There will be about $36 billion fewer federal dollars up for grabs by contractors next fiscal year, according to new analysis of the president’s proposed budget, a projected decrease that could be felt by businesses who work for the government.

A report from FedSources, a market research firm in McLean, Virginia, says contractors can expect to see about 5 percent fewer contracts in the fiscal year beginning October 1. It’s a big change for a business community that has seen contracts rise for nearly a decade.

“It may not be $36 billion after it goes through the appropriations process, but it will be a cut, and it will be significant,” said Ray Bjorkland, senior vice president and chief knowledge officer at FedSources.

The cuts are in part a result of rising costs for energy and health care combined with President Barack Obama’s freeze on discretionary spending, according to the report, as well as the current “insourcing” initiative, aimed at less reliance on contractors by way of hiring more government workers.

FedSources projects government spending on contractors will remain relatively flat through fiscal 2014. The report shows spending dipping from $720 billion in fiscal 2011 to below $700 billion in fiscal 2012, then rebounding to $727 billion by fiscal 2014. The fiscal 2010 budget has $756 billion for contracts.

“It’s going to affect the so-called government-services sector—the companies that do not necessarily have some unique, high-demand domain expertise, but are rolling up their sleeves and helping the government run on a day-to-day basis,” Bjorkland said.

Reduced contracting will mean fiercer competition for the contracts that are available, Bjorkland said. “We anticipate more protests because people are going to be upset if they lose their incumbency or if they are cut out of future jobs because of insourcing,” he said.

Contractors will have to carefully align their offerings with spending priorities and consider partnerships with other companies previously seen as competitors, the report says. While big government contractors will feel some of the pain of such a drop, smaller companies will be more adversely affected by contract scarcity in the coming years.

One of the few agencies where Bjorkland said he expected to see contracting growth, albeit a small amount, is the Veterans Benefits Administration. Contractors are expected to be hired to continue to help disentangle the complicated paperwork and benefits system.