Mixed signals on acquisition are creating a confused market

It is an old saw that markets crave certainty. The more predictable and stable market dynamics and conditions are, the better. In the government market, however, stability has always been relative.

On one hand, the government market is, by definition, enormous, always there and, until last year’s shutdown of USAID, always paid its bills. On the other, it is routinely buffeted by budget pressures, changing political and policy priorities and leadership transitions. 

While most of those factors are inevitable features of our democratic system, since the 1990s, every administration has sought to streamline and rationalize the processes that govern federal acquisition, bring the process closer to the norms of the commercial marketplace, and increase access to new and emerging technologies.

Those efforts have produced some successes. But as everyone involved knows, they remain very much a work in progress.

The current administration is no different. It launched the “Revolutionary FAR Overhaul,” or RFO, the latest in that long line of efforts to reform the acquisition system.

The RFO has generated a series of proposed changes that, while perhaps not literally “revolutionary,” are significant and potentially valuable. And while their actual impact won’t be known until the final implementing rules are issued and contractors and government customers alike can determine what they actually mean in practice, the RFO has been a serious and thoughtful initiative.

Likewise, the Department of Defense initiated multiple seven-year “framework” agreements for weapons systems purchasing which could have positive impacts--if accompanied by real funding and opportunities.

But here’s the rub. Those positive developments have been accompanied by a number of other policy initiatives which have arguably pushed the acquisition system backwards. And the collective confusion, mixed signals, and new requirements they have generated have in turn created unusual levels of confusion and uncertainty across the market.

Consider this.

Last year, the Department of Defense aggressively challenged contractor fees and profit margins—not during the award process but, rather, in the middle of performance on competitively awarded contracts. That was unprecedented. The department also instituted new policies imposing new, higher level approval requirements for even modest contract awards.

Further, a few months ago the secretary declared that “bureaucrats” (presumably the warranted contracting officers) would no longer be allowed to negotiate prices on major contracts.

And within the last couple of weeks, the deputy secretary issued new cost and pricing policies that will require that virtually all contractors performing on other than fixed-price contracts with a value of more than $10 million (including those awarded in an open competitive process), grant the government direct access to their, and all of their subcontractors’ cost and pricing records.

The goal? To ensure that the profits they are making are “consistent with best commercial practices.”

To say that these initiatives raise a host of practical, legal, and other issues would be an understatement. Imposing new layers of compliance is likely to do little to help expand or strengthen the industrial base. And make no mistake, the message to the workforce as to what the leadership is focused on, and what they will be evaluated on, is clear. And it’s not “cost, schedule and performance.”

At the same time, agencies across the government, including DoD, continue to contend with the after-effects of DOGE.

It is now clear to just about everyone that far too often the workforce cuts, including in acquisition, were non-strategic and went way too deep. Today, DoD is aggressively re-hiring to fill the many workforce gaps those cuts created. But they, like others, are finding that those coming back tend not to be the more seasoned, experienced professionals.

Given that, and some of the new and complicated rules changes, the training and workforce development needs, which have always been significant, are extraordinary. But there is no sign that either the strategy or resources to meet those needs at the requisite scale is in place.

Outside of DoD, one of the administration’s most significant initiatives has been to consolidate procurement at the General Services Administration and to seek to sharply reduce agency-specific (or agency managed) contracts.

That consolidation is well underway. Yet, it remains unclear as to the extent to which agencies will be willing to transfer responsibility for major, mission critical procurements to a third party (agency). GSA is also undergoing significant internal restructuring that, while likely the right thing to do, comes at a particularly fraught time. After all, GSA is also still struggling to recover from the enormous DOGE-driven workforce reductions, making the agency’s ability to absorb and efficiently manage its new responsibilities unusually challenging.

Here too contractors attempting to understand how all of these dynamics will play out face substantial uncertainty.

Finally, just over a week ago, the Small Business Administration's proposed a dramatic overhaul of the small-business size standards. At its core, the proposal revives an idea first floated more than a decade ago: creating something resembling a mid-tier set-aside. It is a complicated debate, and whether the proposed changes make sense depends in large part on where a company sits in the market today.

But there is little doubt that, if adopted, the changes will have significant consequences. We have already seen marked reductions in contract awards in all of the socio-economic categories. The new size standards would further and substantially upend the dynamics of small business contracting.

Traditional small businesses will face substantially more competition within the set-aside market from much larger companies than ever before. Set-aside contracts could become much more common and larger, affecting both traditional small businesses and the rest of the market. And the implications for mergers and acquisitions, including within and among small businesses, could be substantial.

In short, the GovCon market is being asked to interpret and adapt to all of these changes at once, with some signals actually pointing in different directions.

The government wants more competition and faster access to technology, but acquisition organizations have fewer people to execute procurements. It wants commercial-like acquisition practices, while simultaneously contemplating more government scrutiny of commercial profit margins.

It wants to improve industrial-base resilience and competition, while increasing the rules of compliance and those that determine which companies can compete for which contracts. It wants acquisition professionals to move faster and be more innovative, while adding new layers of review and approval that signal little confidence in that workforce and without much needed, robust workforce development strategies.

For contractors, these aren't abstract policy debates. They affect decisions about hiring, capital investment, pricing, teaming, technology development, organic growth, and mergers and acquisitions. Markets will adapt to change. What they struggle with is uncertainty and confusion about the direction and pace of change.

For the government market to achieve its objectives of effectiveness, efficiency, responsiveness, and competition, it is essential that those elements that are not inevitably buffeted by politics and priorities be as consistent and clear as possible.

In other words, if a market craves clarity and certainty, this isn't that.