Growth Industry

The effects of a global war on terrorism, a growing homeland security effort and a burgeoning budget deficit made themselves felt strongly in the federal contracting arena in fiscal 2003. Agencies awarded more than $290 billion in prime contracts, an increase of more than 18 percent over the $245 billion awarded in fiscal 2002, according to data collected by the General Services Administration.

Defense spending to support the war in Iraq and to complete projects in Afghanistan fueled much of the growth, says Paul Murphy, president of Eagle Eye Publishers Inc., the Fairfax, Va.-based market research company that analyzed the GSA data to compile the rankings in this issue. Several Defense contractors saw their awards soar as a result of the Pentagon's wartime spending. Service contracting giant Halliburton Co., for example, ranked 35th on last year's list of Top 200 contractors, with $689 million in awards, but moved all the way up to 11th place this year, with more than $3 billion in contracts.

Federal agencies also purchased more homeland security-related goods and services in fiscal 2003, Murphy notes. Defense and homeland security spending likely will remain strong over the next few years, he predicts.

Civilian purchases not related to security may level off or even decline as agencies begin to feel the pinch of budget deficits, although demographic trends could create exceptions, Murphy says. For example, the government will have to meet the health needs of an aging population of veterans-a potential boon to medical supply and services companies.

Improvements in agencies' methods of reporting purchases to the Federal Procurement Data System, the GSA repository of federal spending statistics, will affect future spending numbers as well. Last fall, GSA unveiled FPDS-Next Generation, a modernized reporting system. The change came not a moment too soon, according to auditors at the Government Accountability Office. Last year, GAO officials sent a letter to Office of Management and Budget Director Joshua Bolten to convey their "serious and continuing concerns with the reliability of the data contained" in FPDS. "We are pleased that the administration is moving forward with plans to modernize that system through FPDS-NG," the auditors wrote.

Fiscal 2004 data will begin to reflect revised reporting techniques, although some agencies have been slow to notify FPDS-NG of their contract awards. Murphy estimates that when all agencies have switched over to the system, more detailed reporting could boost contracting numbers by as much as $30 billion annually. The adjustments could push the federal procurement bill close to $350 billion. It is already well over $300 billion if "black" spending by intelligence agencies and contracts under $25,000 are added to the GSA prime contract numbers in this issue.

Share the Savings

As GSA seeks to improve federal contracting data, agencies are also under pressure to use more innovative contracting vehicles. Share-in-savings contracting, which allows agencies to offer companies a cut of the savings they help generate, is one such approach, albeit a somewhat controversial one.

Share-in-savings agreements initiate opportunities by allowing agencies to acquire technology and other items without making large, upfront investments, proponents argue. "These contracts provide the most powerful incentive imaginable for the contractor to deliver results to the government," says Drew Crockett, a spokesman for Rep. Tom Davis, R-Va. "The genius is in the simplicity: The more a company saves the government, the more it gets paid."

This spring, Davis introduced the Acquisition System Improvement Act, which included a provision extending agencies' ability to enter into share-in-savings agreements. The legislation comes as the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council are writing rules implementing a section of the 2002 E-Government Act encouraging the limited use of share-in-savings agreements for technology projects.

State and local governments have benefited from the share-in-savings approach, and some federal agencies, including the Education Department, are trying out the method on a pilot basis and enjoying success, says Olga Grkavac, the executive vice president of the Information Technology Association of America's enterprise solutions division. ITAA, an Arlington, Va.-based trade association with more than 500 member companies, has backed past versions of Davis' procurement reform legislation and is supporting the Acquisition System Improvement Act, Grkavac says.

But opponents of the share-in-savings approach argue that the method cuts into Congress' ability to oversee contracts. Since share-in-savings projects need little upfront funding, agency officials can push forward on projects without first obtaining the approval of congressional appropriators, says Danielle Brian, executive director of the Project on Government Oversight, a Washington-based watchdog group.

Former Bush administration procurement chief Angela Styles, now a partner at Miller & Chevalier, a Washington firm specializing in contract law, also is critical of the approach. She has suggested that the acquisition councils have been slow to write final rules on implementing the E-Government Act's share-in-savings measures partly because of a reluctance to embrace the contracting method.

But Ralph DeStefano, deputy director of contract policy in GSA's Office of the Chief Acquisition Officer, says the speed at which the councils are moving reflects the complexity of the share-in-savings approach, which "represents a counter-intuitive way of conducting procurements." Extra time is needed to vet the councils' draft policy, proposed in October 2003 and updated in early July 2004, he says.

The councils expect to issue a final policy on technology share-in-savings contracts by the end of November, about three months after the close of the public comment period on the July proposal. Officials from several agencies have asked GSA "to help determine if projects are suitable for the share-in-savings concept" and OMB's e-government office has "been an active proponent of applying [the approach] to certain e-government initiatives," he says.

If Davis' latest procurement reform legislation passes, affording agencies the chance to enter share-in-savings agreements on more than a pilot basis, the contracting approach should catch on, Grkavac says. Davis hasn't given up on advancing the legislation this year, but "debate would likely be more constructive next year," says David Marin, a spokesman. "We are entering the peak of the political mean season, when differences of opinion over policy are hard to separate from overt partisanship."