Jittery times for government contractors.

• Author: Erwin, Sandra I.
• Position: Defense Watch

* For all the talk about an improving outlook for the defense industry after a six-year downturn, much anxiety still hangs in the air.

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The Pentagon has proposed a budget for 2017 that cuts procurement spending by $7 billion, and contractors will have to wait and see what, if anything, Congress does to beef up that account. In the long term, there are high expectations for new Pentagon investments in technology and changes in its procurement process to step up innovation. And contractors are mapping their competitive positions in hopes of capitalizing on the anticipated new opportunities.

Alas the environment today is quite tense. Things are especially tough for small and medium sized businesses that are finding it more difficult to compete against the larger, more established players.

It has generally been the case in the defense sector that the top-10 prime contractors dominate big-ticket programs, small businesses are guaranteed a share of the work, and mid-size firms move up and down the food chain according to the demand.

The rules of the road are changing, and companies are adapting, either by merging or acquiring competitors, selling off unprofitable businesses or diversifying into civilian markets.

For smaller firms that operate with lower margins for error, the business climate is worrisome, executives and lawmakers assert. Slices of the defense market where upstarts and small businesses have enjoyed success--cybersecurity, information services, data mining--are becoming central elements of the Pentagon's investment strategy. That means everyone, including major defense contractors and Silicon Valley firms, is gunning for the work.

The competition is fierce, says Dolly Oberoi, CEO of C2 Technologies, a federal contractor. "The big boys want to do everything. They got so desperate they started competing with us in our little pond." And the regulatory environment doesn't help, she adds. Government programs that were designed to balance the contracting market and protect small businesses are actually making it worse, Oberoi says during a recent industry conference. A big gripe is the system used by the Small Business Administration to categorize companies by size. This is frustrating, she says, because companies like hers sometimes are disqualified from bids for being too large even though they are substantially smaller than many of their competitors.

"The SBA inhibits growth or kills companies," she says...