When the Department of Homeland Security was created after Sept. 11, 2001, many contractors looked forward to a wealth of new opportunities to win work from the government. A decade later, the reality has been something different: Contract spending by the agency has been relatively flat.
If it’s been a boon to anyone, it has been to medium and small companies that have been able to snag smaller contracts, while the largest companies are winning a shrinking share of the work.
The department spent $14.2 billion on contracts in fiscal 2011, up from $13.8 billion in 2010, according to a recent report by the Center for Strategic and International Studies’s defense-industrial initiatives group. But spending has been generally flat — with the exception of a boon year in 2006 following Hurricane Katrina, when DHS spent close to $18 billion on contracts.
“In the aftermath of 9/11, homeland security seemed like it was going to be a huge mission forever, but it turns out it was largely a passing thing,” said Loren Thompson, a defense industry consultant. “Big companies thought DHS was the place to really grow, but they quickly started running into bureaucratic barriers that led them to lose much of their enthusiasm.”
Now, the largest DHS contractors are winning a smaller portion of the work. The top five contractors won nearly 24 percent of all contract spending in 2006; by 2011, that dropped to just under 19 percent.
“These trends indicate that the industrial base supporting DHS is becoming less centralized and that contract dollars are not regularly obligated to the same contractors or to the biggest contractors,” the report said.
About 12,400 small firms now are in the DHS market, up from 9,800 in 2005. They won about 29 percent of DHS contract dollars in 2011 — far more than the 16 percent slice for small businesses at the Pentagon.
Medium-size firms — with less than $3 billion in revenue — have seen their piece of the pie grow slightly; they increased their share from 25 percent in 2004 to 29 percent in 2011.
Some of this shift is related to DHS’s increased use of smaller task orders, instead of large, single contracts, and its focus on strengthening small-business requirements, said Tom Conaway, who helped establish Unisys’ homeland security unit and now runs his own firm Azimuth Group.
However, David J. Berteau, director of the international security program at the Center for Strategic and International Studies, said larger contractors are also likely less interested in DHS.
“There was such a belief by the defense companies that DHS was going to be a big new market [but], it’s not a growing market in terms of dollars and it may not be all that profitable,” he said. “The [large] companies are basically turning their attention elsewhere, and that opens up the field for mid-sized companies.”
In a statement, the Department of Homeland Security said it consistently awards about 30 percent of its total contracts each year to small businesses and has sought to “increase contracting opportunities for firms of all sizes, especially small and mid-sized businesses.
“Early and open engagement with these firms not only increases competition, it also helps the department achieve its critical mission at a fair price,” the department said.