Contractors hit hardest by contract cancellations at the Education Department

Tom Temin: What’s going on here? You have a long list of contractors to Education, and you list the total sum of unexercised ceiling and options, and unexercised impacted ceiling. So it looks like some of the money has been spent, but a lot of it is at risk. Is that basically what we’re looking at here?

Kevin Brancato: Yeah, so we realized that the entire Department of Education potentially is at risk, and all the contractors supporting Education would be at risk as well. So to look at how much potentially could be saved by the government, how much would be at risk for the contractor, it’s not what has already been spent, it’s what could be spent on the contract in the future. And what we mean by unexercised, it’s basically they haven’t gotten the money yet, although the contract itself says this year and in future years, it is possible that the money could come in if the government makes funds available.

Kevin Brancato: We summed all that up — roughly 180 vendors, as you said — a total of $3.2 billion in future potential contract spending that we think is very much at risk, given most of the missions and roles inside of the Department of Education. Not all, but most. And it’s tough to tell which ones would be at risk. That’s actually putting it pretty high. The average at risk is like $17 million in the future, and that’s a substantial amount for a lot of these contractors.

Tom Temin: And it varies widely across the board. For example, I’m just looking at one company, BNL Inc. — not a huge contractor, $2.6 million really — but your analysis shows all of it is at risk for them, 100% at risk. But on the other hand, if you look at one of the giants like Carahsoft, which has a billion dollars in obligations, only about $2 million is at risk. So they only have about a 0.2% risk factor. So it’s all over the board.

Kevin Brancato: When our team did the analysis, I’m not sure we were expecting to see just how many small, specialized businesses are there supporting agencies that they have developed to support these agencies’ very particular needs and missions. So as you mentioned, about 21% of all the vendors at risk are going to lose everything because they have so specialized to that agency and those agencies’ missions, and are very tailored. And they’ve become experts in being able to support those clients. Twenty-nine percent had very high — that is, it’s basically more than half of their work. But I think it really surprised us, at the Education Department and other departments that are at risk, just how great a share of vendors potentially could lose everything.

Tom Temin: So really, the specialized vendors that might have been part of the education domain, let’s say, more than the non-specialized services contractors or resellers who have bought across the government — different set of buckets there, basically.

Kevin Brancato: Yeah, and I’d say that’s very accurate — and people who have really understood and aligned themselves with the core missions. They’ve been back and forth over the years, series of outsourcing, insourcing back and forth, movement of people between government agencies and contractors. And so there’s a tight-knit community, especially of the smaller contractors supporting these agencies. And Education is just like the others. It’s very difficult for these contractors to just move up and say, “Well, tomorrow I can support the Homeland Security mission or the Department of Interior mission.” That’s just simply not the case. It’s not possible for them to do this.

Tom Temin: Yeah, there’s one company called Educational Testing, and they’re going to lose everything — or at risk of everything.

Kevin Brancato: It’s potentially — maybe you would see Department of Defense would have schools that it runs, and you could move, but it’s very focused. So that sort of example, you’d have to realign your business for a federal customer. You may wind up outside the federal market entirely.

Tom Temin: Because if you are specialized, say in the education domain, and your company does $10–20 million, you are in the “I’ll-sell-it” range of revenue. But why would an Ernst & Young or an Accenture buy it if the business is going to go away? It has no real backlog.

Kevin Brancato: There’s no real backlog at all. And that’s really the problem here. Now, we’ve seen this a lot with our own customers. We provide software for federal contractors to manage their opportunities and manage the contracts once they’ve won them. We have a couple that are facing really serious difficulties because of Education, USAID, CFPB and other agencies that are at risk. And the diversification of their business really winds up being critical.

Kevin Brancato: We see them using our tools strategically to find where can they go next — adjacent customers or adjacent market spaces. And it becomes very difficult in this space to try to pursue both. You really need the information at your disposal to do that. And many of them, I think, are just caught off guard by the severity of the changes that the Trump administration is making so rapidly.

Tom Temin: We are speaking with Kevin Brancato. He is senior vice president of product strategy at TechnoMile. And you mentioned some of the other agencies that you have analyzed with kind of an AI crawling bot software here that ferrets out this information. And in Education, 20% of the vendors are at risk of all their business. Is that the profile you’re seeing at other agencies also?

Kevin Brancato: Consumer Financial Protection Bureau — it’s very similar. While the scale and scope of future dollars at risk is about one-tenth the size, about $375 million, there were a number of vendors — roughly about 120 or so — but what we saw is that about 15% of the vendors there are at risk to lose everything. Twenty percent had a very high exposure, so there’s a little bit less exposure, but much less on average per company — about $3 million at risk. Smaller companies supporting USA mission, and they maybe had a more tighter focus on a small business participation. So they’re very similar at CFPB.

Kevin Brancato: But that is very different than what we saw at USAID. USAID — very similar to Education in the amount of dollars that are at risk in the future, with about $3.6 billion compared to $3.2 billion for Education — but about 500 vendors. And to our shock, 81% were at high risk, but the majority of their business was at risk. Seventy-one percent were at risk of losing everything. Astonished by that. But when you realize that fundamentally where they’re supporting USAID, they’re supporting them internationally with some very specific services that have no alignment with anything else in the government, it makes a lot of sense that they would have a very difficult time — at risk of losing quite a bit. And we’ve seen this in the marketplace with great pain, with companies having to shutter themselves and employees losing their positions, in addition to the government employees being let go.

Tom Temin: And if you were to analyze a large, broad department like Health and Human Services or Homeland Security, probably those trends would be a little fuzzier because of the diversity of missions and the size of the vendor base and the different things they’re buying.

Kevin Brancato: For the agencies that we mentioned, the Trump administration had taken what I had previously called a “pincer movement.” So these are the ones who are up top — they’re basically cutting the agencies to the maximum extent allowed by law. Other places, they’re doing a more haircut-type approach. They’re looking at every transaction and what they can cut, but it’s not everything — and we don’t know what is everything. To be fair in an analysis, we wouldn’t say everything’s at risk at HHS. We certainly know it is not. There are definitely key areas.

Kevin Brancato: You would say the same thing about approach to grants and energy or in these other areas, where there’s a substantial desire to cut some spending — and it’s obvious in some areas but not others. For example, we took an analysis of the top 10 contractors that GSA had said, “Please come give us some money, give us some information back.” We just said, “Okay, what do they have in management consulting and in that space?” We looked, and the companies are massive. There’s $94 billion in unexpired obligations — future potential work — a lot of it in the management consultant area, but it’s not simply obvious what is most at risk and what isn’t.

Kevin Brancato: But I think there, when you start looking at these broader areas, is where the government maybe has not articulated very well what they’re trying to accomplish with that line-by-line approach. To me, when they approach these big contractors or small contractors, they’re saying, “We want you to continue supporting these missions.” And they are saying, “Cut your costs.” What they really mean is, “Please innovate as much as possible and come back to us with radical innovations that can transform how the government operates with fewer people and fewer contractors to complete the same mission.”

Tom Temin: And that mitigates in favor of some of the big consulting contractors because they do have IT and operational expertise inside them. Accenture, for example, has lost some management consulting contracts, but they also operate a lot of systems and they also have an AI practice — them and many others like them — which means they could recover what’s lost with some of these new innovations that you mentioned. Not so much the case for maybe the small, highly specialized vendors.

Kevin Brancato: I completely agree with that. Some small, highly specialized vendors with AI capabilities — there are a couple that are our clients — really have great, amazing capabilities, and they probably can do a lot if they had the right contacts. And I say that because I think my wider view of what the Trump administration is doing is basically applying the entire principle of creative destruction to all the institutions in the federal marketplace.

Kevin Brancato: It’s acquisition policy, it’s the FAR, it’s preference for OTAs and commercial technology. It’s looking at every single transaction and not just making changes in budget requests. Literally every aspect of the federal market is being torn asunder from an institutional approach — just going back down to the root and trying to figure out where they could potentially restructure how the government buys.

Kevin Brancato: I don’t think the government’s been very good at articulating just how much it wants to change, and how much it expects the companies to come back with solutions to meet the agency’s mission.

Tom Temin: I think the way they have put it, if it’s anything that’s explanatory, is this coming from some of the presidential executive orders. “We want to do only what is statutorily required,” although that takes a lot of research to get back down to the enabling statutes and map those against the functions the agencies are actually doing. That’s another whole exercise.

Kevin Brancato: It is. And so when we think about the set of institutions that they’re changing, they’re still going to have a FAR — but much more streamlined. They’re still going to have acquisition policies —but they’re going to prefer IT. They’re going to have a budget process, although it’s my understanding that a lot of the internal budget processes — the requests along the way — those have also been streamlined dramatically internally.

Kevin Brancato: And so it’s not clear to me, when we do get a president’s budget request, what detail is going to be in there and how much — and that may be intentional. I think there’s a lot of change that’s going on and a lot of room for flexibility here. The government is looking for a way to get out of the lockstep it feels that it’s been in. I’m not saying companies haven’t been innovative in the past, but if they come back and they say, “Well, we can save 5% here, 10% here,” the real question the government says is, “Where can you save me 80%? Where can you save me 90%?” That’s the answer they’re looking for. And I think why they’ve been disappointed in some of the responses so far.