Federal Contractors’ Pain Won’t Vanish After Shutdown End
The U.S. government shutdown may hurt contractors long after Congress and President Barack Obama find a way to open federal offices and resolve the debt ceiling dispute.
Federal agencies award more than $500 billion a year, or a rough average of $1.4 billion a day, to tens of thousands of contractors. With each day of the partial shutdown, the pipeline gets more clogged by late payments, halted work and canceled solicitations for new contracts. That bottleneck may affect contractors’ fourth-quarter results.
“Even if the government suddenly opens for business, we can’t expect everything to get back to normal right away,” said Larry Allen, president of Allen Federal Business Partners, a McLean, Virginia-based consulting company. “This is going to be a wave that makes its way through the government’s operational infrastructure probably at least until the end of the calendar year.”
If the shutdown continues through the end of the week, it will be difficult for big contractors to make up for lost revenue before the end of the year, said Michael Lewis, managing director at McLean, Virginia-based Silverline Group LLC, a strategic consulting firm for aerospace and defense.
“If the government defaults, all bets are off the table,” Lewis said in a reference to Oct. 17, the day on which the U.S. Treasury Department says the nation will need to borrow more money to pay its existing bills.
The companies may slightly reduce their fourth-quarter revenue estimates, he said.
The shutdown might also reduce some contractors’ earnings in the last quarter of 2013, Peter Arment, an analyst with Birmingham, Alabama-based Sterne Agee Group Inc., said in a report this week.
Lockheed Martin Corp. (LMT), the government’s biggest contractor, already has experienced some delayed payments because of the government’s furloughs, said Gordon Johndroe, a spokesman for the company.
About 800,000 federal workers, including Defense Department inspectors and auditors who help certify invoices from vendors, were furloughed when the shutdown began Oct. 1. The Pentagon said Oct. 5 it was reinstating most of the department’s 350,000 civilian employees.
Some of those previously furloughed workers “were needed to move invoices along” and their absence slowed payment processing, Bill Urban, a Navy commander and Defense Department spokesman, said in a phone interview. Now that they’ve been reinstated, payments should be back on track by Oct. 11, he said.
The military accounts for more than two-thirds of federal awards.
Lockheed, which put 2,400 workers on leave this week, should begin to recover payments now that most civilian military workers are back at work, Johndroe said in an e-mail. While the Bethesda, Maryland-based company reduced its furloughs by 20 percent, many employees aren’t able to work because civilian government sites are closed or the contractor has received a stop-work order.
United Technologies Corp. (UTX)’s Sikorsky Aircraft unit, which makes Black Hawk helicopters, is expecting late payments from the Pentagon, Paul Jackson, a Sikorsky spokesman, said in an e-mail. The unit slowed its helicopter production last week after defense inspectors, who are required to monitor production lines, were placed on leave.
United Technologies, based in Hartford, Connecticut and the sixth-largest federal contractor, canceled plans to furlough as many as 4,000 workers this week after the Pentagon’s decision to recall civilian employees.
Small companies are generally more vulnerable because they don’t have as much capital or credit to sustain themselves.
Companies send invoices to federal agencies at different times, depending on the terms of the contract, said Allen, the consultant. Payment is supposed to be within 30 days.
Most smaller companies submit invoices at the start of each month, Allen said. That means those contractors won’t experience the full impact of the shutdown until November, said Maria Horton, a disabled veteran who owns EmeSec Inc., a 38-person cybersecurity company based in Reston, Virginia.
EmeSec has been told to stop work on three contracts during the budget impasse, she said. It is working on about a dozen contracts during the shutdown.
“We will not see the true implications until the first week of November,” Horton said in a phone interview. “If you haven’t been able to work in early October, you’ll see fewer hours and less revenue because you’ll have little in your invoice for November.”
A unit of Leidos Holdings Inc. (LDOS), a Reston, Virginia-based engineering services vendor that was spun off from SAIC Inc. (SAIC) last month, put 800 workers on leave because the government closed the Frederick National Laboratory for Cancer Research in Maryland where they work, Stu Shea, its president and chief operating officer, said in an interview.
Tougher times are ahead, Shea said.
“You’ll begin to see more significant and deliberate actions by companies to deal with their growing overhead problem,” he said. Those actions may include plant closings, benefit cuts and the idling of more staff, he said.
Barbara McClain, owner of a construction company in Andalusia, Alabama, said she’s ready to dump the federal government as a customer.
Her company, McClain Contracting Company Inc., does work for the Defense Department and has struggled to win orders during the past several years, she said.
Since the federal shutdown began on Oct. 1, she has cut two positions in part because the government canceled five contracts her company had sought, she said. That means her company wasted money preparing proposals for business that ultimately wasn’t awarded to any firm.
“In 2009, I thought I’d work for as long as I could get out of bed,” she said in a phone interview. Now, “I think it’s over.”
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