Government Contractor Confidence Shift: What’s Driving GovCon Market Outlook in the Second Half?

By Paul Irby and Deniece Peterson

At the beginning of every year, Deltek measures government contractors' confidence to grow their public sector sales in the Clarity Report Government Contractor Confidence Index (GCCI). This year we had an opportunity to see how confidence levels may have shifted. Through our pulse survey conducted from July-September, 2024, we found government contractors’ confidence to grow their public sector sales has declined since January. This drop raises important questions about the factors influencing contractors’ outlook, which we’ll explore further in this blog.

Understanding the Deltek GovCon Clarity Report GCCI

The GCCI from the Deltek Clarity Government Contracting Industry Report, measures overall confidence that government contractors can grow their public sector sales over the next 12 months. It is measured on a scale of zero to 200, with zero indicating the lowest confidence level, 100 neutral, and 200 indicating the highest confidence. The calculation is based on a series of questions regarding government sales in the last 12 months and respondents’ impressions of the spending environment. Though the index is subjective, it is an informative indicator of the level of risk business leaders perceive in the marketplace.

In January 2024 the GovCon Clarity Report calculated the GCCI to be 142.8, which represents a slight decrease from 2023 (144.0). This decrease was not surprising given the uncertainty around budget allocations, the upcoming election and more.

The Deltek Clarity GCCI Pulse

Between July and September 2024 (Q3) we had an opportunity to survey government contractors – both Deltek customers and non-customers- through a series of webinars and Customer Town Halls to get a “pulse” on their confidence sentiment within the government contracting market and to see how it might compare to January.

In Q3 of 2024, the index measured 137.8, which represents a 3.5% decline in the Government Contractor Confidence Index between Q1 and Q3 2024.

What’s Behind the Decline in Confidence?

There could be several reasons helping to explain this decline.

• Election Year Jitters: The upcoming federal election creates an environment of uncertainty as contractors work to develop growth strategies. Although federal spending has increased under each of the past several administrations, contractors are likely bracing for potential programmatic shifts ushered in by a new administration.
• Competitive Pressures: Contractors are also facing a more competitive environment as contract consolidation shifts awards from unique contracts to task orders.
• Economic Headwinds: Although inflation and interest rates are on the decline, contractors continue to face rising costs including supply chain costs, wage competition and compliance costs, which can impact revenue growth and margins.
• SLED Market Challenges: There have been several recent articles on the negative impacts on the state, local and education (SLED) market caused by a loss of broad stimulus funding. A new trend in 2024 emerged with a decrease of around 5-6% year-over-year in the number of advertised bidding opportunities in the first half of the year. We attribute this to the ending of broad unrestricted funding from the American Rescue Plan Act in particular, which some governments had been using as a crutch to help them avoid painful cuts so far and maintain consistent spending levels in the face of tough inflation in many commodities (with nondurable goods prices rising over 20% two years in a row in 2021-22) and a still-recovering economy. With July marking the start of the 2025 fiscal year for nearly all state governments and many larger local ones, some SLED entities are facing a kind of “fiscal cliff” where they must make immediate cuts to help balance revenues and expenditures and begin operating without ARPA's help. This will affect some states and individual organizations more than others, depending on how they have handled their stimulus funds and budgeting in recent years. A recent study by the Volcker Alliance among state governments revealed that a minority, representing around one-third of combined expenditures, were deemed “at risk” of making cuts. We see this as more of a one-time reset in bid volumes, not a continued stair-step decline.
• Fiscal Concerns: Concerns over a possible recession or “hard landing,” combined with growing alarm about the unsustainable national debt and large annual deficits, have raised uncertainties. Interest payments are now projected to surpass defense spending, due to increasing debt with annual deficits that are unusual in a non-recessionary period. Historically, federal spending remained stable during recessions, while state and local (SLED) spending dropped as governments balanced budgets with shrinking revenues. If bipartisan efforts to reduce or restructure federal spending emerge—something international bodies like the IMF and major bond rating agencies are urging—contractors may worry about future prospects. Past attempts at budget cuts have focused on the discretionary budget, which accounts for just 25-30% of the total budget but contains most federal contracting dollars. Contractors are likely cautious, waiting to see if changes will affect the discretionary or mandatory budget, which makes up over 60% of federal spending and includes federal SLED allocations. Though this caution may only reflect a minority of GovCon firms, it could explain the more conservative outlook seen in the GCCI index since the beginning of the year.

2025 Strategic Priorities for GovCon Growth

To strengthen your 2025 strategy, Deltek recommends several key actions for government contractors:

• Leverage Bellwether Inputs: Use insights from Deltek’s Top Federal Opportunities to guide your strategy and align with future trends.
• Target New Agencies: Explore agencies already purchasing from your competitors and identify where your offerings can gain traction.
• Build Strategic Partnerships: Identify teaming partners that can support and accelerate your growth in key areas.
• Optimize Tactical Execution: Focus on best-fit opportunities to increase your win rate.

By gaining confidence in these tactical elements, you’ll free up bandwidth to focus on the bigger picture—monitoring competitive dynamics in your niche, tracking changes in government funding, and preparing for broader market shifts. This forward-looking approach will help ensure your company stays ahead of industry trends, positions itself for future opportunities, and avoids losing ground in a fast-evolving market.

The Q3 GCCI pulse survey revealed that the most successful and experienced government contractors are those that have optimized the balance between daily execution and long-term strategy. These companies are not just focused on the tactical tasks of winning contracts—they’ve refined their day-to-day processes so effectively that they can also shift their attention to bigger-picture strategy. By scaling their operations and managing the details efficiently, they create space to focus on long-term planning, goal setting, and staying ahead of industry trends. This balance between execution and strategy is what sets growing companies apart in the competitive GovCon landscape.

By balancing what you can control—like using the right tools, staying compliant and getting ahead of opportunities—with factors outside your control—such as government spending shifts and market dynamics—you’ll be better positioned to secure your growth in 2025 and beyond.