Sequestration would be bad news for contractors on many levels

By Stan Soloway,August 06, 2012

The specter of sequestration, which no one seems to support or believe to be wise policymaking, continues to loom large, despite recent reports of some progress and a change in the tone of the dialogue on Capitol Hill.

What would the effects be if this hammer actually comes down? Regrettably, there are still too many variables to bring any clarity to either the immediate or the longer-term effects, but we know there would be many. Moreover, we know that regardless of whether sequestration is imposed, the government services market will continue to be marked by two undesirable characteristics: increasingly constrained resources and uncertainty.

If the law is not changed, sequestration goes into effect in January and the full-year required spending reductions must be shoehorned into only three quarters of the fiscal year, exacerbating and magnifying its effects. Thus, it is reasonable to expect layoffs across many industries that support the government. In July, George Mason University’s Stephen S. Fuller estimated the total national employment impact could be in the millions. However, particularly in the services industry, it is still too early to speculate on the pace of those impacts and precisely where they would occur.

While contracts entered into prior to Oct. 1 are exempt from sequestration, all funds available as of Oct. 1 would be subject to it — regardless of whether those funds are tied up by an awarded contract. And because the Washington area is a major center of federal activity, the impacts here will likely be felt more acutely than most other areas of the country in terms of both job loss and job creation.

Contractors awaiting the award of new work after Oct. 1 would likely find longer than usual delays in procurement decision-making as those unobligated funds become the first targets for reduction, which in turn would affect job creation. And it is also likely that existing contracts would be reduced in scope or terminated as agencies struggle to meet the requirements of sequestration and exercise whatever flexibility the eventual implementation rules allow.

While waiting to see if Congress and the president can agree on actions to avoid sequestration, there are actions companies should take to prepare. To start, companies should inventory all of their contracts and contract structures, since cost-type contracts are more likely to be affected by sequestration than fixed-price contracts. They also need to understand and trace the source and timing of their contract funding. And they should work proactively and collaboratively with their customers, who face the same uncertainties and planning challenges, to identify potential cost reductions that might mitigate some of the effects of the budget cuts.

But don’t forget two other key facts. First, contract spending is down and that directly translates into some combination of jobs lost and jobs not created. Second, this region is home to tens of thousands of civil servants who could also face furloughs and potential longer-term personnel cuts.

In the end, sequester is about more than job losses and economic impacts. It is about our government’s fiscal health and its ability to effectively and efficiently serve its citizens. Sequestration is a bad idea on every level, which is why, in the government contractor community as elsewhere, there is growing sentiment that it is time to set “party loyalties” aside and take the tough, statesman-like steps that are essential to finding a necessary alternative.

Stan Soloway is president and chief executive of the Professional Services Council, the nation’s largest organization of government services contractors. He was previously deputy undersecretary of defense in the Clinton administration.

 

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