Small businesses brace for a dearth of government contracts, thanks to lingering effects of the recession and political changes.

Small businesses may soon find it harder to get government work.

Blame a confluence of factors — political pressure to reduce the federal debt, the winding down of stimulus spending, and a White House bid to bring more government activities in-house. “It’s a perfect storm,” says attorney Robert Burton, a Washington, D.C.-based partner with law firm Venable LLP and a former deputy and acting administrator of the Office of Federal Procurement Policy.

To be sure, the federal government will hardly become miserly. It runs a $3.6 trillion-plus budget, and in fiscal 2009 — the last year for which data are available — awarded $96.8 billion in contracts directly to small businesses. That represented nearly 22 percent of all federal contracts. It also channeled many billions more to small businesses that were working as subcontractors to larger government contractors.

A changing tide for government contracts

Still, times are changing. In 2009, President Obama called on government agencies to make sure they had the capacity to manage and oversee their contracts, and to bring workers in-house if necessary rather than continuing to outsource. In response to this “in-sourcing” initiative, Defense Secretary Robert Gates said his department, which accounts for about two-thirds of all federal contract dollars, would seek to hire as many as 30,000 new civil workers over the next five years.

Meanwhile, growing concerns about the federal debt are giving momentum to budget-cutting initiatives in Washington, D.C. In March 2009, shortly after taking office, President Obama directed federal agencies to save $40 billion in contracting costs annually by fiscal 2011, which ends this September. Since then, Republicans in Congress have been pushing for even more cuts. More recently, President Obama proposed to trim or eliminate more than 200 federal programs in his fiscal 2012 budget.

“In this environment, small businesses are going to be hurt,” Burton says. “They’ll be hurt even more because subcontracting opportunities will be diminished. As prime contractors have fewer opportunities, they will attempt to do more of the work they do get themselves.”

Burton represents a number of small-business clients who worry they may be forced out of business by the president’s in-sourcing agenda. He’s also serving as a legal advisor to the Small Business Coalition for Fair Contracting, a group that contends the in-sourcing initiative is threatening to unfairly take work from its members.

New hope on the contracting horizon

If all this sounds disheartening, it’s worth remembering that no matter what Washington is able to accomplish in terms of paring the federal budget or advancing its in-sourcing agenda, it will still award hundreds of billions of dollars of contracts to private businesses annually — and it’s obliged by law to try to award at least 23 percent of that money to small businesses.

Some new opportunities are opening up, too. In the field of information technology, for example, federal Chief Information Officer Vivek Kundra said in February that he wants to shift about a quarter of the government’s $80 billion in annual IT spending to cloud computing. As part of that effort, federal agencies have been ordered to move three services each to the cloud within 18 months.

Horizon Data Center Solutions, a Dallas-based firm that employs about 30 people, was recently selected as one of the vendors eligible to provide those services. It will do so in partnership with Eyak Technology LLC of Dulles, Virginia, an Alaska Native-owned small business with a long track record in government contracting.

Clyde Stoltzfus, director of government marketing at the University of Pennsylvania, says serving as a subcontractor to an experienced prime contractor is a good way for small businesses to break into the market. During the recession, he notes, many small businesses tried to win work as prime contractors but found little success because they didn’t have a track record with the government.

“It’s not that small businesses can’t do contracting on their own,” he says, “but the comfortable niche for most of them is subcontracting.”

Tips for winning a contract

Burton also advises small businesses to be “more aggressive than ever” in their marketing efforts.

“Historically, contractors have just sort of looked at federal business opportunities and submitted proposals based on their capabilities,” Burton says. “Now it’s important for small businesses to have aggressive marketing campaigns and to get in front of the program managers making decisions about contract opportunities. The government is not that much different than commercial companies — decisions are based on relationships and effective marketing, and, of course, past performance.”

For more tips on breaking into the government contracting market, see our previous article, “Playing the Government Contract Game.”

Securing government contracts may get a little more difficult in the year ahead, but with the right preparation, it won’t be impossible.