GAO Report on Government Contracting Finds Overall Decrease from 2011-2015 and Most Obligations on Service Contracts

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Every year, billions of dollars in products and services are needed to keep running the U.S. federal government’s 18 cabinet-level departments and nearly 100 other independent agencies. In March 2017, the Government Accountability Office (GAO) released results of its one-year audit of the government’s contracts between fiscal years 2011 and 2015 (including its fixed price, cost-reimbursement, and time-and-materials/labor hour contracts). Overall, GAO’s report shows a 24 percent decrease in government-wide contracting in FY 2015 from FY 2011 levels (a drop of approximately $438 billion), with defense obligations decreasing almost 31 percent and civilian agencies decreasing almost 7 percent. As most vendors and their counsels know, the majority of government contracting occurs with defense agencies. From GAO’s data, the defense department spent about $1.65 trillion in government contracts between FY 2011 and 2015; civilian agencies spent about $825 billion in government contracts in the same period. In most cases – about two-thirds of the time – the government put the risk of cost overrun (amount by which the actual cost may exceed the estimated, original, or target cost) on the contractors through fixed price contracts.

What does the government buy? Government contracting is divided between services and products. Over the audited period, defense agencies tended to have more contracting for services than products each year, and civilian agencies dramatically contracted for more services than products. In fact, service contracts represented about 60 percent of total government-wide obligations from FY 2011 to 2015, with professional support services representing more than 15 percent of that total for both defense and civilian agencies. Second to professional support services were IT and telecommunications services for civilian agencies (about 16 percent) and maintenance-related services for defense agencies (about 10 percent). Isolating FY 2015 and comparing defense versus civilian contracting for services and products, defense agencies spent approximately $144 billion on services versus civilian agencies’ approximately $129 billion on services; defense agencies spent approximately $130 billion on products versus civilian agencies’ approximately $36 billion on products.

Government contracts for products made up about 40 percent of total contract obligations from FY 2011 through 2015. Most of defense agencies’ products were for aerospace components (about 24 percent), while most civilian agencies’ products were for medical, dental, and veterinary goods (about 39 percent). Although information technology equipment and supplies accounted for the second highest percentage (almost 16 percent) of total civilian agencies’ obligations, IT equipment and supplies were not in the top-five product obligations for defense agencies; instead, defense agencies allocated their contracts to guided missiles (about 9 percent), ships and dock-related items (also about 9 percent), communication equipment (about 8 percent), and fuels and lubricant-type goods (about 7 percent). Translated, this means defense agencies have a steady need for customers selling parts and equipment, but overall the government tends to buy from people-based businesses – particularly in the civilian agencies of the Department of Health and Human Services, National Aeronautics and Science Administration, and Department of Homeland Security.

How does the government buy products and services? The GAO has previously noted that competition with one or more vendors is a critical tool for government contracting, because competition helps save taxpayer money. From FY 2011 through 2015, almost 66 percent of total contracts were procured through competition. However, in FY 2015, the government received only one offer in response to its solicitations for 14 percent of competitive contracts (for about $40 billion of the total $282 billion competed), which the GAO has flagged as problematic. The Army had the highest competition rate among defense agencies in FY 2015 (at 59 percent competition of the Army’s contracts) – but even the Army fell at or below the civilian agencies’ competition rate. For civilian agencies in FY 2015, competitive contract dollars were obligated most in the Department of Energy and the National Science Foundation (both at 92 percent), the Department of Education (86 percent), and on the low-end of competition rates, in the Social Security Administration (58 percent). The GAO explains that defense agencies have used the “urgency exception” without a determination of exceptional circumstances warranting non-competition and that some defense departments were only providing limited justification for not procuring competitively. Under federal procurement laws, the urgency exception may be invoked when the need is “unusual and compelling” such that the government may risk injury – financial or otherwise – but the GAO previously warned that the exception is not permitted when an agency need is due to lack of advanced planning. The report alludes to lack of planning underlying some agencies’ noncompetitive contracting.

Finally, who does the government buy from? In FY 2015, many federal dollars were concentrated in 10 vendors who received nearly 27 percent of the total contract obligations. The percentage is even more concentrated when isolating defense contracts: Almost 40 percent of defense obligations comes from 10 vendors (compared to almost 20 percent of civilian obligations from 10 vendors). Small businesses received almost $100 billion in government contracts in FY 2015, with most agencies meeting or exceeding small business participation program goals. Opportunities may present themselves for small businesses or for large businesses who subcontract with small businesses in government contracts with the Department of Veteran Affairs and the Department of Agriculture, among others, because these agencies did not meet their small business goals for FY 2015. Though the GAO report does not include names of particular vendors included in the top 10 or most often procured as a small business, the GAO does reveal that its information was gathered from the government’s Federal Procurement Data System-Next Generation – the government-wide procurement database often relied on by contractors (and their counsel) – and noted the system was “sufficiently reliable” for reporting purposes.

The GAO report presents a backwards-looking picture of the government’s purchasing habits and may be limited in its usefulness to predict post-2016 election trends. However, government customers or commercial vendors seeking to become government customers – particularly those selling specified aeronautical, naval, or machine parts or those selling professional/administrative support services – may find comfort in historical trends given the billions of contracting dollars the government allocates among its agencies.