How the approaching debt-ceiling crisis could hit contractors first

If you see a robed figure on the corner with a sign reading, “The End is Near,” take note. He could be talking to federal contractors. The longer the debt limit debate in Congress drags on, the more likely it will interrupt federal buying. To go deeper, the Federal Drive with Tom Temin spoke with federal sales and marketing consultant Larry Allen.

Interview transcript:

Tom Temin You’re postulating, Larry, that even if there is a deal reached at the very last moment, it could still throw the monkey wrench into the contracting works.

Larry Allen Tom, I am. And I think it’s important to note that while most of the country looks at the middle of June as the do-or-die date for getting a budget ceiling deal for government contractors, that waterfall is right in front of them. It could happen this week. It could happen next week. But you shouldn’t be thinking about June as a government contractor because it’s going to happen much sooner than that for government contracting for a number of reasons. Not the least of which is the companies, the people and government agencies that companies want to meet with are increasingly going to have to be in continuity of operations meetings. They’re increasingly going to have to plan, Tom, as if part or all of their agencies are going to shut down. Regardless of whether they ultimately end up shutting down, there are standard required plans for anticipating that. And here we are, scarcely 60 days out from the cliff that’s been predicted. And right now, government contractors are probably already starting to see their flow of business slow down a little bit. Some of those meetings, particularly with senior level people, are going to be increasingly difficult to get because they’re distracted elsewhere. This is going to have an impact on business at least into the third quarter and depending on whether we get a deal and when, Tom, it could also leak into the fourth quarter.

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Tom Temin What you’re saying then, essentially is that the fear, uncertainty and doubt will mean that contracting the most discretionary of the discretionary dollars would be the first that people would start to hoard, so to speak.

Larry Allen Well, they’re going to hoard those discretionary dollars, and they also might just stop spending them if they feel that their agencies might be shut down and they are unable to take delivery of goods ordered. We actually have seen this before when the government did have a shut down over appropriations. Companies would deliver things to government loading docks that were closed because of the shutdown and then they had a mess. That’s the short version. All things happened then, but it was a mess. So I think agencies remember that. Maybe some contractors remember that. And that’s going to have to play into the planning right now, Tom, that’s going on around a potential debt ceiling shutdown, which we’ve never had before. So we don’t know if it’s going to be exactly like an appropriation shutdown or not. But we do know that it’s going to cause disruption and that both contractors and their government customers are going to feel the effects and they’re going to have to plan accordingly.

Tom Temin Right. Because the Treasury would have to start deciding which government obligations are the most important and which are the least. And so they would not choose, its likely, contractor obligations and spending obligations as a high priority, given what a crisis that would be, in other words.

Larry Allen I think that’s a significant fact, particularly if you’re a small business that relies on cash flow. Even if you’ve delivered something and the government agency is using it, in the event of a debt default, we could really end up seeing small businesses not getting paid because of the Treasury’s prioritization of where available funds go. And it could be months before some of these businesses are paid, even on proper invoices. That’s just one of many negative effects. What I’m really trying to drive home, Tom, is there are likely to be negative effects even if we do end up with a deal at the last minute. And contractors have to be prepared to understand what the potential impact of their business is going to be and in the unlikely — I hope — event of an actual default and partial shutdown, how much of that could impact what happens during the fourth quarter?

Tom Temin We’re speaking with Larry Allen, president of Allen Federal Business Partners. Yes, because the fourth quarter will likely lead to another continuing resolution. And if that continues with 2023 programs, therefore, into fiscal 2024, at least you’ve got what could not have been spent during the debate over the the near-miss of the debt ceiling deadline could then proceed. Under the CR, at least.

Larry Allen So if you can get something started now, Tom, with new projects, that’s really the deal between now and the end of the current fiscal year. We certainly are going to start FY24 with a continuing resolution. And what I always counsel people is try to get those projects that are on the drawing board at least kicked off. You don’t have to have the first play from scrimmage to follow the football metaphor. But they do have to get kicked off so that in the event of a CR, you can keep them going.

Tom Temin All right. And think of the Deflategate we’d have then if something happened on the dollar and things. And I wanted to ask you about the Federal Trade Commission. You’re telling your clients these days that that’s an agency contractors need to pay attention to, perhaps to a greater degree than they would have in the past.

Larry Allen That’s exactly right. I really think that government contractors should add the Federal Trade Commission, the FTC, to the list of government agencies they need to look at in terms of the impact that agency actions could have on their government contract business. Right now, we have a very progressive and activist FTC that is looking at what had been considered the normal conduct of business in several areas. But there are really two specific areas, at least Tom, that are or soon will be impacting government contractors. Probably one of the ones that’s most significant is the weaponization of the False Claims Act to punish contractors that overhype the capabilities of their solutions. We’ve seen the FTC recently, Tom, turn its attention to artificial intelligence claims made by companies and saying, look, if you’re promising the moon and the stars but you’re not delivering it, that could be construed as a false claim. So it’s that marketing message. What’s the veracity of your marketing message? And the FTC is really taking a hard look at that. And of course, the False Claims Act is a very powerful tool just from the civil side where you have a per invoice fine and the ability to recover treble damages. So that’s one area. Another area where the FTC is getting involved is in the use of non-compete agreements. Now, this isn’t exclusive to government contractors, but in point of fact, many government contractors do have non-compete agreements in place with their employees. And earlier this year, the FTC issued a pretty substantial notice of proposed rulemaking that would essentially ban most types of non-compete agreements. There are reasons why non-compete agreements are in place. Companies spend a lot of time training employees and share sensitive information, and then the employee leaves and goes somewhere else. You really don’t want to have them sharing trade secrets with the new employer. Nevertheless, the FTC believes that that’s a restriction on the mobility of employees. So they’re taking a shot at non-compete agreements. Although government contractors already have a host of agencies that they have to look at that could impact their business, Tom, unfortunately, now they are going to have to add the FTC to that list.

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Tom Temin Yes, because even if the FTC’s actions are struck down in court, there’s still that period of time and expense until all of that actually plays out, which could be years.

Larry Allen That’s right. It could be years. And typically it would be years. And if you’re involved in the litigation, then you’re having to pay for that. And that’s a big cost of doing business. It’s also a distraction from your daily business. Even if you’re not paying to litigate it, if some of the rules stay in place during the time that the litigation is working itself out, you’re kind of hamstrung by having to follow the rules, even if they are eventually overturned. And so that’s a short term cost and a short term distraction at a time when you probably really don’t want any additional distractions. What you’re really trying to do is grow your company and service your customers.

Tom Temin And pay your employees.

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