A Look Ahead at State and Local Contracting Market Conditions for 2021

After weathering a year like no other in recent memory, the state, local, and education (SLED) market is primed for a solid rebound in 2021.  This is not necessarily to say it will soar, but the indicators do provide a very credible baseline for optimism.

For the contractor community, the most important indicator is bid volume.  As we pointed out in our 2021 SLED Government Contracting Forecast report, the market will be at 96% of its 2019 prior bid volume in 2021:

“ While this is still a considerable gap from pre-pandemic levels, the 4% of lost bids will be much improved from the 16% gap of 2020. By 2022, the number of bids will exceed that of 2016 but remain under the 2017-19 period. ”

Deltek’s report also details the bid recovery for each of the twelve industries that comprise the SLED market. Industries that will quickly rebound the closest to 2019 levels in 2021 include construction, operations & maintenance, public safety and technology. Out of this list, public safety is anticipated to be the #1 industry by 2022 in terms of making an almost full recovery back to 99-100% of the starting point. A number of the remaining industries will reach around 98% by then.

Strategies for Businesses to Navigate State and Local Market Conditions in 2021

2017-18 were strong years for bids, with totals exceeding 490,000 per year.  While the market is unlikely to see those volumes in the next few years, our forecast points to more than 470,000 bids released in 2022.  However, that doesn’t necessarily mean that this gap of 20,000 business opportunities have vanished into thin air.  A decline in bid volume does not guarantee a corresponding decline in spend.  Delayed projects could be consolidated into multi-phase solicitations.  And we know that statewide contracts and cooperative purchasing will be preferred avenues for SLED buyers to clear out procurement backlogs.

Deltek’s Top 3 Strategies for Optimizing State and Local Government Sales report is designed to help SLED contractors maximize their performance in the three key business development (BD) strategies: pursuing planned future projects, pursuing expiring fixed-term contracts, and leveraging cooperative purchasing.

For each of the three strategies, Deltek has provided contractors with an index that indicates the likelihood of each SLED buyer type to use each strategy.  Using bid data from the GovWin platform, we know that planned future projects represent at least an $800 billion market opportunity through 2025 and that cities, counties, and states are most likely to use this procurement strategy, primarily in the construction and transportation industries.

Expiring fixed-term contracts represent a $300 billion market between now and next year with states representing the predominant utilizers of this strategy in the areas of operations and maintenance, technology and telecommunications, construction, and professional services.  Finally, cooperative purchasing (counting the national organizations) is expected to grow from a $50 billion market in 2021 to over $60 billion by 2025.  Coops are widely used by cities, counties, states and independent school districts.  Purchasing for construction, operations and maintenance, technology and telecom, and transportation represent roughly 90% of all coop sales.

The Impacts of Federal Stimulus Funding on State and Local Contracting and Bids

Finally, we have the lingering question of more federal stimulus for the SLED market.  Several prominent organizations initially presented fairly large estimates of impact based on earlier national economic forecasts and available government data at the time. However, more recent evidence suggests that at least the state government portion of the picture has improved.

Many states were not hit as hard by revenue downturns related to the COVID-19 pandemic as originally expected. The National Association of State Budget Officials (NASBO) is expecting fiscal year 2021 general fund spending to decline to -1.1%, down from the post-Great Recession peak growth rate of 5.5% (2019). Compare this to the Great Recession when spending declined from a peak growth rate of 9.4% (2007) to -5.7% (2010). Because of this new evidence, the argument for a comprehensive unrestricted SLED stimulus package is presumably dead. But our bid research, as well as employment data points to worse declines outside of state government. This leaves open the possibility of smaller-scale and more targeted funding to assist other areas of SLED where funding gaps that can be proven are more serious.   

There are two major components of the SLED market where stimulus funding could potentially be feasible.  The first is K-12 education. Remote learning is not going to be sustainable over the long term for moderate to lower income households and those with a single parent.  Some form of on-premises learning must resume by fall of this year.  Combined FY 2021 aid to K-12 schools from COVID-related stimulus totaled $67 billion, which was more than was allocated to any other part of the SLED sector.  More will have to come to get K-12 schools back on site, and this might be one of a few areas with the potential for broad bipartisan support.

The other area of concern is mass transit, which has seen its ridership reduced by as much as 70% during the pandemic and would require a major infusion to sustain it as it ramps up services and slowly regains ridership.  Unfortunately, this is an area with much less bipartisan support.

The outlook for the SLED market for 2021 is positive. Some corners of the market, such as mass transit, will remain in the danger zone, but much is yet to be sorted out as new leadership takes the reigns in Washington. Deltek’s existing resources, such our Administration Transition Resource Center, will track the SLED market rebound every step of the way.