Federal Contractors and Sticky Costs

Abstract

Federal contractors must deal with an exceptional amount of paperwork and bureaucracy relative to firms that deal only with the private sector. I investigate whether federal contractor's costs have different responses to revenue increases and decreases. I start by generating a set of federal focus firms that have a business unit name that incorporates the words federal, military, and defense. These firms have built their organizational structure around federal contracting. Because extra paperwork costs are likely to be part of the Selling, General, and Administrative (SGA) costs, I estimate a model of SGA sticky costs. I find that when revenues increase, federal focus firms have greater increases in SGA costs compared to controls. This increase is consistent with higher fulfillment costs for federal contracts. When revenues decrease, federal focus firms have a much lower decrease in SGA costs compared to controls. Federal focus firms have extremely sticky SGA costs. This stickiness is consistent with federal focus firms having higher fixed costs in their procurement systems.