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Government Contractors

Industry Overview

The US federal government each year spends about $500 billion to buy goods and services, including $240 billion for Medicare, $150 billion for defense, and $100 billion for non-defense items. State and local governments spend an additional $150 billion on capital projects, such as highways, bridges, and public buildings. Government contractors include large corporations, like Lockheed Martin and Boeing; academic institutions, like the University of California and California Institute of Technology; healthcare companies, like AmeriSourceBergen; and tens of thousands of smaller companies.

The government contracting industry is highly fragmented, but at the federal level there is concentration at the top. The 100 largest federal contractors receive about 60 percent of procurement dollars.

Competitive Landscape

Demand is driven by the expanding needs of governments and the trend toward outsourcing. The profitability of individual contracts depends on efficiency, because most contracts have a fixed price. Large companies have advantages in getting large contracts and may have greater expertise in the contracting process, but small companies can compete successfully for most contracts by offering the lowest price. Although some government contracts can be handled only by large companies, small companies can be very competitive by supplying specialized products or services, or by working as subcontractors. Some programs set funds aside specifically for small businesses.

Products, Operations & Technology

In addition to supplying ordinary administrative goods and services, commercial vendors provide governments with specialized goods and services such as consulting; information technology (IT); research; construction; weapons; and medical care. Different levels of government have different commercial needs. Local governments contract mainly for construction and waste management services. State governments spend heavily on construction; consulting; medical services (Medicaid); and information systems. The federal government uses commercial vendors most heavily for defense, medical services, consulting, R&D, and information systems.

Aside from Medicare, the federal government contracts with commercial vendors for about $200 billion of goods and services through Procurement Contracts issued by some 60 executive departments and agencies. The largest amounts are contracted by the Department of Defense (DoD); Department of Energy; General Services Administration (GSA); and NASA. Although contracts and purchases must usually be awarded to the lowest qualified bidder, various programs that favor small businesses are administered through the Small Business Administration (SBA). About 4 percent of total federal procurement dollars were awarded under such programs. Overall, 20 percent of procurement dollars go to small businesses, 70 percent to large ones, and the rest to nonprofits, foreign contractors, and other vendors.

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