Mid-Tier Contractors Getting Left Out

More recently, agencies seeking to customize their contracts have begun issuing their own awards. Often, several companies will win access to these agency-issued contracts but then have to bid again for specific assignments under the award.

"The contract process is a perpetual process," said Sudhakar Shenoy, chief executive of mid-size Reston contractor IMC.

All told, the new contracting practices raise costs, said Pierre Chao, author of the CSIS report. "Companies have to spend money to bid and win positions on these [agency] vehicles, in addition to government-wide ones, and the agencies have to hire people to administer these contracting vehicles," he said.

The trend has contributed to a frenzy of consolidation among government contractors, thinning the ranks of medium-size firms. The consolidation rate has doubled since 2000.

After the Sept. 11 terrorist attacks and the dot-com bust, investors were lured to the growing contracting industry as a "flight to safety," said Richard Knop, head of the defense and government contractors group at investment bank BB&T Capital Markets, Windsor Group.

Contractors -- in particular defense companies that in the past focused on building planes and tanks -- went public and "became aggressive buyers of services and technology companies," Knop said, adding that there have been roughly 400 mergers and acquisitions a year in the sector in recent years.

In 1995, for instance, General Dynamics received $360 million in federal services contracts, making it the 20th-largest contractor. A decade later, after buying 30 companies, it was the 10th-largest firm, awarded $3 billion in contracts, according to the CSIS report.

Kendell Pease, a General Dynamics spokesman, said the company takes pains to make opportunities available to medium-size firms. "We open up ourselves to show them -- here's what we're doing, what do you have to make this work?" he said.

John Chapel, chief executive of McLean contractor Aviel, which has 400 employees and almost $80 million in annual revenue, said mid-tier companies like his are looking to buy smaller firms or merge with companies of similar size "because of the mass that's needed to compete."

The challenge to medium-size companies can sometimes feel like a whack on the back of the head -- and create unusual incentives to stay small.

With $500 and a personal computer, Enrique A. Tessada, a Mexican immigrant and Navy veteran, created his government contracting shop in 1993. Under a special small-business program to help people from disadvantaged backgrounds, Tessada Associates, in Springfield, grew from $40,000 in revenue the first year to $69 million by 2005.

But making the leap to the next level is proving a lot harder. Tessada no longer qualifies for the small-business program, and his company is having trouble keeping pace with bigger rivals. As a result, "we've been pretty flat this last two years. We've lost a couple of bids we were operating," Tessada said.

CTI of Fairfax, a contractor specializing in translation services, is a small business that years ago was in the middle tier. Its chief executive, Celestino Beltran, has no intention of going back up to the middle tier and missing out on the small-business set-aside.

He recalled his experience in the middle tier as a "rough, rough time."

Beltran added: "We're totally depending on the big guys including us on their team."