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Deltek: Spending deal for 2012 is mixed bag for contractors

By Kevin Plexico,

The last-minute deal made earlier this month to fund government operations through the end of fiscal 2012 means one thing for contractors: certainty.

Through most of fiscal 2011 and the beginning of 2012, the government lived off a series of short-term continuing resolutions — essentially stop-gap measures that left agency heads unsure about how much money they could spend and when.

With funding secure through the end of fiscal 2012, departments now can begin new projects, trim existing efforts and issue solicitations that had been on hold.

Still, contractors remain uncertain about what the budget will mean for their revenue. Cutting an agency’s funding won’t necessarily result in cuts in contract spending, as agency spending on contractors varies extensively.

The Energy Department, for example, contracts out over 70 percent of its annual budget, while the Labor Department contracts out about 1 percent of its funding.

Deltek breaks down the contracting landscape:

The Agriculture Department faces a 2 percent budget cut compared to its 2011 level, but the opportunities for contractors are mostly unchanged as the department spends just 8 percent of its funding on contractors.

The Commerce and Justice departments see modest funding increases, but funding for NASA, the agency most dependent on contractors (it spends 79 percent of its funds on them), has been cut by nearly $650 million or 4 percent.

The regular discretionary funding for the Defense Department increases by $5.1 billion. But that boost is offset by a $43 billion drop in funding for the wars in Iraq and Afghanistan. Companies doing business with the Pentagon have long expected those cuts as troops withdrew from Iraq, but these contractors remain acutely aware that the recent failure of the congressional “supercommittee” could result in a $600 billion cut in the defense budget over the coming decade.

Energy and water funding, which covers organizations like the Energy Department, the Army Corps of Engineers and the Bureau of Reclamation, will rise by $328 million compared with fiscal 2011 – welcome news for the contracting industry, which collects 71 percent of the Energy Department’s funding.

The Treasury Department and the Internal Revenue Service will each take a hit (7 percent and 5 percent respectively from 2011 levels), but last year’s financial overhaul means that the Securities and Exchange Commission will see a roughly 10 percent boost in funding.

The Department of Homeland Security, which spends more than one-third of its budget through contractors, saw its first funding cut since it was established. The agency’s budget will drop to $39.6 billion, a $2 billion reduction. Much of the cut will hit the base budget of the Federal Emergency Management Agency, which receives billions more in emergency assistance funding. Other parts of DHS, like Customs and Border Protection and Immigration and Customs Enforcement, receive modest boosts.

The Environmental Protection Agency faces a 3 percent cut. While contractors will see some impact, the EPA only spends about 24 percent of its budget through contractors.

Several of the departments that use contractors the least are rolled into one funding measure. The Labor and Education departments and the Department of Health and Human Services each spend no more than 2 percent of their respective funding through contractors. Agencies like the Centers for Disease Control and Prevention and the National Institutes of Health, which do much of that spending, actually see budget growth.

Military construction takes a largely anticipated hit of $3.5 billion, but the Department of Veterans Affairs receives a $2.1 billion increase in its discretionary funds, some of which will go to contractors as part of an ongoing effort to modernize health care information technology.

The State Department absorbs a $2.6 billion hit to its operations budget, 31 percent of which is obligated to contractors.

The Department of Housing and Urban Development sees a $3.8 billion cut from its 2011 funding level, but the Transportation Department gets a $4.1 billion increase, including nearly $500 million for national infrastructure improvements. This is good news for contractors, as HUD contracts out just 1 percent of its funding compared to the Transportation Department’s 8 percent.

Herndon-based Deltek conducts research on the government contracting market. Kevin Plexico is vice president of federal information solutions.

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