Government Contract: Do you need to evaluate your customer?

Many times in the commercial business world companies do their due diligence prior to accepting a large order from a new customer.  This includes evaluating whether or not the new customer is a viable concern, how well they pay their bills and their capability of meeting the obligations in the new arrangement. In other words, what is the risk involved in doing business with this new customer.  It certainly doesn't make good business sense to incur cost on the business side if the revenue to be realized in return does not come through or is at risk.   In the past, this due diligence was not required on a Federal Government contract since the government had the highest credit rating possible and they always paid and on time.  That may be changing right now. In 2011, we saw Standard & Poor's downgrade the U.S. credit rating for the first time in history from AAA to AA+. Last week many of the credit rating agencies were saying that the sequestration cuts would not be enough to protect the current credit rating of the US Government.  The agencies probably would have downgraded the rating of the US had the sequestration cuts not gone into effect but they are now also saying that these cuts are not sufficient to establish control of the spiraling debt.  Many, including Fed Chairman Ben Bernanke, think that the sequester are only very limited, short term measures.  The main drivers of the deficit remain the entitlement programs and nothing is being done to address them.  Combine that with the aging population in the US and the debt can be seen to continue to rise, even with the sequestration cuts. 

We have seen that the government is slowing payments to try and conserve cash flow (See our blog dated Feb. 25, 2013 on "Changes in the Government Contract world" and our blog dated March 8, 2013 on "The Effects of Sequestration on Small Business").  These measures are all a drop in the bucket compared to the entitlement programs that are driving the deficit.  Given the inability of Congress to work together on both sides of the aisle lately, it seems unlikely that progress will be made this year or in the near future.  Should that continue, the credit rating agencies will have no choice but to lower the ratings again.  This becomes a little more risky for businesses contracting with the federal government.  These businesses will have to evaluate the risk and now do some due diligence on whether or not they want to do business with the Federal Government.  There is a price for doing business with the Federal Government.  This price may rise in the near future as well. 


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