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»

Now What?

Federal Market Outlook After

March Budget Madness BRIAN FRIEL

PRIVIA ACHIEVE 2013

FEBRUARY 20, 2013

Federal Business Intelligence Analyst

KEVIN BRANCATO

Senior Defense Analyst

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1

SEQUESTRATION OVERVIEW

Background

Bloomberg Government estimates $85 billion in annualized

March 1 cuts split between defense and nondefense

» Defense = $42.7 billion/7.3 percent, mostly discretionary

» Nondefense discretionary = $27.4 billion/5.3 percent

» Nondefense mandatory = $15.4 billion, percentage varies

» Additional $12 billion defense-only cut occurs March 27.

Impact on specific programs is difficult to determine

» Law says every “program, project and activity” must be cut

equally; neither law nor Congress clearly defines “PPA”

» OMB may allow some discretion in how cuts are applied

Contractors should prepare for cuts

» Cuts to future contracting opportunities; modifications or

cancellations of existing contracts

Budget Control Act of 2011, as amended, mandates

sequestration on March 1, 2013, lowers spending caps for

fiscal 2014-2021 to achieve $1.2 trillion in overall savings.

Continuing resolution funding government operations expires

March 27, 2013, same day as defense-only second

sequestration set to hit.

Impact

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2 SEQUESTRATION ESTIMATES

Contractors to Take $30.8 Billion Sequester Cut: BGOV Insight

» http://www.bgov.com/news_item/Z-oN793yKThmWks5X_RaeA

ADDITIONAL BGOV

SEQUESTERATION

RESEARCH

» Nine Federal Programs

Face Budget Chopping

Block

http://www.bgov.com/ne

ws_item/lQfE9nnVck-

pHRNyfd_M-A

» Defense Contracts

Plunged 67% in

January as U.S. Cuts

Loomed

http://www.bgov.com/ne

ws_item/qjVGrZtCF1nb

pKqIWKjrTw

Department

Contract

Sequester

Agency

Sequester

Percentage

Agency

Sequester

(Incl. Mandatory)

Agency

Discretionary

Sequester

Defense $23,148 7.3% $40,863 $40,827

Energy $1,657 6.5% $1,791 $1,775

HHS $1,036 5.3% $15,838 $4,316

DHS $853 5.4% $3,325 $3,059

NASA $823 5.3% $949 $949

DOT $508 5.3% $2,129 $1,748

State $481 5.3% $1,687 $1,685

Justice $355 5.6% $1,708 $1,557

Treasury $335 5.3% $1,243 $759

Agriculture $289 5.3% $2,018 $1,281

Int’l assistance

programs

$279 5.3% $1,298 $1,291

Commerce $250 5.3% $616 $603

Interior $171 5.3% $923 $684

Labor $123 5.3% $1,510 $671

HUD $133 5.3% $3,206 $3,206

EPA $89 5.3% $498 $496

Education $73 5.3% $2,613 $2,417

SSA $46 5.3% $304 $304

NSF $24 5.3% $382 $377

Judicial branch $23 5.3% $362 $348

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3 HOW DOD MIGHT MANAGE O&M SEQUESTER

DOD wants to treat O&M

differently from acquisition

accounts

» Defining PPA as entire

account

» Would allow for more

discretion to trim spending by

different percentages within

accounts

» OMB or Congress could

object to DOD’s

interpretation and selective

cutting

Training and Education

Land Forces

Recruiting, Advertising and

Examining

O&M Account

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4 SEQUESTRATION OUTLOOK

Scenario 1: March short-term deal

» Negotiators use sequestration effects to drive deal to replace or put off this

year’s sequestration cuts

» Sets funding levels for rest of this fiscal year. Leaves further battles for fiscal

2014 appropriations process.

Scenario 2: No short-term deal, sequester proceeds per current law, no sign of

long-term deal

Scenario 3: Long-term deal begins to take shape in March

» Negotiators buy two-month delay of sequester with $24 billion in replacement

or delayed cuts.

» Budget process used to work out details of trillion-dollar deal.

Most likely outcome:

» Sequester begins

» Need to deal with continuing resolution forces action by March 27.

» Snowballing effects of sequester require short-term fixes

» Budget battles continue through at least fiscal 2014 appropriations cycle.

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5 MARKET OUTLOOK

Sequestration could

cut $30 billion from

contracts in fiscal

2013.

Market could settle

over next few years at

$450 billion to $500

billion.

War drawdown

biggest factor.

Across-the-board dips

as agencies issue

fewer, smaller, shorter

contracts.

Policy drives

procurement.

$0

$100

$200

$300

$400

$500

$600

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003*

2004

2005

2006

2007

2008

2009

2010

2011

2012

Billio

ns

Federal contract spending (2011 constant dollars)

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6 MARKET OUTLOOK

Fewer contracts as agencies

rethink acquisition strategies

and consolidate work.

$0

$600

$1,200

$1,800

2011 2012

T4 Other Contracts

IT Services Spending at the VA

Dollars in millions by fiscal year

30% on T4

Shorter terms as

procurement chiefs push

more frequent competition. 2.2

3.4

4.2 4.1 3.8 3.8

4.2 3.9

3.2

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2004 2005 2006 2007 2008 2009 2010 2011 2012

Average Length of SeaPort-e Task Orders (in years)

• Average length fell a

full year from fiscal

2010 to fiscal 2012

• Fiscal 2012 average is

lowest since fiscal 2004

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7 MARKET OUTLOOK

More scrutiny equals more

delays.

More bid protests equal

more delays.

“The tripwire policy reflects a significant

environmental change in acquisition policy

from ‘How quick can I get this done’ to ‘Do I

know how every penny is being spent.’” –

Navy notice to contractors - May 14 2012

guidance.

- Reduction of duplicative contracts

- Automatic review of labor rates over $250K a

year.

- Tracking of proposed versus actual rates.

- Crackdown on subcontracting pass through

fees.

- Increased re-solicitations when only one bid

received.

2,353 2,475

0

500

1,000

1,500

2,000

2,500

2011 2012

Up 5.2%

GAO Bid Protests Filed, by Fiscal Year

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8 MARKET OUTLOOK

Uncertainty drives more work to IDIQs.

$15

$25

$35

$46

$54

$69

$79

$88 $92

$84

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Bill

ions

MAC Obligations By Fiscal Year

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1.4

1.6

1.6

1.8

2.0

2.3

2.3

2.4

3.8

5.0

$0 $1 $2 $3 $4 $5 $6

Encore II

Alliant

EAGLE

ITES-2S

SEWP IV

CRAF

USC-6

S3

LOGCAP IV

SeaPort Enhanced

Billions

FY2012 Obligations

Note: Non-schedule MACs. FY2012 data is preliminary. LOGCAP IV is the Army’s Logistics Civil Augmentation

Program IV; S3 is the Army’s Strategic Services Sourcing; USC-6 is U.S. Transportation Command’s Universal

Services Contract – 6; CRAF is U.S. Transportation Command’s Civil Reserve Air Fleet; SEWP IV is NASA’s Solutions

for Enterprise-Wide Procurement IV; ITES-2S is the Army’s Information Technology Enterprise Solutions – 2 Services;

EAGLE is Homeland Security’s Enterprise Acquisition Gateway for Leading-Edge Solutions. The Navy Runs SeaPort

Enhanced; the General Services Administration runs Alliant; the Defense Information Systems Agency runs Encore II.

Source: Bloomberg Government proprietary federal procurement database.

MARKET OUTLOOK

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4 POLICY DRIVES PROCUREMENT: CYBER

President Obama’s

executive order on

cybersecurity will drive

opportunities at

Homeland Security this

year.

32

218 229

328

$0

$50

$100

$150

$200

$250

$300

$350

Federal Network Security Information security on federal networks

2012 2013

Funding for DHS Cybersecurity accounts, by fiscal year (in millions)

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11 POLICY DRIVES PROCUREMENT: HEALTH

Centers for Medicare and

Medicaid Services and

Internal Revenue Service

lead $1.3 billion in

Affordable Care Act

contract awards. IRS is

ramping up its work now.

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Q&A

12

Learn more about Bloomberg Government at BGOV.com