In the wake of the Congressional supercommittee’s failure to strike a deal, the Defense Department is bracing for the possibility of across-the-board spending cuts.
Under the terms of the law that created the deficit-cutting supercommittee, if the panel was unable to come up with a plan to cut $1.2 trillion by this week, then that same amount in automatic cuts would be applied — half to civilian agencies and half to DoD — to 2013 budgets.
“There’s a lot at stake here,” said Todd Harrison, a senior fellow at the Center for Strategic and Budgetary Assessments. “And the bottom line is the threat of sequestration is going to hang over the Department of Defense and other parts of the federal government for probably another year.”
Harrison joined the Federal Drive with Tom Temin and Amy Morris, to discuss how sequestration will affect defense managers and contractors. He said the full force of the automatic cuts would reduce the Pentagon’s base budget by 11 percent to about $472 billion — about what it was in 2007. For the rest of the decade, DoD’s budget would essentially only grow to keep pace with inflation.
“So, we’re looking at pretty substantial cuts to the department,” Harrison added. “But the biggest threat, I think, is that it will happen so abruptly.”
But with the possible cuts not coming for another 13 months, there are plenty of opportunities for Congress to delay or rescind them.
“I think it’s highly likely that they will make adjustments to it,” he said. “At a minimum, I think that they will delay the enforcement of sequestration. I think it’s entirely likely that they will find a way to undo it, altogether.”
Despite that, the defense industry should start planning for deep cuts — perhaps as much as a 21 percent drop in acquisition funding from current levels, Harrison said.
But contractors need to look beyond just the top-line numbers.
“When you look at how Congress and DoD tend to make cuts in acquisition programs,” Harrison said, “they go after the big programs first — because that’s where the money is.”
He said prime and top-tier contractors working on the top 20 acquisition programs should prepare for range of possibilities: slowed-down production schedules, reduced orders and, even, cuts to some entire programs.
Those cuts could be magnified for smaller second- and third-tier contractors. As the larger players’ programs are squeezed, they may bring more of the work in-house, rather than contracting out to smaller companies.
Noting his own experience working for a small contractor, Harrison said: “This is can be very disrupting to a company. It could lead to rather abrupt layoffs of people, and we could be looking at companies either exiting the defense market or merging together or being acquired by a larger company.”
The best thing for program managers, in both government and industry, is “to get as lean as possible,” Harrison said.
“You can’t have any fat or the perception of fat in your organization,” he said. “You’ve got to show that you can meet your cost and schedule targets, that you’re producing a quality product or quality service, as the case may be. And you’ve got to show you’re contributing real value … “I think that’s the best you can do in this budget environment — you’ve got to show value.”
Click “Listen” above to hear the full interview, including Harrison’s take on how sequestration cuts compare to past drawdowns in DoD spending.