Ripe Market for Small Business Contractors
For the second consecutive government fiscal year, the Small Business Administration announced that the Federal government had exceeded its spending goal for small business (“SB”) prime contracting (the most recent previous year where this was achieved was FY2006). The “Prime Contracting Small Business Goal Achievement” has increased each year since FY2011, and while actual spending exceeded target spending by 0.4% in FY2013, the excess was ~2.0% in FY2014. Digging deeper into historical spending activity, it is apparent that this trend is poised to continue well into the near-term and have serious implications on the growth prospects for middle-market companies.
Within the top five government-wide acquisition vehicles (“GWAC”) that allow for SB awards, task order awards to SB prime contractors exceeded 40% of awarded ceiling values in FY2014, totaling approximately $31.2B. Moreover the aggregate size of new set-aside GWAC opportunities has recently reached peak levels, exceeding $21B in total ceiling contract value (triple that of FY2014, which was low due to a lack of multi-billion dollar set-aside contracts). SB as a category appears to be taking precedence over other set-aside designations (e.g., HUBZone, 8(a), etc., Service-Disabled, etc.), as ~97% of the ceiling value within these top opportunities will be competed as SB(2). These are examples of what we believe to be a paradigm shift in the priorities of procurement officers, who are receiving intense pressure from the SBA and in turn taking contracting goals very seriously by committing to increase future SB spending. Moreover, this trend is buoyed by proposed legislation H.R.273, which aims to raise SB goals by 2% of total spending.
The implications of this new shift towards SB on middle-market contractors are two-fold. First, the expanding opportunity for SB-qualified contractors will continue to provide abundant revenue opportunities in an otherwise uncertain budgetary environment. However, it is worth noting that this SB-driven growth will only be beneficial in generating near-term cash flows and establishing new customer footprints vs. building enterprise value in an M&A context (which we more closely associate with F&O awards). The more important implication, from an enterprise value perspective, is the latitude government agencies may have to allow SB companies to move work into F&O designations. Historically, one of the biggest questions around whether or not a contract can “transition” has been the questionable incentive of agencies to do so when they have been consistently missing the mark on SB contracting targets. With a growing track record of meeting / exceeding SB goals, and an abundance of contractors that are able to satisfy SB requirements, will we see flexibility from procurement officers in transitioning / on-ramping legacy SB work to F&O designations?
(1) Source: Deltek GovWin IQ
(2) The largest new opportunities in this space include the Alliant II SB ($15B), NOAALink ($2.5B), and USAF AEC CONUS ($930M)