all the available tools to remain competitive. Contractors must balance the risk between pricing that results in bids much higher than the competition and low pricing resulting in significant losses. Small businesses will be uniquely challenged in this regard. Overestimating inflation can lead to significantly higher bids than the competition’s, but underestimating it can result in sizable losses on a contract.
  • Keeping an open dialogue with their customers to understand how inflation impacts their operations and collaborate on solutions.
  • Staying informed about economic and inflationary trends and being prepared to adapt business strategies as needed.
  • Reviewing the impact of inflation on their workforce and the possibility of raising the wages and benefits to maintain the talent. This can be done through employee incentives empowering key personnel weathering today’s challenging financial environment. To retain key employees, some mid-tier contractors have made proactive salary adjustments or given one-time bonuses at year’s end.

4. An Increased Focus on Small Business Participation

There are good reasons to believe there will be an uptick in the share of opportunities available with small business set-aside requirements. The current Administration has made increasing the share of small businesses receiving government contracts a top priority, and small business targets and agency equity plans are designed to lower entry barriers and open up opportunities for small businesses from all socioeconomic backgrounds. The federal government and agencies set percentage goals for how much contracting business should be set aside for small businesses every year. Currently, the goal is to increase Small Disadvantaged Business (SDB) awards to 15% of total federal contract spend by 2025, which means an additional $100 billion in contract awards to small businesses. Several mid-sized businesses may now be eligible as small thanks to the revised 380 new size standard requirements published in May and October 2022. Many eligible contractors will benefit from this.

How To Prepare
Small business government contractors can increase their chances of benefiting from the government’s initiative on increasing small business participation in federal contracting by implementing the following strategies:

  • Understanding the government’s small business procurement goals and regulations and identifying opportunities aligned with their capabilities and strengths.
  • Utilizing small business certifications, such as 8(a), Women-Owned Small Business (WOSB), HUBZone, or Service-Disabled Veteran-Owned Small Business (SDVOSB) to increase visibility and access to set-aside contracts.
  • Building relationships with prime contractors and government agencies to increase visibility and understanding of their capabilities and to identify potential teaming opportunities.
  • Building a strong online presence through the System for Award Management (SAM) and other government procurement portals to increase visibility and access to opportunities.
  • Networking and participating in industry events, such as trade shows to increase visibility and make connections with potential customers and partners.
  • Building a strong compliance program to ensure all regulations and requirements are met to demonstrate good faith and increase the chances of winning contracts.
  • Offering competitive prices and providing high-quality products or services to increase the chances of being selected for contracts.
  • Building a strong team with the necessary technical and management skills to increase the chances of winning contracts and successfully executing them.

5. An Emphasis on Supply Chain Resilience

The COVID-19 pandemic, the conflict between Ukraine and Russia, cybersecurity concerns, and other events have all contributed to global supply chain challenges, making it crucial to ensure the US supply chain is dependable and resilient.

Supply chain security and restoring domestic manufacturing capacity are now priorities for the federal government. This entails increasing domestic content production and a preference for products made in the United States. There have been significant changes to Buy American laws over the past year. This includes incorporating a Final Rule into the Buy American Act (BAA) to increase the domestic content requirement from 55% to 60% and eventually to 75% by 2024. Additionally, it mandates the use of iron, steel, and other building materials made in the United States under the Build America, Buy America Act.

We’ve noticed that many government contracts now have Supply Chain Risk Management (SCRM) requirements built into them, and we anticipate that contractors will need to focus primarily on the strength and longevity of their supply chains in 2023. New software and cybersecurity supply chain regulations will need to be incorporated into the operations of IT contractors in particular. Supply chain resilience is important for the US government because it ensures that essential goods and services can continue to be provided to the public during disruptions, such as natural disasters, economic downturns, or geopolitical conflicts. A resilient supply chain is important for national security as it reduces dependence on foreign suppliers for strategic goods and services.

How To Prepare
Government contractors can improve the longevity of their supply chain and reduce risks by implementing several best practices, such as:

  • Conducting thorough supplier assessments and due diligence to identify potential risks and vulnerabilities in the supply chain.
  • Establishing clear and consistent communication with suppliers to ensure compliance with government regulations and requirements.
  • Developing and maintaining a comprehensive supplier management program that includes risk management, performance monitoring, and continuous improvement.
  • Creating a comprehensive risk management plan that addresses potential risks and vulnerabilities across the entire supply chain.
  • Utilizing technology to automate and streamline supply chain management processes to help ensure compliance with government regulations and requirements.
  • Regularly reviewing and updating policies and procedures to ensure they remain compliant with current regulations and industry best practices.
  • Building long-term relationships with suppliers to increase the stability and security of the supply chain.
  • Participating in relevant industry groups and forums to stay informed of the latest developments in supply chain risk management and compliance.

2023 is shaping to be an exciting and challenging year for government contractors. With new funding sources, expanding compliance requirements, and a focus on small business contracts, it’s important for contractors to stay ahead of the curve. As always, paying close attention to the latest market intelligence is critical for success, iQuasar’s team of proposal writers and managers will help you navigate this complex market by helping you find and prepare compliant proposals in response to federal, state, and local contracting opportunities that fit your business.

Part II – Federal Contracting Trends for 2023

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