The 1993 meeting known as “the last supper” marked a turning point for American defense manufacturing. Then-Deputy Secretary of Defense William Perry asked defense industry executives to consolidate and streamline, explaining that post-Cold War budget cuts would no longer sustain many existing companies. The government would not direct how consolidation should occur or ensure that critical shortages did not develop.
Norm Augustine, who attended as CEO of Martin Marietta, later described feeling like he sat at a historical pivot point. That pivot compressed 51 major prime contractors into five: Lockheed Martin, RTX, Boeing Defense, Northrop Grumman, and General Dynamics.
Thirty years later, the effects of this consolidation continue to shape the nature of U.S. defense procurement. The reduced competition and diminished surge capacity stemming from that contraction created dependencies on a small number of companies. Mid-sized contractors occupy the space between these consolidated primes and small businesses, providing capabilities that neither category can efficiently deliver.
Margarita Howard, CEO and sole owner of HX5, operates a 1,000+ employee firm in this mid-sized market. Her company provides engineering, research and development, and information technology services to NASA and the Department of Defense. The work requires navigating between the primes above and small businesses below—a position that reveals both the opportunities and pressures facing mid-tier defense contractors.
Consolidation Created Supply Chain Vulnerabilities
The concentration at the top cascaded through the supply chain. Companies building tracked combat vehicles decreased from three in 1990 to one by 2020. Surface ship builders shrank from five to two over the same period.
There was also a drain of mid-tier suppliers. Small business participation in defense acquisitions declined by over 40 percent in the decade preceding 2022, according to the Department of Defense’s “State of Competition within the Defense Industrial Base” report. If the trend continues, DoD could lose 15,000 suppliers over the next decade. This attrition affects technical specialties where only a handful of companies possess specific capabilities.
The defense industry now exhibits what economists call vendor lock. When only one integrated entity possesses the capability to address complex requirements, sole-source contracting becomes unavoidable. The prime contractor dictates terms with minimal accountability because no competitive alternative exists.
HX5 sits above the small business threshold but well below the scale of prime contractors billing tens of billions annually.
“We have won some, for our size company, very large prime contracts,” Howard says. “And we have large businesses as our subcontractors.” This inversion—where mid-sized firms manage work for larger companies—reflects the capability gaps that prime consolidation created.
Technical Depth as Competitive Advantage
HX5 differentiates through workforce composition rather than capital intensity. The company focuses on STEM professionals with government experience rather than investing in extensive manufacturing infrastructure.
“Our focus is professional support services in research and development and in specialty areas, primarily the STEM fields of science, technology, engineering, and math,” Howard says. “So, across the DoD and NASA, those are the specialties that make up our primary workforce. They have to have advanced education.”
The educational requirement narrows the talent pool considerably. Defense work adds security clearance requirements and government-specific experience on top of technical credentials. Yet HX5 maintains low turnover. “Many have been with us for 10 years or so, and we just have a highly dedicated and experienced workforce,” Howard says.
The company prefers hiring professionals with prior NASA or DoD experience. “Experience in their respective fields, while supporting these agencies’ respective programs and missions, is very different from experience gained from working in the commercial world,” Howard explains.
HX5 operates at over 70 across locations and 20 states. Scale matters, but technical capability determines who qualifies to compete. Technical depth allows the company to compete for demanding contracts that smaller firms can’t staff.
The Dual Role Strategy
Mid-sized contractors navigate between prime and subcontractor roles depending on the opportunity. This flexibility can provide revenue stability and build the diverse performance history needed for future competitions.
“When pursuing work as a prime contractor, the company has to invest in comprehensive proposal development, form teaming arrangements, which can sometimes be very complicated, manage client relationships, and prioritize the various competitive risks that may affect any of a number of potential outcomes,” Howard says.
Subcontracting focuses on specialized work within someone else’s program. “When pursuing work as a subcontractor, you tend to focus on specific specialization areas, you network regularly with multiple prime contractors, and try to demonstrate the value you bring as a partner to the prime’s team,” Howard notes.
Government procurement officers prioritize proven performance, creating a catch-22 for new contractors. The subcontracting path helped HX5 build credentials before competing as a prime. Subcontracting provides performance records that enable prime competition later.
Augmenting Primes
The Brookings Institution noted that more than 12,000 small and medium-sized firms operate as subcontractors to prime contractors. Many of these companies possess specialized capabilities that primes cannot economically maintain in-house.
Mid-sized contractors can’t replicate the capital infrastructure of Boeing or Lockheed Martin. But they provide alternative sources of technical expertise and program management that reduce single-point dependencies. When multiple contractors can execute similar work, agencies gain negotiating leverage.
Howard emphasizes relationship building with agencies. “Building strong relationships with government agencies is an invaluable asset for successful government contractors as it can serve to provide the contractor with positive performance appraisals and sometimes even lead to new or additional business,” she says.
Economic and Competitive Pressures
Mid-sized contractors face pressure from both directions. Large primes use economies of scale to underbid on work that mid-tier firms could execute. Small businesses benefit from being able to focus on much smaller, highly specialized programs that mid-sized firms may have outgrown.
The Semiconductor Industry Association projects the United States will face a deficit of approximately 1.4 million technicians, computer scientists, and engineers by 2030. An estimated 82% of defense industrial base companies report difficulty finding qualified STEM workers. This talent shortage affects all contractors, but mid-sized firms lack the brand recognition and compensation packages that help primes recruit.
Howard addresses workforce competition through mission emphasis. “You have to get up in the morning and be excited about the particular program you’re supporting,” she tells recruits. “Let’s get to the moon, let’s accomplish this mission overseas.”
