Contracting | Shifting From Tanks to Technology

For government contractors, 2007 wasn't pretty: They had to contend with tighter budgets and increased oversight from a new Democratic Congress, as well as polarizing controversies surrounding the conduct of contractors in Iraq.

Executives at many local government contractors, and others who closely follow the industry, say the outlook for 2008 could be equally difficult.

"It's a mixed environment from the funding standpoint and certainly the contracting community has begun to feel the heat of Congress," said Robin Lineberger, executive vice president for global public services at BearingPoint, a McLean management and consulting company.

So far, contractor oversight has been largely limited to high-profile issues such as the conduct of Blackwater security personnel in Baghdad. And it's not clear whether oversight has taken a toll on profits. But some expect the scrutiny to expand more broadly next year -- and attitudes toward contracting on Capitol Hill and in the presidential race could shape future spending.

"It's very clear that a lot of people's perceptions about the quality of federal contracting have been informed by what they've read and heard about contracting in Iraq and Afghanistan," said Stan Soloway, president of the Professional Services Council, the industry's trade association.

"On all sides, rhetoric gets ratcheted up," he said.

For two of the Washington region's biggest government contractors, Lockheed Martin of Bethesda and General Dynamics of Falls Church, 2007 was a banner year. Increased demands for armored tanks and other heavy machinery for the military boosted the bottom lines of those companies, whose stocks are each up more than 15 percent for the year.

Others have not experienced such robust growth, though. Money hasn't been available in significant amounts for the kinds of services most contractors provide, such as installing computer systems, building custom software and coordinating the movement of people and goods.

That's because federal agencies -- with the exception of the Defense Department -- have had to hold off on new spending because of conflicts between congressional Democrats and President Bush. Congress didn't pass a budget for fiscal 2007, and instead stuck to funding at 2006 levels.

A few years ago, many contractors were enjoying 10 to 15 percent growth rates. That's fallen to single digits in many cases, said Ed Bersoff, a longtime executive and investor in the local government contracting sector.

One result has been that companies have been more cautious about hiring.

Though it has continued to enjoy strong growth, Stanley Inc. of Arlington has postponed adding employees until being assured that the government would pay for some programs.