A recent executive order titled “Restoring Common Sense to Federal Procurement” is triggering one of the most significant shifts in the government contracting (GovCon) landscape in decades. This move, which initiated a full review of all 53 parts of the Federal Acquisition Regulation (FAR), is fundamentally altering the competitive environment for small businesses. For the thousands of small disadvantaged businesses (SDBs) who rely on federal contracts, this shift is creating significant stress and uncertainty.

The order’s stated goal is to streamline procurements and focus on securing the “best price for the best quality.” However, a key change is the weakening of a longstanding previous objective to “fulfill public policy.” This creates a new, and for many, more stressful, reality.

The New Playing Field: What’s Changed?

While the total federal budget is growing, the way that money is allocated is changing. The impact is being felt most acutely by SDBs, a category that includes 8A-certified, women-owned (WOSB), and service-disabled veteran-owned (SDVOSB) businesses.

Here are the key facts of the new environment:

• A “Smaller Slice”: The administration’s goal for SDB contract spending is shifting from a recent 15% target back to the 5% statutory floor. This is creating a more competitive environment for SDBs, who now face increased competition for a reduced share of dedicated contracts.
• Fewer Sole-Source Awards: Contracting officers are now largely prohibited from granting direct, non-competitive (sole-source) awards to SDBs, a tool that was previously used for contracts up to $5.5 million. These contracts must now go through a full competitive process. This adds significant time and proposal costs, which can exceed six figures, for small businesses.
• A Weaker “Rule of Two”: The “Rule of Two,” a foundational element of small business contracting, was not struck down, but it has been significantly limited. Officers are no longer obligated to set aside task orders for small businesses under large multi-award contracts (MACs), and this decision can no longer be legally protested.

The Stakes: What This Means for Your Business

This major shift in federal procurement is creating immediate, tangible pressures. With increased competition and higher proposal costs, some owners are facing a difficult choice. The disruption is fueling a wave of mergers and acquisitions (M&A). Some owners, facing the new burdens and significant uncertainty, are choosing to sell their business. This, in turn, is creating a “roll-up” opportunity for other firms and private equity, which are looking to grow and consolidate market share.

Your Proactive Playbook: 6 Strategies for the New Market

The most successful businesses are not waiting to react. They are pivoting now to meet the new reality. Here are the key adaptive strategies we are seeing in the market:

1. Diversification: Businesses are aggressively chasing the money, which is flowing into high-spend agencies like the Department of Defense and the Department of Homeland Security. Others are diversifying away from the federal government entirely and targeting the commercial sector.
2. Focus on Innovation: The government is placing a new, heavy emphasis on innovation and efficiency, actively seeking technologies like AI, robotics, and big data. Small businesses, which are often the source of such innovation, have a new opening to lead with their technology.
3. Productizing Services: There is a major shift away from fully custom-built solutions and toward “commercial off-the-shelf” (COTS) products. Savvy contractors are “shrink-wrapping” their services, branding them as products that can be bought and customized, making it easier for the government to buy.
4. Strategic Partnering: Small businesses are increasingly partnering with one another to aggregate their capabilities. This allows them to compete more effectively against larger companies for “full and open” contracts.
5. Strategic M&A: While some are forced to sell, others are using the disruption as a growth strategy. Well-capitalized firms are actively acquiring other companies to expand their capabilities and market share.
6. Assemble Your Expert Team: Do not navigate this alone. Proactively build a team of advisors who specialize in the GovCon industry. This includes a CPA, an attorney, and, critically, a banker who understands the specific cash flow, regulatory, and financing challenges that small government contractors face. A specialized banker can provide the tailored financial solutions and connections needed to pivot and grow.

Conclusion: Building a Resilient Future

This is a market disruption that, while challenging, also creates significant opportunities for agile, well-advised businesses.

The key is to shift from a reactive to a proactive stance. Success in this new landscape requires a strategic review of your services, a clear-eyed look at the competitive field, and a strong team of expert partners. Having the right advisors who deeply understand the nuances of the GovCon industry is no longer a luxury. It is a necessity for navigating these changes and building a resilient, sustainable business.

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This topic was discussed in depth with experts Shirley Collier and Jill Cochones on Capital Bank’s “Pick Up! Pick Up!” podcast. Listen to the episode “The GovCon Squeeze Call” here: https://youtu.be/NBfLXAukmuA?si=ZmKQFRtKcrkUGrAY

Is your government contracting business navigating these financial challenges? Contact Capital Bank’s dedicated GovCon Banking team for tailored solutions: