What the Federal Hiring Freeze Means for Contractors

President Trump’s Hiring Freeze executive order (EO) issued on his first day in office halts federal civilian hiring for 90 days for all federal agencies except the military armed forces related to immigration enforcement, public safety or national security.

Effective at noon January 20, the moratorium will cease once the Director of the Office of Management and Budget (OMB), the Office of Personnel Management (OPM) and the newly created Administrator of the U.S. Department of Government Efficiency (USDS) offices develop a reduction plan to drastically change the way the federal government does business, except for the Internal Revenue Service (IRS). The EO prohibits agencies from filling vacant positions, creating new positions or using contracting actions to fill the gaps. Furthermore, the EO verifies Social Security, Medicare or Veteran’s benefits will not be negatively impacted nor will it negate collective bargaining agreements. The action also provides the OPM authority to grant necessary exemptions.

Impetus for Downsizing the Federal Workforce

The federal civilian workforce has continued increasing at a steady rate since 2017. As of December 2024, the Bureau of Labor and Statistics (BLS) reported $3.01M federal government employees, including U.S. Postal Service (USPS) employees. This represents an 8% growth since Trump’s first hiring freeze in January 2017. However, excluding USPS, the federal headcount reflects only a 5.3% (121 employees) increase during that time. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

According to the March 2024 OPM FedScope data, the Department of Veterans Affairs (VA) was, by far, the largest government employer accounting for 21.4% all federal employees. The VA, along with the remaining 19 agencies below, could find themselves targets for reductions beyond the existing vacancies. Conversely, agencies with smaller workforce footprints may find themselves eliminated or consolidated with other agencies.

 

 

 

 

 

 

 

 

 

 

 

 

Federal Contractors Will Feel the Heat

Regardless of the final plan, one of the proposed DOGE concepts includes leveraging attrition. This not only includes retirements, but vacancies created by employees failing to comply with the EO mandating a return to in-person work five days per week and from ongoing terminations. This will inevitably lead to widespread vacancies within contracting offices, and federal contractors will feel the impact.

While awarding new contracts to fill the voids such as program managers is expressly prohibited, agencies may rely on contractors to fill the gaps using existing contracts, leading to modifications and increased scopes of work. Delayed contract awards, recompetes and/or cancellations are also possible, especially if the associated projects were dependent upon filling vacant positions. Agency reorganizations will also require vendors to establish relationships with new procurement officials who may be inexperienced with acquisition processes or unfamiliar with their capabilities, and firms may face new regulations and compliance requirements. As new procurement environments evolve, increased competition may drive down prices narrowing profit margins. Potential budget and funding reallocations in a dynamic and uncertain market could result in financial instability among small businesses that rely on federal contracts. 

 

*updated to include U.S. Postal Service employee numbers.