Surviving Sequestration: Tips for Federal Contractors
Published: April 03, 2013
Although most of us didn’t believe it would actually be allowed to happen, sequestration has become a reality. Contractors are now being forced to operate in this new environment which will require $1.2t in cuts over 10 years if Congress and the President can’t agree on equivalent savings elsewhere. That translates into $85 billion in cuts for FY2013.
What does this mean for the contracting community? Deltek estimates that for FY2013 federal contract spending could be cut as much as $35 billion, $30 billion in the Defense Department. Cost cutting implementation will depend on the agency. Some agencies, such as Energy, HHS and NASA are fairly dependent on contracting, making contract dollars a bigger target for those agencies, while agencies such as EPA and HUD are at the opposite end of the spectrum.
Although these cuts seem daunting, they only represent a 7% cut of total federal spending for FY2013, and also pale in comparison to other recent major economic events, such as the 54% loss in stock market value from 2007 to 2009 and the 33% loss in the housing market from 2006 to 2009. Additionally, starting in 2014 and for next 7 years, discretionary limits increase 1-2% per year even with sequester in place. Lastly, there are still billions of contract dollars that will be flowing.
So, what can federal contractors do to weather this storm? To survive the initial potential sting, contractors should know the termination provisions and option expirations for their contracts and subcontracts. Contractors should talk with their customers to understand what accounts are funding their contracts and how they will be cut, if at all. Don’t give the government an excuse to cancel for cause. Address any performance deficiencies immediately. Take preemptive measures to protect contracts from cancellation by working with clients on proactive approaches to reduce scope/cost of contracts. Finally, inventory contracts based on their importance to fulfilling federal customers’ missions to assess areas most at risk for cuts.
We’re not able to see the effects of sequestration in contract spending data yet, but federal budgets have been tight for the last few years. Despite this challenge, some federal contractors have managed to thrive and grow contract revenue. According to Deltek’s research, 62% of companies with $10-$100m in revenue were able to grow federal prime contract revenue between FY2011 and FY2012, 55% of those with $100m-$1b in revenue, 38% with over $1b in revenue, and 27% of those with less than $10m in revenue.
So, how are companies finding growth in a flat market? Diversification is the key.
To find organic growth contractors should expand current areas of expertise. For example, develop new contract channels for products and services already being offered. Expand presence on task order vehicles, if your company doesn’t already have a wide presence on those types of contracts. Subcontract more, if your company tends to prime on most contracts. Build operational excellence so that your contract past performance speaks for itself and gives you a leg up for new opportunities. Enter higher growth and somewhat protected business areas like cybersecurity, cloud computing, health IT, analytics/big data, or data center consolidation initiatives.
Port your offerings vertically to another agency or bureau within the same department and/or move horizontally to another department with similar business needs and requirements. Use available information resources to identify opportunities, gather information on agency buying behavior and preferred contracts, to identify potential teaming partners, and gather competitive intelligence.
Consider the state and local government as an adjacent market. Only one-fifth of grants to state and local government are impacted by sequestration. The state and local government market is in a good recovery and most governors’ agendas are changing to “improving” rather than “slashing.” While there are some segments in which all funding is subject to sequestration, such as employment/training and education, there are others in which the impact is a percentage of a small percentage, such as in health and transportation.
Finally, building work in commercial and international markets is aiding some contractors, especially defense contractors. According to a recent story in the Washington Post, Lockheed Martin has just received a patent for a material that filters water to make it potable and is in the process of increasing production and looking for commercialization partners. General Dynamics is expanding its commercial business and announced a partnership with Samsung earlier this year. BAE Systems bought Atlantic Marine in 2010 to help it expand into commercial shipbuilding.
Sequestration, budget negotiations, and deficit reduction efforts will continue to stifle federal budgets for the foreseeable future, requiring contractors to venture out of their comfort zones and, in some cases, make difficult business decisions. However, companies who tighten operations, and creatively diversify offerings, contract channels, and their client base can and will survive.