A contracting firm called Leidos took in more than $16 billion in revenue last year, most of it through contracts with federal agencies like the Department of Veterans Affairs.
So when the Trump administration’s budget cutters took aim at the V.A. last month, it seemed like bad news not just for the department’s employees but also for Leidos and dozens of other private-sector firms.
“No more paying consultants to do things like make Power Point slides and write meeting minutes!” the department’s secretary, Doug Collins, wrote on X. Overall, the department indicated that it was canceling more than 850 contracts worth nearly $2 billion.
But shortly after Mr. Collins’s announcement, the outlook for some of the V.A.’s contractors seemed to brighten. The department put the cancellations on pause, saying it needed to review the contracts to avoid “eliminating any benefits or services” to veterans or V.A. beneficiaries. It later narrowed the list of canceled contracts by a few hundred.
And experts on government contracting said cuts to the agency, which announced last week that it was seeking to trim 80,000 of its roughly 480,000 employees, could even lead to increased spending on federal contracts.
These experts noted that cutting employees without reining in a government function — like providing health care and benefits to veterans, work in which Leidos plays a key role — typically means the job will fall more heavily on contractors.
“If you cut people and you don’t cut the mission, you have to rely on other sources to do the work,” said Stan Soloway, a Defense Department official in the Clinton administration who has led a trade group representing government contractors.
A Leidos spokesman, Brandon Ver Velde, said in a statement, “We strongly support the goal of creating a dramatically more efficient and effective federal government that costs taxpayers less money,” adding that “delivering innovations that do that is core to our mission.”
However it shakes out, the insular and little-understood world of federal contractors is by no means immune to the uncertainty that President Trump and Elon Musk, the head of his government efficiency initiative, have brought to the federal apparatus.
In the months after the presidential election, as it became clear that Mr. Trump and Mr. Musk would rein in federal agencies, the share prices of publicly traded contractors like Leidos and Booz Allen Hamilton plummeted. (The prices are still up from earlier this decade.)
Then one of the government’s top officials involved in procurement, the acting head of the General Services Administration, sent a memo last month asking the heads of federal agencies to review a list of potentially nonessential contracts — those that generate only “a report, research, coaching or an artifact” — and defend any they deemed essential.
A follow-up memo listed the 10 highest-paid consulting firms across the government and said they were scheduled to receive over $65 billion in fees beginning this year. “Please provide us with a list of the contracts with these firms that your agency intends to terminate and those that it intends to maintain,” the memo added.
Leidos and Booz Allen were on the list. Employees of some contractors said their firms had discussed job cuts amid the scrutiny.
But the Trump administration appears to have softened its stand since then. After meetings with executives of large contracting firms, The Wall Street Journal reported, another top G.S.A. official said in a statement that “we value their partnership” and that “we welcome them working with us to decrease our excessive government spending while continuing to provide the essential services the government needs.”
Stock analysts who follow companies specializing in federal contracts said they were generally bullish on the companies’ prospects. “Short term, there will probably be some disruption and uncertainty for the contractors,” said Scott Mikus, a director at Melius Research who follows federal contractors. “But probably in the medium to long term it’s a good thing.”
Matthew Akers, an equity analyst at Wells Fargo, noted that for all the attention-grabbing headlines, the government had canceled few large contracts so far. “If there was low-hanging fruit they could have cut,” he said, “I think they would have done it.”
Leidos appears to illustrate the point. Founded by a nuclear physicist in 1969, the company was soon hired to study the effects of nuclear weapons by the federal government, which had just stopped conducting atmospheric tests in favor of simulations. The company, then known as Science Applications Inc. (and later SAIC), entered the health care business the next year, winning a federal contract to study radiation treatment for cancer.
Like many federal contractors, SAIC benefited when the Clinton administration trimmed the federal work force by hundreds of thousands and ended up increasing the government’s reliance on private firms, according to a 2011 report by the Project on Government Oversight, a nonprofit group that monitors federal contracting. The George W. Bush administration expanded contracting further.
The company went public in 2006 and renamed itself Leidos in 2013, spinning off SAIC as a smaller consulting business. A series of acquisitions vastly expanded its size and reach.
Today, Leidos makes products as varied as airport scanners and guided missiles. It develops offensive and defensive cyber capabilities, conducts intelligence analysis, upgrades computer systems at several federal agencies, performs medical exams for veterans and runs a federally funded cancer research lab, where it employs more than 2,000 scientists, technicians and administrators.
While these are not businesses that would normally be housed inside a single company, government contracting creates a strong rationale for combining them: All the businesses benefit from Leidos’s intimate knowledge of the often-convoluted and time-consuming process of winning federal contracts.
“Understanding the procurement process, from the award to the contract performance to invoicing to the payment cycle, is really, really important,” said Robert Guerra, who spent decades in senior positions at federal contracting firms. “You need to have systems in place to do it.”
With the government buying more than $450 billion in services and more than $250 billion in goods each year, jumping through such hoops can be lucrative. According to a federal securities filing, Leidos, which employs nearly 50,000 people, earned more than $16 billion in revenue last year and about $1.25 billion in profit. The company said that nearly 90 percent of its revenue came directly or indirectly from federal contracts, and that contracts with the Pentagon or U.S. intelligence agencies generated about half of its revenue.
So far, Leidos has suffered little loss of business. In a report circulated in February, Mr. Akers of Wells Fargo said Leidos might be more exposed to cuts than other contractors because more of its business lay on the civil side of the government’s ledger than with the military. He noted that Mr. Musk’s Department of Government Efficiency had already identified savings of more than $200 million from a Leidos information technology contract with the Social Security Administration.
But the figure appeared to be an error, and the only savings from a Leidos contract with the Social Security Administration appeared to be worth about $500,000, as Mr. Akers noted in a later report.
In other cases, Trump administration priorities are likely to bring new opportunities for the company. Leidos recently won a contract with the V.A. to provide screenings that verify veterans’ disability status, and it may be well positioned to expand its veteran health care business amid the cuts at the department.
“They do medical and disability exams,” Mr. Mikus said. “Veterans are still going to need care as you’re trying to work down the backlog of cases.” Leidos said that it did not see itself as a replacement for V.A. employees but that it could help the department serve veterans better.
Peter Kasperowicz, a V.A. spokesman, said by email that the agency was working to redirect billions of dollars in “non-mission-critical efforts” to reduce backlogs and improve care. He added, “Contracts will be canceled in some instances, and in other instances new contracts will be created to reduce duplicity and leverage better buying power.”
Of course, it may be a mistake to assume that the uncertainty created by Mr. Trump and Mr. Musk will eventually pass, returning the contracting business to its pre-election state. Federal contracting has traditionally provided companies with stable, predictable revenue but lower profit margins than more volatile private-sector work. If the federal government is no longer a reliable customer, the economics of the business may change.
“You’ve got to price in ‘What probability do I think this will happen?’” said Mr. Guerra, the longtime contractor, alluding to the possibility that the Trump administration will abruptly cancel a contract. He suggested that companies might begin to assume a contract was worth, say, 5 percent less than the stated amount to account for such risk.
Still, the industry has arguably survived worse, including spending cuts from a deal between President Barack Obama and congressional Republicans.
Around the same time, in June 2013, news outlets published revelations provided by Edward J. Snowden, a Booz Allen employee who leaked one of the most significant troves of classified documents in U.S. history. The share price of his employer quickly dropped more than 5 percent as investors appeared to worry that the government would curtail its use of contractors on sensitive national security work.
But within a month or two, the crisis had passed, and Booz Allen stock was up about 20 percent. As of this month, its share price had appreciated many times over.
Jack Begg and Kirsten Noyes contributed research.