Column: The Trump Effect--Expectations under the new administration

      Michael Smigocki, CPA, senior managing director, Federal Strategies Group LLC

      Having consulted to the federal government contracting industry for the past 30 years, I have witnessed first-hand the impact that politics has on this industry and the contractors providing goods and services to it.

      One given is that anytime you have a change in Administration, changes certainly will occur in the industry and in individual companies.

      This happened with President Reagan’s tremendous defense build-up that gave birth to the “Beltway Bandits,” more recently with President George W. Bush’s focus on homeland security in a post-9/11 world, and with President

Obama’s “economic stimulus” spending

      Now with President Trump recently having surpassed his first 100 days in office, some of his contracting priorities and initiatives are becoming clear. This article will discuss some of these items as well as provide you with some practical advice on dealing with these expected changes.

Shift in spending priorities

      The first expectation is that under President Trump and the current Republican-majority Congress there is the prospect of a major shift in the spending of the federal government.

      Throughout his campaign and now as president, Trump has made it clear that he supports large increases in defense spending. In addition, he wants investments in homeland security (i.e. building a border wall on the Mexican border) and a reorganization of the intelligence infrastructure and capabilities.

      Trump also has talked about making a large investment (in excess of $1 trillion) in the nation’s infrastructure (roads, bridges, tunnels, etc.). Contractors that are positioned in these areas of spending should see increasing revenues.

      However, where will the money come from for the President to fulfill all of these initiatives? It will be very difficult to raise the money by increasing taxes in the current political environment.

      Expected increases in debt service payments due to rising interest rates also are going to make federal budgets tighter.

      It is likely that if Congress supports President Trump’s push for more defense spending the money will come from agencies that are not core to President Trump’s initiatives (read Civilian Agencies).

Civilian agencies

     If you currently are a civilian agency contractor, expect that current contract opportunities will, at a minimum, be delayed. Some opportunities may evaporate as money is pulled away from these efforts.

      Options under existing contracts may not be exercised while other contracts may be terminated for convenience, as monies likely will be shifted to President Trump’s initiatives.

      The end result in the civilian agencies is likely to be greatly increased competition for the remaining contract opportunities that are left.

      Civilian contractors should be doing all they can right now to reduce their costs and to variablize their expenses to make themselves as cost competitive as possible for these new procurements.

Short-term spending

      It should be noted that, at the time of writing this article, Congress passed a debt ceiling bill that averted a government shutdown, and included in this bill was funding of efforts for the Environmental Protection Agency and for the Health and Human Services Dept. that were expected to be cut. However, these are short-term spending increases and the expectation is that spending may be greatly reduced in these agencies.

     One of the first Executive Orders President Trump signed was to initiate a hiring freeze throughout the government. With attrition of government personnel occurring at increased numbers, this is expected to present opportunities for service contractors.

Predictions

      I expect that the government will continue the usage of multiple award vehicles in the contracting process. This has proven to be an effective means by government procurement personnel to timely award various contracting efforts at continued competitive pricing.

      In addition, I expect a continued shift away from the Low Price Technically Acceptable (LPTA) model and towards best value. The government has learned that the initial cost savings they realized under LPTA resulted in substandard work and increased costs over the life of the contracts.

      President Trump has demonstrated his intention to insert himself into the federal contracting process as he did with Lockheed Martin’s F35 program. His premise was that Lockheed was charging too much and prices needed to be renegotiated. It is unclear whether he plans to insert himself into other program or contracting initiatives.

      Having cut his teeth in the highly competitive and razor-thin- margin real estate development and construction industries, he is very familiar with the contracting process. Also uncertain at this time is his attitude towards the various set-aside programs and contracting with small, minority and women-owned, veteran-owned, etc., entities.

Conclusion

      Just as with prior presidential transitions, federal contracting is expected to change. The dynamic contractors who have the ability to shift with these changes will be the ones who prosper in the upcoming years.

Michael Smigocki, CPA, CVA is the Senior Managing Director of Federal Strategies Group, LLC. He provides government contract and management consulting, M&A advisory, litigation support and expert testimony to the government contracting industry. He can be reached via email at MikeS@FedStrat.com.

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Column: The Trump Effect--Expectations under the new administration

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