If you thought federal contracting spending exploded last year, you’re right
Last year was a good year to be a federal entrepreneur due to the pandemic and a few other things. Federal contractors spending rose double digits. And there have been some changes to the list of the biggest federal contractors. Federal Drive with Tom Temin got the highlights from Bloomberg Federal Market Analyst Laura Criste.
Tom Temin: Laura, good to see you again.
Laura Criste: Thank you for.
Tom Temin: And this is the annual release of the Bloomberg Top 200 but first, give us an idea of the rise in spending. I mean, these were pretty dramatic.
Laura Criste: Yes, so in fiscal 2020 it was a record spending of $ 682 billion, which is pretty crazy, just comparing it to the previous year of $ 599 billion for the fiscal year. 2019. As you said, this was largely due to COVID. But we can also talk about some of the other trends.
Tom Temin: Yes, COVID. I think we understand a lot of the expense, and it was all over the place. Were there other factors causing this, although last year?
Laura Criste: Yes. So two areas we really like to focus on at Bloomberg Government are IT and Professional Services. And both of these markets would likely have increased in fiscal 2020, compared to 2019. Historical trends have shown that they will increase. It’s a bit difficult to completely separate COVID-related spending from regular market spending. But just based on what we’ve seen happen in those two markets, I think both would have continued with IT in particular, with COVID we’ve seen more remote work type spending increases. It was therefore about material and security. But we’ve also seen things like increased spending on IT modernization, which most likely would have continued to rise even without COVID.
Tom Temin: And which agencies were responsible for the biggest increase in spending?
Laura Criste: The main agencies will therefore be HHS, which will be mainly COVID. We are going to talk about it a lot I think, even if people are tired of talking about it. VA spending increased and it wasn’t necessarily because of COVID. There’s a big deal called Patient-Centered Community [Care] with TriWest. They provide medical services, and it wasn’t all COVID. The VA has increased by about $ 3 billion due to the pandemic. But overall it has increased by over 10. So we saw some increases there that weren’t related to the pandemic. The Navy has seen a sharp increase, mainly due to purchases of F-35s. So these are sort of some of the big ones I’ve seen.
Tom Temin: And there has been a fairly healthy increase in the use of other transaction authorities as well. And I think that’s something the industry likes to get. And that’s definitely something the government likes to do, because it’s easier than attributing under the FAR.
Laura Criste: Of course, yeah. We have therefore seen an increase in OTA in recent years. And that’s something my team has covered quite extensively. For a variety of things like prototypes and R&D type contracts, IT has become more common for OTA use. But in fact, again, the big increase for OTAs – it was going to be in the medical field in R&D to help develop vaccines and medical equipment due to the pandemic.
Tom Temin: So, was Operation Warp Speed part of the contractual expense, the expense to develop the vaccines in the first place?
Laura Criste: I’m not 100% sure if this overlaps. I haven’t seen Operation Warp Speed appear in OTA stuff specifically, but –
Tom Temin: I just meant in the expenses of the general contractor.
Laura Criste: Oh, yeah, it popped up. I mean, you can see the vaccines being developed, you can see the logistics of moving them from one place to another. Manufacturing – you find it in the contract data.
Tom Temin: Okay, and you’re projecting a pretty good year for 2021 based on the trends you see, just give us a sense of where this is going.
Laura Criste: Spending in 2021 is therefore a bit difficult to predict. In the report, you probably saw that we have a pretty wide range of projections going from $ 600 billion, which matches FY2019 levels to $ 695 billion, which is above FY20 levels. And the reason is the stimulus money, it’s a little hard to know, are we going to keep increasing with the COVID stimulus spending? CARES law money expires at the end of fiscal 2021, but [American Rescue Plan Act of 2021] money doesn’t, at least not all. So we can see this multi-year money and we don’t know exactly when the agencies are going to spend it. But we’re sort of projecting into that pretty wide range. Some areas where we think there will be increases will be IT and professional services as we talked about. For IT in particular, with the executive decree on cybersecurity from Biden, and in general the administration’s focus on cybersecurity, and then also with this executive decree on the cloud. So we expect IT to increase in these two areas in particular. And then in IT modernization in general – digital services is another area where agencies are sort of trying to improve themselves. So these are areas where we certainly expect increases in 2021.
Tom Temin: We chat with Laura Criste, Federal Market Analyst at Bloomberg Government, and move on to ranking entrepreneurs. I guess people won’t be surprised to learn that Lockheed Martin has remained Federal Entrepreneur No.1, but by a margin of almost three to one over the next, No.2, which is Raytheon. Not quite three to one, two and a half to one. So, they’ll never be toppled, right?
Laura Criste: I don’t see it, it’s a little difficult to overthrow your top aircraft producer, especially in fiscal 2021 when they received over $ 24 billion just for the F-35, this which is, I think, about a third of what they’ve been forced into in fiscal 2020. I’m not sure that will continue to be the case with the new administration, we’ll have to see what happens over the next year. year 2021 with regard to this level of expenditure. But I don’t think they’re going to get knocked down anytime soon.
Tom Temin: And you mentioned TriWest Health Care Alliance in that big VA case. They therefore went from n ° 42 to n ° 9 in the top 200, which explains this one. There was one bizarre one, however, that dropped from some 130,000 on the No.29 list: Amentum Patent Holdings. And what was the phenomenon there?
Laura Criste: Amentum in fiscal 2019 was not really a business. AECOM therefore sold its management services division, Amentum. So it kind of went from not really existing to # 29. And what’s quite interesting is that AECOM, so it ranked 19 in FY 2019. So you can compare Amentum. to that kind of, but they weren’t one of them. – the whole company has not budged. But AECOM fell to # 95. So you can see that Amentum was a big part of AECOM and when you split them up you get # 29 and # 95, up from 130,000 and # 19. So we still have two companies now in the top 200, rather than one, I guess. It was a big company before and still is.
Tom Temin: Okay, but at $ 2.6 billion that’s not trivial sales. And it looks like to be on the 200 list you have to start with around $ 359 million in sales to make that list. So there are many, many, many, many small entrepreneurs. But among that top 200, there are people who are approaching the hundreds of millions and billions of dollars.
Laura Criste: They are all quite big.
Tom Temin: Okay, so what else we need to know about this top 200 list?
Laura Criste: I think a few others that might be interesting that we talked about are Fisher Sand & Gravel. This one won big contracts on the border wall in FY2020, so we may not see it next year. And we’ll have to see what happens with that, it’s a little hard to end the contracts once they’re started. But I know the Biden administration wanted to try and do it. And then analytical services was another area that I found interesting, because it has a corporate subsidiary called ATI and they run consortia. They’ve gone to # 6. They keep increasing, in fact, every year because of this subsidiary that runs these consortia because of all the OTA transactions that go through that company. So it’s a little weird where the business doesn’t actually get all that money, but it keeps appearing higher and higher in the BGov 200 because that money goes to other entrepreneurs, so maybe a good consortium or a set of consortia to join for our auditors? Because they might earn some of that work that goes through ATI or analytics.
Tom Temin: And finally, the number of mergers and acquisitions has decreased somewhat in 2020, compared to ’19 and ’18, where there were around 400. What do you attribute this trend to?
Laura Criste: I attribute this to the pandemic as well. I think companies were afraid to spend a lot of money because they didn’t know what their financial situation would look like. We’ve actually seen at least in the IT market that FY2021 M&A is likely to more than make up for shortfalls in M&A activity, or I don’t know if you want to call it that, but the decline in 2020 with mergers and acquisitions. More and more companies may be buying the companies they were thinking of before, or making those investments now rather than when they were a little more worried about what the economy might look like.
Tom Temin: Well, one thing you can say, this market is always exciting, isn’t it?
Laura Criste: Ah of course. Always a lot of changes.
Tom Temin: Laura Criste is a Federal Market Analyst at Bloomberg Government. Thank you very much for joining me.
Laura Criste: Thank you.