Contractors prepare for prospect of deep federal budget cuts should Congress fail to reach a budget agreement before the end of the year.
Sequestration is topic No. 1 among the federal contractor community these days. But there may be more than just talk surrounding the prospect of deep federal budget cuts should Congress fail to arrive at a budget for fiscal 2013 before fiscal 2012 ends on Sept. 30.
Warren Suss, president of Suss Consulting, said concern about the impact sequestration would have on contractor jobs and the economy is being translated into political pressure on Capitol Hill.
Contractors are “letting the Hill know that sequestration would create a lot of pain,” he said.
Suss said he could not specifically name contractors that are engaged in a concerted lobbying effort because his evidence is anecdotal, having spoken to only a few firms. “But I know that there sure are a lot of individual companies that will try to work this way. There’s too much at stake,” he said.
Suss said, “Companies are working the Hill now to try to talk some sense into Congress in terms of helping them understand the potentially devastating impact of sequestration. The impacts in many cases are counter to the intent of savings budgets.”
Suss said too that because of the way current federal contracts are written, particularly DOD awards, “industry has the right – and will exercise the right – to go back to the government to request additional money for contracts that are delayed or cut short due to sequestration.”
Companies can’t keep engineers and IT specialists on their payroll “sitting and waiting until this situation gets resolved,” he added.
“So, in many ways, industry is thinking about the unthinkable and coming up with ways of cutting back on costs if their revenues drop in a dramatic way due to sequestration,” Suss said.
In fact, Lockheed Martin Chairman and CEO Robert Stevens has broached that thought.
Speaking at a Lockheed Martin media event June 19, Stevens said, “Our position is to not have sequestration occur in its current form. I think it’s an improper way to try to get real traction in reducing spending in an efficient and effective way.”
But if sequestration does occur, he said, it could cause significant disruptions in Lockheed Martin’s supply chain because the company would have to modify its contracts and streamline operations – shorthand perhaps for employee layoffs.
Even without sequestration, Lockheed Marin is already consolidating many of its operations to reduce costs, added Christopher Kubasik, Lockheed’s president and COO. And he warned that if sequestration were to happen, additional facilities would be closed and consolidated.
Suss said, “Sequestration could be very destructive to the ongoing improvement and enhancement of the government’s technology, including support for troops in the field.”
Perhaps that’s why most contracting executives whom Washington Technology contacted for this story declined to comment.
A BAE Systems spokesman said the company isn’t scheduling interviews on the topic of sequestration at this time. But he provided the following statement:
“The defense industry, military leaders and many national security experts have sent a unified message to Congress that automatic cuts will be harmful and would have dire consequences including job losses. Given the ambiguities in the Budget Control Act, it is challenging to determine which specific programs will be cut by DOD if sequestration occurs.
“That said, we are working with industry groups to identify potential impacts. And like any prudent business, we are trying to better understand the overall impact on BAE Systems and assess the company’s obligation to notify employees of possible layoffs.”
One CEO willing to talk about the situation was Sid Fuchs, president and CEO of MacAulay-Brown, a defense contractor with offices in Dayton, Ohio and Northern Virginia.
“Cuts are coming. To what level of severity, we’re not sure,” Fuchs said. “It’s also not clear within the customer community where the cuts are going to occur.”
Sequestration “is a storm we’re going to have to weather,” he said.
Despite the uncertainties surrounding sequestration, Fuchs said MacAulay-Brown is positioning itself for growth, making investments in the company and in technology that includes hiring new talent.
Fuchs said companies like his whose core competencies are in key national security mission areas will continue to see a positive market. “However, I do think they’re going to get impacted as well,” he added.
“We are very heavy into the national security and intelligence space and we’ll continue to do those things,” he said. “We continue to spend a lot of effort on the intelligence analysis and operations markets as well.”
As a private company MacAulay-Brown isn’t constrained by 90-day reporting rules and therefore can approach the situation with a long-term view, he said. “We’re trying to be aggressive and keep our costs down and play to win.”
There’s a difference, Fuchs said, between playing to win and playing not to lose. “You need to be diligent and keep moving forward.”
Companies that continually cut expenses so as to continue making their profit numbers will be in a less than favorable position “when the storm passes – and it will,” said Fuchs, who likened the potential effects of sequestration to Darwin’s survival of the fittest.
“It’s sort of going to shake out the competition. I think the strong companies that are profitable, well run, well managed, that really have solid execution; those companies will continue to do fine,” he said.
However, “those companies that have tremendous weaknesses – whether it’s infrastructural or it’s [their] go-to-market model, I think those companies are going to have issues,” he said. “This is part of a natural process by which the weaker companies are shaken out.”
Nevertheless, Fuchs said he believes “Congress will find a way to either avoid sequestration by a continuing resolution or postponing it to some later time.”