Federal contractors on the labor market battlefront

John Wasson was undeniably optimistic as he discussed whether sustained levels of inflation would affect ICF International’s ability to grow and achieve its margin goals. But as the CEO zeroed in on wage inflation during the company’s Nov. 2, 2021, earnings call, he did not mince words.

“This,” he said, “is a challenging time.”

Wasson’s acknowledgment that ICF is not immune from the widespread staffing issues in the United States represents the latest chapter in a tale as old as time in the government contracting ecosystem: the fight to attract and retain talent.

As 2022 begins, macro labor market forces are compounded by industry-specific challenges such as potential vaccine mandates. Amid those pressures, federal contractors are fully engaged in the war for talent, seeking technically skilled and cleared individuals eager to further the mission and protect the homeland. The competition is especially fierce—particularly as the cutting-edge skills needed on today’s battlefield converge with those predominant in other alluring sectors such as commercial technology.

The national labor market is tight—is it time for contractors to stretch?

The pendulum is swinging in the U.S. labor market. In 2020, there were layoffs en masse and, for good measure, at least one reference to the unemployment rate during every Zoom coffee meeting. On the other hand, last year’s employment data moved back toward pre-pandemic levels. Weekly filings for jobless benefits (a proxy for layoffs) in early January 2022 totaled 207,000, falling below the pre-pandemic average from 2019 of 218,000 for the past five weeks. Unlike the broader domestic economy, contractors were generally spared from this employment rollercoaster.  

Businesses now are laser focused on strengthening their workforces, and federal contractors are no exception. On the bright side, federal contractors aren’t digging themselves out of a labor shortage hole quite like their commercial-market-serving counterparts. Government dollars continued to flow during the height of the pandemic, and section 3610 of the CARES Act supported keeping on the payroll employees who are critical to national security. Therefore, while contractors aren’t rebounding from workforce reductions, they are investing in workforce retention, upskilling talent, attracting new talent and aggressively positioning for the workforce of the future.

Wages are rising—are executives ready to open their pocketbooks?

After Wasson acknowledged challenges in today’s staffing environment, he noted that ICF is monitoring wage inflation and wage pressures carefully, and he remained confident they could pass a significant portion of those costs to clients. Increased labor costs can be passed on to the government customer if sufficiently supported and documented during the bidding process. For contracts already in process, it may be easier to pass on increased labor costs related to cost plus contracts (as opposed to time and materials contracts, for example) without having to execute change orders.

At the very least, higher wages have become an unavoidable topic in strategic conversations among executives.

“I’m very happy to pay for them,” CACI CEO John Mengucci said when discussing top talent during an Oct. 28, 2021, earnings call. Mengucci, like many others, emphasized the willingness to pay up for highly technical employees with the right skills, certifications or clearances.

If wage increases continue, contractors with a concentration of preexisting fixed-price contracts will begin to feel margin pressure if unable to renegotiate. Additionally, the government can expect to see an increase in future contract pricing reflecting contractors’ increased cost of labor.

Threats and government needs are evolving—are your talent and capabilities?

The skills and tools needed to serve the government continue to advance. Tomorrow’s battlefield is in cyberspace and outer space—and even in the metaverse in the form of secure threat simulation and training. That is a far cry from traditional land, sea and sky domains. Digital warfare is on the lips of federal contractors who acknowledge the need for data-driven and innovative solutions to increasingly digital and complex threats.

Emerging perceived threats to national security include cyberattacks on mission-critical infrastructure, increased speed and complexity of near-peer threats, and the adoption of data-intensive artificial-intelligence-based applications. Also, companies could go beyond traditional mapping and training applications toward opportunities in gaming, simulation and metaverse applications.

These opportunities—while impressive, exciting and maybe even a little daunting—suggest the need for highly skilled talent in fields such as data science, artificial intelligence, machine learning and computer science. The war for talent in these fields has been raging for some time with no end in sight. Federal contractors must compete with their fellow federal contractors and commercial technology hubs around the country to attract, retain and advance the workforce needed to provide such technology driven and innovative solutions.

What about the vaccine mandate?

The Biden administration’s federal contractor vaccine mandate is under a nationwide stay of enforcement as various lawsuits work their way through the court system and the omicron variant works its way through the U.S. population. If the mandate is ultimately upheld, federal contractors would once again be faced with maintaining compliance and addressing the portions of their workforces that are unvaccinated.

Prior to the stay of enforcement, industry executives were closely monitoring their workforce vaccination rates with an eye on the Jan. 4, 2022, deadline. During third-quarter earnings calls, executives cited estimated workforce vaccination rates (partial or full vaccination) ranging from 75% to 95% with intent of full compliance. Many addressed concerns relating to the remaining 5% to 25% not yet in compliance, understanding the potential for disruptions to their operations and through their supply chains.  

Kratos CEO Chris DeMarco, for example, predicted disruptions because of the executive order “including but not limited to employee distraction, unrest, some retirements, resignations” and “other situations that we had not previously anticipated or planned for.”

Meanwhile, CEO Mark Aslett of Mercury Systems highlighted the long-term benefit of the mandate while acknowledging the short-term headwinds. “We should enhance the resiliency of the business by protecting our employees and strengthening our ability to deliver on our commitments,” he said Nov. 2. “In the short-term, however, it may result in higher employee turnover and impacts to our operations.”

At a minimum, continued court stay of the federal contractor vaccine mandate presents uncertainty to navigate in the coming days. Full enforcement, though, could compound labor pressures for federal contractors.  

What’s next?

Federal government contractors should continue to closely monitor their workforces, train and upskill their employees; hire top talent when given the opportunity, and invest in workforce retention efforts. A virtual working environment has enhanced worker mobility and made job interviews much easier to fit into the day. If workforce retention initiatives weren’t a key focus previously, they should be part of any contractor’s top priorities in 2022. While a tight labor market can be challenging, a renewed focus on talent can lead to improved corporate culture, a more technically capable workforce, a more empowered and engaged workforce, and the opportunity to better position for the evolving needs of federal customers.  

About the Author

Stephanie Johnson is a government contracting senior analyst in RSM’s Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. These senior analysts advise clients on conditions influencing middle market leaders. Stephanie is based in McLean, Va.

The views expressed are those of the author and do not necessarily reflect the official position of ExecutiveBiz or Executive Mosaic.