Looking back, it has been an eventful year in the government contracting industry, but there are plenty of reasons to be optimistic for the year ahead — including several trends to watch for.
Last year, I wrote about significant trends for 2022 that were expected to impact how government contractors operate in the coming year. Those items were backed by data coming from Deltek’s GovWin IQ platform of government contracting intelligence, supported by our team of 150+ expert research analysts. We identified compliance, contract consolidation, an increased focus on small businesses and new sources of funding and appropriations as the key trends to watch. It’s safe to say those themes did indeed turn out to be significant for nearly all types of government contractors this year.
This year, my team has identified 10 key trends expected to have an effect on government contractors and provided additional context behind how and why they will impact the industry in the months ahead.
- 2023 appropriations followed by the return of budget uncertainty. Questions about government budgets and spendings always seem to be at the top of the list. Congress provided agencies and the companies that serve them with a holiday gift by passing appropriations for 2023. The omnibus bill provides $1.7 trillion in funding for FY 2023, an increase of roughly 8 percent from the prior year. While that provides near term certainty, stability and growth for federal agencies, with changes in Congress and the debt ceiling approaching, uncertainty is likely to return as we approach FY 2024.
- Inflation outlook. Questions about impacts from inflation go hand-in-hand with uncertainty about the budget. Although inflation rates are expected to decline at least somewhat, government contractors across a wide range of industries are still experiencing challenges or recovering from a period of heavy inflation. Going forward, they will continue to experience some inflationary increases in intermediate and final goods, energy and talent. With costs higher and increased competition, contractors will need to take a close look at pricing strategies and make sure they are using all the tools they have available to remain competitive.
- Small business support. Increasing small business government contracts is a major priority for the Biden Administration, with agency equity plans and small business targets intended to lower barriers to entry and create opportunities for all socioeconomic small businesses. As government agencies continue to actively work to try and draw in new small business entrants, small, disadvantaged businesses, to participate in the public sector marketplace, there should be more opportunities available with small business set-aside requirements.
- Supply chain. Global supply chain issues, spurred by the COVID-19 pandemic, the Ukraine/Russia war, cybersecurity concerns and other events have made ensuring the resilience and trustworthiness of the U.S. supply chain a top priority. And in 2023 we expect contractors will need to pay special attention to the health and durability of their supply chains. IT contractors in particular, will have new software and cybersecurity supply chain rules to incorporate into their operations.
- Adoption of GWAC/IDIQs. Contract consolidation, category management impacts, small businesses accessibility concerns and agency efforts to increase competition for task orders are expected to continue. This for contractors to position themselves well to be competitive on governmentwide acquisition contracts and indefinite-delivery/indefinite-quantity contract vehicles. With more contracts being consolidated into fewer, larger vehicles, every edge that a business can get over its competitors will be crucial in order to set themselves apart.
- Cybersecurity compliance. Numerous policies and initiatives to achieve government-wide cybersecurity objectives have been adopted impacting compliance requirements for product and service providers. Chief among those is the long-awaited Cybersecurity Maturity Model Certification 2.0, planned for roll out in 2023. Government sellers in all industries, not just information technology, should watch this closely as well as numerous other cyber related policies of the Biden administration.
- Workforce trends. Contractors have been dealing with and will continue to be impacted by the effects of the ‘Great Resignation,’ along with increased wages due to inflation. Agencies will continue to be in fierce competition for talent as a wave of retirements in the public sector is expected to continue. Both agency and business leaders will be facing similar challenges in hiring, recruitment, retention, diversity, inclusion, skill development and demand for a flexible work environment.
- Environmental, social, governance initiatives. The Biden Administration’s focus on ESG will drive additional climate-related policies, regulations, funding and initiatives, including those increasing oversight of contractors’ environmental impact. Similarly, as agencies keep ESG initiatives more front of mind, we expect that environmental and social responsibility will become significant factors in bid evaluation decisions.
- Digital transformation. Agencies are focusing more closely on modernizing their IT capabilities and digital transformation priorities. Some of the technology areas they are paying close attention to are cybersecurity, cloud computing, artificial intelligence and machine learning, 5G communications, quantum computing, blockchain and customer experience capabilities. Sellers of these products and services have a major opportunity to partner with government to transform government services and operations.
- Mergers and acquisitions. Companies that have mergers and acquisitions as a big part of their plans for 2023 will face intense competition with other buyers and agencies wary of the impact of mergers. With agencies devoting more resources and directing more oversight at M&A efforts, contractors planning M&A in the year ahead will need to develop strong due diligence efforts and be prepared to address regulators concerned with the impact on competitiveness, supplier diversity and small business contracting.
How to prepare for these 10 government contracting trends in 2023
These are just a few of the trends that we expect to be significant to government contractors in the next 12 months. With 2023 appropriations in place, agencies are poised to move forward with strong investment plans underpinned by significant budget increases. Many of these, such as the uncertainty of future federal budgets and the potential for continued (or reduced) inflation, will be in flux over the course of 2023. As always, paying close attention to the latest market intelligence is critical for firms to succeed.