Understanding HHI Concentration Risk in Federal Contracting
Published 2026-02-15
The Herfindahl-Hirschman Index (HHI) is a measure of market concentration originally used in antitrust economics. In the context of federal contracting, we adapt it to measure how concentrated a company's government revenue is across its customer agencies.
Why Concentration Matters
A contractor that earns 80% of its revenue from a single agency is in a fundamentally different risk position than one that spreads its work across 10+ agencies. If the dominant agency cuts budgets, re-competes the contract, or awards to a competitor, the concentrated contractor faces catastrophic revenue loss.
This is particularly relevant for mid-size GovCon firms ($50M-$500M in annual revenue) that may have grown rapidly by winning a few large contracts but haven't yet diversified their customer base.
How HHI Is Calculated
The HHI is calculated by summing the squares of each agency's share of a company's total obligations. For example:
- A company with 100% of revenue from one agency: HHI = 100² = 10,000 (maximum concentration)
- A company split evenly across 4 agencies: HHI = 25² × 4 = 2,500
- A company split evenly across 10 agencies: HHI = 10² × 10 = 1,000
Concentration Thresholds
ContractCliff uses three concentration levels based on the HHI score:
| Level | HHI Range | Interpretation |
|---|---|---|
| HIGH | Above 2,500 | Heavily dependent on 1-2 agencies. Significant revenue risk. |
| MED | 1,500 - 2,500 | Moderate concentration. Some diversification but still exposed. |
| LOW | Below 1,500 | Well-diversified across agencies. Lower single-point-of-failure risk. |
Using HHI for Competitive Intelligence
Concentration data is valuable for several use cases:
- Competitive positioning: If a competitor has HIGH concentration, they may be vulnerable if their dominant contract is re-competed. This is a potential BD opportunity.
- M&A diligence: Acquirers should evaluate the HHI of target companies — high concentration means higher post-acquisition risk.
- Strategic planning: Contractors can use their own HHI score to prioritize diversification efforts and reduce risk.
- Investor analysis: For publicly traded defense contractors, HHI provides a quantitative measure of revenue risk beyond what earnings calls reveal.
Finding Concentration Data on ContractCliff
Every company profile on ContractCliff includes an HHI concentration badge and detailed agency breakdown. Search for any federal contractor to see their concentration score, top agency, and percentage of revenue from their largest customer.
The homepage also shows concentration badges for the top 10 federal contractors, making it easy to spot which large firms are well-diversified and which are concentrated.