A Real Economy publication

Government contracting outlook

Nov 28, 2023

Government contracting outlook key takeaways

The federal government is invested in the success of space innovation and tech advancement.

Artificial intelligence and machine learning are changing the environment for contractors.

Protecting intellectual property is a top priority for both contractors and the government.

Government contracting trend #1: The future of defense is artificial intelligence

The United States’ industrial policy includes vertically integrating defense manufacturing by reshoring semiconductor production and investing in research and development to create the technology needed to compete globally, providing the bandwidth, tactical prowess and speed to defend our nation.

As tensions continue to rise between the U.S. and China, and conflicts persist elsewhere in the world, our nation’s leaders are assessing the current state of our military. The technology our defense industrial base provides will be vital in maintaining a competitive military advantage over near-peer threats with greater size and scale.

The government will likely leverage the rapid advancement of artificial intelligence (AI) and further development of unmanned vehicles to accelerate military capacity while improving tactical prowess. Government contractors, in turn, will need to align their strategies and enhance their functional operations to meet the demands of their federal government customers with equal speed and technical advancement. 

Government contracting trend #2: Space innovation and tech advancement

Rising interest rates are restricting capital investment and slowing nonorganic growth, which affects the mergers and acquisitions (M&A) and venture capital markets. However, defense technology—and specifically space—is getting a lifeline from the government, which is still investing in critical cutting-edge opportunities.

The newly established Office of Strategic Capital (OSC) is expected to play a pivotal role in providing funding for technology that supports national security and advances space innovation and exploration. The government's involvement in the space and defense sectors is vital due to its interest in protecting national security and outpacing global space competitors.

Government contracting trend #3: Compliance in a competitive market

Government contractors must ensure that they stay compliant with heightened regulations.

The U.S. government has written some large checks lately—for COVID-19 relief, infrastructure investment, Ukraine aid and the fiscal year 2023 omnibus budget package. The government has outsourced execution of many of these initiatives to contractors, and will continue to do so. But Washington wants taxpayers to know their tax dollars are stewarded well. An emphasis on public trust means heightened regulations for government contractors as contracts are awarded and funds are disbursed. Contractors cannot lose sight of these requirements as they compete in a consolidating industry that may start courting new entrants looking to get in on the action.

Federal government contractors all share the challenges of operating in a highly regulated environment. What differs is how they choose to differentiate, where they focus investment, and how efficiently and effectively they maintain compliance.

Government contracting trend #4: Compliance and tech innovation

Technology and innovation are foundational for the U.S. federal government to serve and protect its citizens. To do this well, the government must work with contractors to develop cutting-edge solutions, educate its acquisition workforce to guide the procurement process effectively, and put safeguards in place to ensure its achievements are protected. This is a challenging but worthy pursuit that government contractors are ready to tackle in partnership with their government customer.

Strategics moving into venture capital

Public defense contractors have frequently played the part of strategic acquirer in a robust and resilient merger and acquisition market. Now those same companies are taking on the role of investor, making strategic minority investments in pioneering businesses via their venture investing arms. This was a common topic of conversation during third-quarter earnings season, with multiple executives announcing injections of cash into their venture funds and/or the deployment of those funds via strategic investment.

RSM contributors

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