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Cautious Outlook on Federal Contracts

Tuesday, April 17, 2012

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“What makes us unique?”

Businesses that want a piece of tomorrow’s shrinking federal contract pie need to develop a good answer to that question today, construction management consultant FMI Corp. advises in a new report.

The Federal Construction Sector: Understanding a Transforming Market” offers a mixed view of the fast-changing, fiercely competitive federal construction climate.

 Base realignments and closures should bring more work in upgrading and renovating facilities, the report says.

 Naval Facilities Engineering Command

Base realignments and closures should bring more work in upgrading and renovating facilities, the report says.

The bad news: Despite calls from nearly every politician to the contrary, there will be a “pronounced decrease in overall infrastructure funding.”

The good news, for small business: More of that money than ever will be parceled out in smaller contracts to small businesses, especially those that can deliver energy innovations and sustainable options.

Promoting Small Business

"In my 30 years of contract experience with the federal government, I have never witnessed such an emphasis and focus on promoting small business,” says Jackie Robinson-Burnette, associate director of the Office of Small Business, U.S. Army Corps of Engineers.

“We are seeing policies, guidance and support at the highest levels of the government, including the Office of Management and Budget, the Office of Federal Procurement Policy, and the Deputy Assistant Secretary of Defense for Acquisitions, Logistics and Technology."

Federal budget constraints, shifting national security priorities and a “diverse set of owners with multiple objectives” are remaking the federal construction market, according to FMI.

Companies that want to stay in the game must understand “the key forces accelerating these changes, as well as the shifts that are impacting the design and construction industry as a whole.”

Key Trends

FMI sees three major trends on the federal design and construction landscape:

• Decreased overall funding, driven by budget constraints and large federal debts;

• Continued emphasis on sustainability and energy efficiency; and

• Increasing federal small business initiatives.

Many companies that leapt unprepared into the federal sector seeking easy money from the American Recovery and Reinvestment Act (ARRA) of 2009 have been disappointed, FMI warns.

“Companies that assumed increased public spending would tide everyone over until the private market recovered are now wondering where their next project opportunities will come from,” the firm reports.

Budget Cuts

As the stimulus money dries up, federal budget cuts are also looming government-wide, especially at the Department of Defense, the Department of Veterans Affairs (VA), and the General Services Admin-istration (GSA), which are all cutting way back on construction.

The military’s Base Realignment and Closure (BRAC) program, which started in 2005, is winding down. The BRAC budget for fiscal year 2012 will be slashed by more than 80 percent from 2011 levels.

The VA, which just completed its largest expansion since World War II, will cut its construction budget by 45 percent. And a 2011 spending bill enacted in April reduced the GSA’s construction account for 2012 by 94 percent to $50 million. The House panel chopped the agency’s $869 million request for repairs and renovations to $280 million.

Add in a mounting national debt, and the likely result will be a culling of the herd for federal contractors who are not at the top of their game, according to FMI.

Getting Ahead

Still, there will be work for companies with “a well-thought-out plan and a focus on the different govern-ment agencies and departments.”

“Working for the federal government should not be viewed as a short-term solution to shrinking private-sector opportunities, but as a long-term strategy for growth and diversification,” according to FMI. “Those companies dedicated to a serious, long-term strategy will likely survive and thrive in the new federal business environment.”

Specifically, “we are going to see more small-scale projects— $100 million or less—including retrofit and O&M-type projects,” says Steve Bowers, chief of the Corps of Engineers’ Contract Administration Branch. “The mega-projects throughout the East Coast and the North Atlantic Division will be rare.”

He adds: “There could also be more construction management (CM)-type opportunities, since agencies won’t have the necessary resources to oversee large construction projects due to recent budget cuts.”

Renovation Surge Foreseen

New rounds of BRAC expected in 2013 and 2015 could generate new work for engineering and construction firms, as well as for subcontractors involved in modernizing and updating bases.

“I think there’s going to be a major push for rehabilitation of existing facilities,” one executive of a large international construction company told FMI.
GSA also has numerous initiatives under way to modernize existing buildings, construct new ones and establish new industry standards in collaboration with the private sector. Much of that work will go to small businesses that can deliver new technology solutions, says Larry Melton, assistant commissioner for GSA’s Facilities Management & Services Programs.

Last year, Melton said, GSA received a record $1.7 billion in reimbursable funding for small projects.

Next year, he adds, “we anticipate more small projects, which are needed to keep our buildings operational and perform critical building repairs. This is good news for small businesses, as GSA awards represent a very large percentage of this work to them.”

Part of those gains will come from a growing trend away from bundling government contracts, and part will come from having more small businesses.

Until recently, only engineering or architectural firms with average gross revenues up to $4.5 million (over three years) were considered “small” under SBA’s stringent federal procurement reg¬ulations. In March, however, the threshold increased to $7 million for architectural services to $7 million and $14 million for engineering services.

‘Opportunities Remain Abundant’

“Entering the federal construction market is not an easy feat,” FMI warns. Success demands “long-term commitment, a sharp focus and a well-thought-out plan.”

However, once a firm has established a presence and reputation, “the opportunities remain abundant, particularly in the realm of renewable/clean energy, smart buildings and small business initiatives.”

Smart federal firms “will carve out a long-term ‘space’ by providing services that target its audience with acuity.”

“To get there, firms will have to ask themselves, ‘What makes us unique?’ and then move beyond the value-cost tradeoff to create and fulfill new demand.”


Tagged categories: Construction; Contracts; Infrastructure; Renovation; Subcontractors; U.S. Army Corps of Engineers

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