Sequestration effects on Federal Contracts
There was a lot written about sequestration earlier this year, including a lot of panic that sequestration would all but shut down the government and our economy would crash. Well it seems that the economy did not crash and the government did not shut down. The news lately has died down relative to sequestration being a doomsday scenario. I think most of what we see today is "blaming" the loss of a program or government activity on the sequestration actions here and there but not the mass hysteria of earlier in the year. So what really happened with sequestration and what will the effects really be? I have recently read a couple of good articles that seem to have a handle on what is actually transpiring with respect to sequestration. In short, the impact is slow to see the actual results of the actions. We have seen some impact but the impact may grow over time, especially if sequestration continues into FY2014 and further.
One of the things that has quieted the talk about sequestration is the fact that unemployment seems to be falling, an opposite effect that some predicted from sequestration. Also, many of the largest defense contractors reported better than projected results in the second quarter this year, again contrary to what was feared from sequestration. It is worth taking a closer look at the defense contractors however. Many of them had international sales or sales to other sectors that helped buoy their results. In addition, any backlogs that these companies had may have helped buoy the results in the second quarter. In other words, the real impact of the sequestration actions have not yet had a full effect on these companies. On the other hand, many smaller businesses have felt the impact of sequestration earlier than the larger primes. Small companies do not normally have extensive backlogs, do not have international sales or diversification to help soften the blow.
There is also the larger picture. While the FY 2013 budget cut $37 Billion from the budget, the reductions in government outlays (what the government actually spent) were not that high. The reduction in outlays in FY13 were about $20 Billion. This is due primarily to "prior-year" appropriated funds that were used to "shore-up" gaps in programs that lost funding. That just "delays" the impact of these budget cuts to next year or later. If FY2014 continues under sequestration (there is no reason to believe it won't) this could result in a further decline in outlays as time goes on.
The bottom line on sequestration is that the effects will more than likely continue to grow over time. Even the larger firms will begin to show signs of strain as a result (there are only so many international sales and only so much backlog available). So the effects of sequestration are not just a temporary problem, this will go on for a while. Smart companies will look at how they can mitigate their risks of doing business with the Federal Government by doing things like evaluating the programs that are in danger of being eliminated and concentrating efforts on programs that are more critical and not subject to cuts. It also is a good time to increase business development and customer relations. Knowing your customer well will not only alert you to new opportunities but will increase your customer's knowledge of your value proposition.