Last year’s big spending at the Pentagon will continue this year, with small business getting more opportunities to share in the wealth. Defense contract spending rose 6.7% in 2022, hitting its second highest annual total at $436 billion, according to a report from Bloomberg Government. The spike in unclassified procurement resulted from numerous factors including inflation, weapons exports, the federal COVID-19 response, the war in Ukraine and defense infrastructure spending. It represented a rebound from a $40 billion COVID-19 related dip in 2021.

Facilities and construction saw an increase in spending topping 20% for a total of $54 billion, while transportation and logistics increased 40% to $30 billion.

Foreign military equipment sales jumped 54% to $38.5 billion.

While some of the net increases in last year’s defense spending can be attributed to inflation and a drop in 2021 spending, predictions for 2023 look robust for defense contracts.

“Across military branches, one of the themes we’ve seen is a significant increase in investment in research development, test and experimentation, or RDT&E. We’ve seen most agency or most branch level budgets for RDT&E increasing by more than 10%,” said Kevin Plexico, senior vice president for research at Deltek in a webinar on Jan. 5.

IT remains one of the biggest categories for research spending. Across DoD agencies there is a push toward increased spending on cybersecurity, artificial intelligence, machine learning, quantum computing and 5G communications. Although there is some cultural resistance to adoption of new technologies as well as the continued use of entrenched legacy technologies, Plexico said he expects expanded use of innovative systems this year.

“The intersection of cloud and cyber is going to be a key inflection point for agencies that are adopting new technologies,” he said.

The emphasis on research and innovation also has an effect on investment in small businesses. Those companies made up 73% of businesses working with the Pentagon and comprised 77% of research and development with DoD in 2021, according to a DoD report.

Biden administration policy directed agencies research ways of contracting dollars to small businesses, and particularly those companies designated as economically disadvantaged. A memo from the Office of Management and Budget last November sought to increase the share of contracting dollars awarded to small disadvantaged businesses to 15% of the total by 2025. It provides guidance to agencies about steps they’re expected to take during the fiscal year.

“Some of the guidance in the memo includes calling for major departments to negotiate goals that achieve 12% small disadvantaged business contracting in 2023, and requiring agencies to implement procurement equity, as well as challenging agencies to lower barriers to entry and creating more opportunities for all socio-economic classes,” Plexico said.

He warned there is a danger of promoting some disadvantaged businesses at the expense of others. The goal of equity action plans is to get contracting dollars that currently go to big business into the hands of small business owners, but that money could move from one small business to another.

“You don’t want to have small disadvantaged businesses take money from women-owned small business contracting or service disabled veteran-owned small business contracting; the real goal is to take it out of larger businesses,” Plexico said.

Moving forward, agencies will fine tune their market research for locating companies and adopting tools such as artificial intelligence and machine learning to improve that research, especially in the area of underrepresented businesses. Agencies will also increase set-aside procurements and expand the use of simplified acquisitions as a means of involving more disadvantaged businesses.

“We’ve seen in terms of takeaways from equity action plans posted by agencies that they include improving market research to improve the sourcing of small businesses, and doing a better job of transparency and reporting on their business opportunities,” Plexico said.

The different mechanisms for promoting small disadvantaged businesses mean 8(a) companies, which are owned and controlled by socially and economically disadvantaged individuals, stand to see a boost in their share of contracts.

“Things to watch in the small business category should be good news for small business and in particular for 8(a) companies. And we think it’s going to lead to a lot more focus on the 8(a) programs and more companies looking at an opportunity to increase their contract opportunities,” Plexico said.