COMMENTARY

Shutdown impact has ripple effect across the market

Government shutdowns cause lasting financial impacts on a much larger community than government employees and families. Often times, government contractors and their employees are overlooked and forgotten during shutdowns.

For contracting companies, large or small, there are extreme financial impacts associated with a lapse in appropriations forcing different levels of program shutdowns across government agencies.

Generally, there are three types of situations contractors find themselves in - all of which present different challenges and impacts to the businesses and their employees. The effects of all these scenarios will have harsh impacts to our communities. 

Complete Stop Work: Hits Revenue Hard, Moderate Effect on Earnings/Profit/Corporate Staff

Contractors perform many important functions that add significant value to government agencies – such as processing new security clearances, assisting with program administration, and providing financial support including payment processing. Often these contractor functions are not deemed mission-critical by the government during a shutdown.

During a complete stop work shutdown, contractors supporting these agencies are instructed to stop all work which results in contractor employees being forced to use their personal paid time off before being furloughed (to stay home without pay). This is especially the case on larger programs where companies cannot afford to pay a large number of employees who are not billing their time.

Ironically in this situation, contracting companies (while not producing revenue) realize less bottom line financial impact. Keeping employees at home without pay means companies only have the cost of their fringe benefits hitting their bottom line. Although some companies may temporarily allow employees to work on corporate initiatives, it is difficult to avoid furloughs when a government shutdown has no resolution in sight. This leads to companies furloughing or even cutting corporate functions since less revenue means less ability to keep indirect staff.

Partial Stop Work: Moderate Effect on Revenue – Hits Earnings/Profit Hard

In the case of a Partial Stop Work, contractors are often told only specific employees supporting a mission are required to report to work, or they are considered only 25 percent to 75 percent mission-critical.

While this is good from an employee and agency perspective, for a contracting company, it means the employee cannot be placed on furlough and the company must absorb the cost of any remaining hours of the employee’s work week. Financially, this causes a tremendous impact to companies. In a competitive industry with already tight profit margins, companies lose money very quickly upfront, even though they will get paid for the work performed at some future date.

This has lasting effects on a company’s profitability and can weaken their cash flow position as the cost of labor exceeds the revenue earned.

Mission-critical Work Without Pay: Hits Cash Flow Hard – Effects Ability to Sustain Operations

In the current government shutdown, mission-critical contractors are required to work without payment since the contractor’s employees performing work are critical to maintaining the agency’s mission. However, in this scenario it is important to remember that many agency financial centers are not deemed mission-critical, and therefore unable to provide payment to contractors.

This is the worst type of scenario for all businesses. Even though contractors may be paid at a future date, cash is needed to pay their employees on time. While most companies use lines of credit to operate, they often do not have enough credit to cover extended non-payment from the government. Not all companies have the same rainy day cash reserves either, so if banks and/or creditors are unable to grant credit extensions, companies may be forced to stop performing work.

Alternatively, companies may choose to stop paying their employees, but this creates a huge corporate problem with human resources compliance. Either way, increased borrowing hits a company’s bottom line hard as interest expenses add up. With all available cash going to cover payroll expenses, companies are forced to stop discretionary funding for training courses, hardware/software purchases, innovation investments, and any other non-critical expenses.

The Net Effect – A long lasting economic decline that resounds across multiple industries.

An extended government shutdown will have resonating financial impacts for contracting companies throughout the 2019 fiscal year. It is likely that companies may have to wait three to four months to receive payment once government finance centers return to regular operations.

Unpaid invoices from November, December, and January will create even more workload and delays. As we move forward, costs continue to accrue - making a company’s financial stability progressively weaker.

In addition, planned government acquisitions will continue to slide later into the year adversely impacting company revenue projections, financial health (debt to equity), and planned investments. In the long run, it is likely that companies will see employees who are not getting paid look for jobs in other markets or industries which will cause problems with turnover and recruiting.

As contracting companies of all sizes deal with major dilemmas resulting from lack of cash flow, potential default on credit payments, stoppage of service to clients, and in extreme cases – going completely under – there will be a ripple effect seen across other industries such as dining, tourism, and retail.

As employees are forced to use PTO and go without pay, their disposable income will dramatically decrease. With less income to spend, these industries will likely see a steep decline in number of families dining out, taking vacations, and making large discretionary purchases.

To avoid large-scale negative economic impacts, it is imperative that government officials end the current shutdown and resume operations across all of government. Financial pressures on contractors are building – companies are running on reserves and untold employee jobs are at risk.

Without near term relief, many companies and their employees will experience lasting hardships. It is imperative our elected officials take swift and decisive action to end the shutdown and prevent further damage to the American economy.

Afterall, does anyone else think it is ironic that with a Republican President and Senate the government is shut down over an argument about how to spend money we do not have. Anyone remember the concept of fighting for a balance budget?

About the Author

Bob Lohfeld Jr. is the founder and CEO of Sev1Tech, a government contracting firm headquartered in Woodbridge, Va. It is a provider of IT, cybersecurity, cloud and program management support services.

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