Well, we avoided going over the fiscal cliff on January 1st but the issue with sequestration of the budget was only postponed. Congress, as they have become accustomed to doing recently, pushed the deadline for sequestration of the budget down the road by a couple of months. But recent actions from the Department of Defense indicate that this department is bracing for sequestration. Secretary Panetta recently questioned the ability to manage the department if sequestration goes into effect:
Each branch of the DoD has issued statements of near-term actions to accommodate possible reductions to the FY-2013 budget. Most expenditures from the department are being put on hold, other than mission critical type expenditures. We have already heard from at least one contractor that the contract they thought would be awarded this month is being held indefinitely. This is not an unusual situation. So how does this play into the DCAA? We all know that there is a huge backlog of DCAA audit work they are trying to work their way through. With the Defense Department putting purchases on hold temporarily and/or severely cutting back, theoretically the DCAA should make some headway into the backlog. If further programs are cut, the amount of incoming work to the DCAA should slow down and allow the DCAA to "catch up" so to speak. In the very short run there may not be a noticeable difference. Over the next year or so, if the DCAA catches up, you may see the DCAA being more thorough and even selecting more contracts to audit. This could mean more scrutiny for the contractors that have programs that survive. This would only mean that contractors would have to spend more time and care on compliance issues. The chances of an audit may go up over time as well if that is the case.
On the other hand, what if the Defense Contract Audit Agency is also subject to sequestration cuts? Then it makes sense that their workforce may also be impacted and the backlog might not change at all. If that is the case there could be no real change in the eyes of the remaining contractors. The real question now is, which scenario will play out? We can only stay tuned and see how this plays out. What is clear is that many contracts will be delayed and/or canceled. Many small businesses (big businesses too) will suffer and some will no longer be able to rely on the DoD as a customer. Several large primes have already announced reduced profits and/or losses from the last quarter. This is only the beginning. It's time to batten down the hatches!