Whether or Not Sequestration Happens, the Sky Will Fall on Government Contractors - (Archived)

Laurie Morrow, Director of Research Services, and Melissa Burgess, Research Analyst at Market Connections, Inc.

If Congress approves spending levels that exceed the budget caps of the Budget Control Act of 2011, we could be entering into an era of sequestration in 2013.   Whether or not sequestration actually happens, there will still be deep budget cuts that will seem like the sky is actually falling on government contractors.

This was our big takeaway from the “OMG—What If Sequestration Happens?” event hosted by Professional Services Council (PSC), the trade and advocacy organization for professional and technical services contractors that serve the federal government.  Alan L. Chvotkin, PSC Executive Vice President and Counsel and Bill Roberts, an attorney at Wiley Rein, LLP, spoke at the July 10 event in Arlington.

According to Roberts, reductions would be made uniformly across all categories if sequestration were to occur, and here’s how it would all play out:

  • $1.3 trillion in reduction could be required in FY 2013 through FY 2021
  • The bulk of the cuts would be split between Department of Defense ($547 billion) and non-Defense accounts (also $547 billion)
  • $100 billion in savings could come from reduced interest payments on reduced debt

As a result, agency customers will look to terminate and/or restructure programs and contracts, as well as move towards firm-fixed-price contracts, even if not appropriate.  Agencies will likely also increase the use of bundled procurements and cost-sharing contracts across various agencies.

In addition, in this new environment, contractors will run the risk of over-servicing their government customers – often feeling compelled to performing services that are outside the scope of the contract – to keep government customers satisfied. The speakers at the event reinforced that contractors need to protect their interests and focus on “value engineering,” while not giving away the shop for free at the same time.

So how should contractors cope in this new environment?  Clearly, this will be a time for contractors to be proactive, fine-tune their business processes and become creative and targeted in their marketing efforts.

Roberts also brought up a point that resonated strongly with us:  contractors need to “stay even further in contact with customers to learn of impending changes.”  While many agencies, including the Department of Defense, have been instructed to move forward with a “business as usual” approach, contractors are seeing some government programs and new contracts fall into a holding pattern while waiting for Congress to find an alternative to sequestration. This could make it increasingly difficult to obtain information about programs and priorities.

As such, contractors could gain deeper insights through  customer satisfaction programs and program performance evaluations. With a third party research provider probing the needs, expectations and motivations of agency customers, government executives are likely to provide more candid feedback. This will give contractors the actionable information they need to continue providing value and retaining business.

No matter how things shake out with the potential sequestration, the painful reality is that major cuts are coming in 2013.  Now is the time for contractors to proactively seek more information from and engagement with government customers, because the sky will be falling very soon.

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