Government Contracting, “The State of the Industry”
Written By: Michael C. Bagley, Partner and Chief Credit Risk Officer of GillmanBagley
Election Day, November 5th, 2024, marked the beginning of a shift in the United States contract spend impacting both its volume and scope of performance. Well maybe not… wait… did it?
The landscape surrounding government contract funding is like the changing of each season. Just as summer runs into fall, the relevant policies, parties, and procedures run through cycles which inherently are predictable. On the other hand, the makeup of the chambers and the administration can create wide variations of uncertainty. Processes known to cycle annually contribute positively to our confidence level as a funding source for the industry, yet the sheer magnitude and scope of the Federal Government makes one steer away due to perceived debtor risk. In this article we’ll discuss ‘The State of the Federal Government Contracting Industry’ and its impact on Factors.
Contract Award Factoring
As a matter of background, the U.S. Government has developed various strategies since World War II which assist the economy by naturally stimulating businesses of all sizes with economic growth. Politics aside, the system was designed to allow for the careful interaction of government officials and the business community while maintaining a high level of propriety. Many conforming processes are well documented in code, agency policies, procedures, and technical rules. Most notably recognized is the Federal Acquisition Regulation or F.A.R. which is the Contracting Officer’s rule book for engaging with registered Federal Contractors. My personal involvement in this community came by way of commercial lending with an eventual move to a niche factoring firm which had as one of its specialties, Federal Government account receivables.
As many of you have experienced, terms such as the F.A.R., SAM.gov and Assignment of Claims are commonplace, but one can be quicky overwhelmed by this plethora of acronyms which, without Google, would leave us at a loss. Acronyms for 3 letter agencies, military short names, certifications such as SDVOSB, 8(a), WOSB, or portals like WAWF, IPP, VIPERs etc. will all be inevitably named dropped on almost every single underwriting and sales call you come across. Fortunately, these terms can be learned and understood. However, the vast risk difference(s) between factoring an account owed for finished goods or completed services compared to contract performance risk of long-term contracts is more difficult to understand and therefore must be examined in order to be mitigated. A lack of understanding of the Federal Government’s budget appropriation, procurement bid process, contract award and invoice billing systems has inherently caused collection challenges and even losses within the factoring industry. During the prior twenty years, Federal Government Contractors AKA GovCons (and by extension their financial partners) have been impacted by the various agendas of both major political parties under four different executive administrations and various military engagements & war. Further, the United States Government shut down three times and Congress even enacted budget sequestration once. Unless, a person is engaged in politics or simply enjoys U.S. history, many of these events passed with only moderate media enlightenment or awareness. Regarding the factor involved in contract support, some of these details greatly matter, while others mildly shift one’s focus. As we continue, I’ll work to answer presumed risk related questions and explain some of the routine cycles with a focus on the foreseeable future.
Administration’s Political Affiliation
Each administration controlling the White House has an apparent impact on the type of contracts awarded during their occupancy and control. However, the United States Government is the largest buyer of goods and services in the world, impacting all levels of government, so is it possible that a specific administration can change the performance scope or volume of contracts awarded? The answer is both yes and no. As mentioned above, despite a high level of conformity, each administration is given a mandate by its electorate to fulfill an agenda. As such, one party may focus heavily on green initiatives and environmental concerns while another may engage the oil and gas industry positively and consider environmental regulation to be prohibitive. The President of the United States may utilize Executive Orders (E.O.) to move his agenda forward, even though they may be challenged by either chamber. An E.O.s will move fast and convert to a contract award promptly after an agency’s budget is identified. It is entirely possible that one Administration has a higher volume of Environmental Protection Agency (EPA) or Department of Education (DOED) contracts, while another grows volume in the Department of Energy (DOE) or Department of State (DOS). Regardless, shifting funds between agencies to meet administrative priorities does not matter to a perspective factor, as each agency is mandated to spend a certain percentage of its budget on small business i.e. a factor’s primary client.
Experientially, two of the government shutdowns mentioned above were caused by the standoff over the Affordable Care Act in 2013 during the Obama Administration and by a dispute over expanding barriers on the U.S.-Mexico border in 2018-2019 during the first Trump Administration. In both cases the controlling administrations were engaging in their respective agendas while causing the U.S. Government to shut down without an appropriations bill or a continuing resolution. During these periods, the government furloughed employees and ceased nonessential operations. Regardless of agency or department, one notable risk was that the people working in the payment offices were deemed nonessential. Let that sink in… as a factor, our obligations aged as we maintained payroll funding for our GovCon clients. Eventually, the shutdown ceased, a budget was passed, and contractors were paid. Factors engaging in contract award factoring must proactively consider the administration’s agenda while understanding the budget and appropriations process engaged annually by congress.
The Budget’s Impact
Factors engaging GovCons and supporting their efforts should be knowledgeable of the general breakdown of the U.S. Government’s budget. So, let’s break it down. In 2023, the U.S. Government “outlays” were over 6.1 trillion dollars. Of which more than half (3.8 trillion dollars) were spent on mandatory spending which includes Social Security, Medicare, Medicaid, and other programs. An additional 659 billion dollars carried the net interest incurred by the national debt, while the remaining 1.7 trillion dollars were spent almost equally on nondefense and defense with defense comprising 47% of all discretionary spending. This spending is somewhat agnostic to the current and active administration due to the mission of the DOD. The DOD’s mission is to deter war and ensure the nation’s security therefore the U.S. budget will always lean towards heavy spending on DOD initiatives whether on peace through strength programs, training, equipment or on deployment of personnel. With nearly half of the discretionary budget falling to defense, skilled contractors serving the military community will remain certain while the remaining half will shift left and right amongst the other non-defense agencies. Therefore, the factoring industry and especially those specifically engaged in the GovCon community have access to factor contract awards with appropriated annual funds of 1.7 trillion dollars. However, buyers beware! Know your customer or should we say to know your contractor, the agency, and the ever-changing rules.
Systemic Changes and Modernization
It behooves me to mention “The State of Operational Conditions” (aka GovCon factoring compliance) is relatively stable except for a few notable technicalities. Operationally managing a GovCon portfolio of accounts receivable is not dissimilar to traditional factoring where an underlying contract or master service agreement may exist. However, it is unique and varies vastly in process, technical procedures, and legality. The associated rules and regulatory processes tend to evolve when modern conditions change. For example, and as discussed earlier, we’re often the recipient of a new acronym or term which catches us off guard. Most recently, we’ve experienced a higher use of “BPAs” as a common form of contract vehicle. A BPA, or Blanket Purchase Agreement, does not have a value but does have a generic scope. Without an order issued underneath, it is worthless much like an IDIQ and should not be funded alone. IDIQ, or an Indefinite Delivery, Indefinite Quantity contract is awarded to at least one contractor and may be award to multiple contractors designated to a specific large scope of work. In both cases, the contractor is eager to set up a funding solution while being unsure if an actual order will be issued.
Another common discussion is whether an electronic signature is required on an Assignment of Claims (AOC). The rules for the contracting officer pertaining to an AOC are easily found in the F.A.R., however it was written in 1940 with instructions which align to the use of carbon copies and ink signatures. However, the Electronic Signatures in Global and National Commerce Act, (ESIGN Act) allows for electronic signatures. These seemingly easy to reconcile differences may appear obvious, but not all contracting officers are keenly aware of how each Act should or does interact without internal legal advice.
More importantly, are the presence or lack thereof certain clauses within an award presented for funding. One clause to search for prohibits the Assignment of Claims while another affirms it. And the absence of either clause does not preclude an assignment either. A second important clause prohibits the use of subcontractors by stating the work must be self-performed. This is essential in underwriting the contract as it may cause a performance issue should subcontractors be utilized. And more recently, contract modernization was recognized by the presence of a set of Artificial Intelligence (AI) clarifying questions. In a recent request for proposal we notated that the officer sought to understand if AI was used to generate the bid and if so for what percentage. The request further, sought to understand if AI is going to be utilized in the performance of the contract. These matters pertaining to AI will most certainly result in a future contract clause being written.
2025 and Beyond
The recent U.S. Presidential Election has caused a shift in the future control of the Executive Branch via Trump’s upcoming second term in office. Barring all similarities to the past regarding party affiliation and usual agenda, the next four years could reflect dramatic changes in spending patterns across various agencies should Trump’s agenda aggressively manifest. His agenda as defined thus far calls for sharp budget cuts and the elimination of entire departments and possibly whole agencies. If these goals are achieved, spending may be significantly offset by the cost incurred to potentially deport millions of undocumented people from the country. It’s clear that the incoming administration is determined to achieve unpresented changes within the Federal Government infrastructure, but our system of government is designed with checks and balances that are designed to slow change. However, with both the upper and lower chamber being majority held by the Republican party along with the White House, the Republicans have a “trifecta” which will enable the Administration to move its agenda quicker through the system.
Next, although this period following Election Day has already proven to be interesting, it has not yet affected a shift in contract awards. More notable is the ending date for the current continuing resolution (C.R.) which is December 20th, 2024. If a budget or an additional continuing resolution is not passed, the Federal Government will shut down yet again. This fact is more concerning for the GovCon and their factoring partner than any other period during the Federal Government’s annual budget process. Outside of this window, risk is limited when a factoring partner follows procedures, properly underwrites each client, and master’s the contract award process.
Conclusion
The State of the Federal Government Contracting Industry swings much like a pendulum. The upcoming two years prior to the next major election, will respond like the pendulum is stuck sideways and right of center due to the Republican’s trifecta and Trump’s Agenda. Budgetary spending on mandatory outlays will certainly continue while discretionary spending will shift around amongst the various departmental agencies. The war in Ukraine and unrest in the Middle East will continue to impact decisions made by both the outgoing and incoming administrations. The outgoing administration has proposed the largest budget in U.S. history of 7.3 trillion dollars for fiscal year 2025. Whether the incoming administration can carve it back remains to be seen. It’s also too soon to foresee if the mid-term elections will result in a leveling of seats in both chambers which may curve the Republican trifecta. Regardless, factoring in this community will remain robust and lively for the foreseeable future.
About Michael Bagley
Partner, GillmanBagley
For three decades I’ve been involved with both client and employee relationships within the financial services industry. During this time of serving people and businesses alike, I’ve learned to focus on the individual most directly impacted by the value of the service provided. This focus has given me a personal motive of service as I tell my team, “it’s all about people”. As a founding partner of GillmanBagley, I’m especially excited to drive our mission which is to provide the highest standard of service and products available through a personal consultative relationship. Michael can be reached at michael@gillmanbagley.com.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.