Industry begins feeling impact of sequestration

By John Grobe
Special to Federal News Radio

Federal employees are facing furlough days in many agencies due to the sequester — the unlikely event politicians said would never happen as recently as a few months ago. Some agencies are being hit harder than others. However, budgetary pain is being felt throughout the federal government.

(Courtesy of John Grobe)
And the sequester doesn’t just affect federal employees. It has trickled down to government contractors. Many contractors are afraid the trickle will become a torrent as a year’s worth of sequester-related cuts are sandwiched into a shorter period of time. The effect on contractors will likely be enhanced, as agencies move to cut contract dollars before they cut or furlough federal employees. This will result in contracts being canceled or cut back.

Small businesses are expected to be the hardest hit, as the loss of even one large contract can mean the difference between profit and loss, even bankruptcy. My company, Federal Career Experts, is a small business that provides training in the areas of career transition and retirement. We have had over half of our already scheduled business canceled. In addition, we have had no “tasks” on Blanket Purchase Agreements (BPA). At this point in prior years, we had been scheduling training sessions on BPAs.

A larger small business that does meeting planning, located in Silver Spring, Md., has had to lay off 10 employees and cut the hours of others. The fact that it does meeting planning exacerbated the effect of the sequester. Agencies were already cutting back on conferences and meetings as part of the fallout from the lavish GSA conference in 2010 — and this was before the sequester hit. The company’s president says there is also a downward price pressure on contracts.

Contracts for services are likely to be cut or canceled before contracts for goods are. For example, the Air Force might choose to reduce the number of contracted accountants or mechanics before cutting the funding for a new weapons system. If the sequester continues, the effect will be felt in the area of goods as well.

The usual cuts in “T&T” (training and travel) will hit firms that provide training especially hard. Not only will training sessions be cut back, but travel funds for agency employees to travel to training sessions will result in sessions not even being scheduled.

Clyde Blandford, executive vice president of FPMI Solutions, a larger contractor located in Alexandria, Va., and Madison, Ala., noted that there will be a trickle-down effect on the independent contractors that form a large portion of many contractor workforces. These “sub-contractors” will see hours cut and the opportunity for more work begin to dry up.

Blandford and others have suggested that there will be pressure for government contracting firms to diversify into other areas to remain viable. In fact, it would not surprise me to see consolidation among firms that serve the same market — the big fish will devour the smaller ones. Everyone I talked to has noted a dropoff in the number of new contracting opportunities. Another contractor said that she has been noticing more re-competes, and fewer newer contract opportunities.

The effect on the United States economy caused by cuts in contracts will be greater than the actual amount of dollars cut due to the “reverse multiplier effect.” Some of us may remember hearing about the multiplier effect in our college economics classes. Let’s assume that 80 percent of money received by an individual (or a contracting firm) gets spent on goods and services such as office supplies, airline tickets, utilities, etc. The employees of those companies (the clerk in the office supply store, the flight attendant for the airline and the customer service representative for the utility) might be faced with less hours, etc., as a result. On a small scale, a cut of $25,000 from a government contract would result in a loss of $125,000 to the American economy. Looking at the $85 billion sequester — that would translate into $425 billion that is not being inserted into the American economy.

The Congressional Budget Office (CBO) predicts a 0.6 percent drop in the economy’s growth rate. With an economy in a slow growth mode (2 percent per year) that will be a significant hit.

John Grobe is a retired federal employee and owner of Federal Career Experts, a small business that specializes in pre-retirement and career transition training. His most recent book, Career Transition: A Guide for Federal Employees, can be ordered at FPMI Solutions. Grobe will be a guest on today’s Your Turn radio show.