Although the world as we know it did not end with the sequestration in 2012, for government contractors, the 2013 government shutdown was like a tornado ravaging a town after an earthquake. Many contractors had to lay off staff assigned to affected government agencies and programs, further straining their already anemic bottom lines. One large government contractor reported that the shutdown cost the government about $30 million, while others reported profit declines by more than 25%. Contractors that provide services to the government reported declining sales, and many warned that 2014 could be even worse. The few contractors who are improving their profits are doing so not by boosting their sales, but by managing their costs. That means declining employment, freezing or reductions to salaries and benefits, and an overall shrinking in contractor capability. As one contractor recently told the Wall Street Journal, “[d]oing business with the government is not for sissies.”
Unfortunately, the worst may be yet to come. Several federal agencies found extra funds that helped them survive the automatic budget cuts in FY 2013, allowing them to minimize draconian terminations of contracts. For example, the Pentagon used more than $5 billion in unspent money from previous years to ease its $39 billion budget cut. The Department of Justice (DOJ) found more than $500 million in similar money. Agencies that have thus far withstood the harshest effects of the 2013 cuts are preparing for a second round in 2014 that will likely be worse than the first. Senate Appropriations Committee Chair Barbara Mikulski (D-MD) said that agency budget chiefs “squeezed everything to get through the first year thinking we would come to our senses.” Unfortunately, that didn’t happen. Most of those accounting maneuvers were one-time steps. The automatic spending cuts in 2014 promise to be far more painful to both federal agencies and the contractors that support them. It is more important than ever for sub-contractors to establish themselves as critical to a project, and for potential buyers to assess just how necessary they are given these external budget pressures.