Under the sequestration cuts that will slice away indiscriminately at the federal discretionary budget starting today, DoD leaders have said that the first big impact to the military will be a crisis in the readiness of the armed services; acquisition programs will survive for some time before they begin to suffer major harms. But that’s not necessarily true when it comes to small businesses.

While sequestration and the broader defense drawdown will no doubt have a broad impact on the defense industrial base eventually, the Pentagon is not worried about defense contracting giants such as Northrop Grumman or Raytheon going out of business anytime soon. Those firms have seen the writing on the wall for some time and have begun streamlining operations, downsizing workforces, building up cash reserves and mining other sources of revenue in preparation for a downturn.

But acquisition leaders in each of the military services say they’re very worried about the fate of small businesses who either contract directly with DoD or serve as second, third or fourth tier suppliers to the large prime contractors.

“It does not take long for a small business to get in trouble very quickly,” said Lt. Gen. Charles Davis, the Air Force’s military deputy for acquisition. “They do things like building the fuses for most of our weapons. It’s a challenging thing and it’s an underappreciated thing, but it’s the one thing that will cause the reliability of our weapons to fail instantly. They’re not necessarily the leading edge on our weapons systems, but they provide things we can’t execute these programs without.”

Falling behind on small business goals

Even before sequestration really kicks in, this year’s budget problems already have hurt some of DoD’s ability to meet its small business contracting goals. The operation and maintenance accounts that fund military training, civilian salaries and a host of other functions, also pay for small contracts issued by individual bases or military commands.

Davis said as each military service has scoured those accounts for savings in order to pay for immediate wartime and training needs, those contracts have been pared back already.

“Anything across our bases and installations, just the most routine services, those are generally all set aside for small businesses,” he said. “A very large chunk of that goes to small businesses to do maintenance on buildings, to do military construction, which we have virtually no money for. We know we’re already $170 million behind on our small business contracting goals compared to this point last year. That’s because base commanders have started pulling back their obligations on O&M because they know what’s coming, just to be able to keep our squadrons flying at a certain level.”

But the lasting effect of sequestration may not be the short-term cuts or delays, but the long-term loss of key suppliers.

For the last two years, DoD has been building a sector-by-sector, tier-by-tier map of its industrial base so that it can avoid surprise failures of firms that build “must-have” products or services and potentially intervene in the marketplace where necessary to keep the most critical firms afloat.

But that task becomes more difficult in an environment in which the Pentagon itself is more or less clueless about its budget for the next few months, let alone the next few years, said Heidi Shyu, the Army’s assistant secretary for acquisition, logistics and technology.

“Due to the instability of the budget, it’s very difficult for even the prime contractors to do any kind of planning, let alone determining the impacts to the lower tiers. This is the biggest concern we all have across the board,” she told the House Armed Services Committee Thursday. “My fear is that we can’t tell these companies who provide a niche capability what they need to do to survive the downturn. We don’t have any visibility in terms of what the gap is.”

Survival of some vendors in jeopardy

Even before sequestration, the federal budget limbo has had a significant impact on small businesses. Since continuing resolutions have recently become commonplace in each budget cycle for at least part of the year, agencies have had to delay awards for new-start contracts for at least the first few months of each fiscal year.

Sean Stackley, the assistant secretary of the Navy for research, development and acquisition, said this year’s CR already has begun to jeopardize the survival prospects of some small companies the service can’t do without.

“The Department of the Navy is extremely unique in terms of some of our platforms like nuclear submarines and aircraft carriers. We build them at very low rates and nobody else builds them at all, and the components that go into these platforms are made largely by small business,” he said. “It’s almost a cottage industry that builds small numbers of critical items. We have to work that small business base directly to ensure its long term viability, come all of the ebb-and-flow of the budget cycle.”

The same is true in the Navy’s aviation programs, Stackley said.

“There’s one small business manufacturer in the entire country that’s responsible for forging and machining most of the rotor heads for all of our rotary-wing aircraft,” he said. “That’s a single point of failure, and in fact, he’s struggling at this particular time.”

If the military begins to lose small businesses that provide critical services, it will have to look for ways to rebuild those capabilities down the road once the federal budget cycle returns to normalcy. It will also have to rework its plans for each of its procurement programs to cope with the 9 percent reduction sequestration will take from each of them, officials said.

The Army’s Shyu said her service will try to recover later what it will lose this year as a result of sequestration, but building those plans right now is next to impossible.

“You can only recover if you have a full understanding of the limitation of the cuts and what’s going to happen next,” she said. “If we had a budget for this year and had some understanding of what’s going to happen in future years, we could at least begin to do that detailed planning. But right now, it’s hard to judge what the impacts are without knowing what’s going to happen. I have some significant concerns about that.”

The broader impacts of this year’s sequestration cuts on big military acquisition programs won’t all be immediately apparent this year, Davis said, and won’t be known until future years, by which time most programs will have been delayed to some degree, and after the procurement workforce has had to break apart each of their programs to determine how or whether they can survive under immediately-reduced funding levels.

“We ask our acquisition folks and program managers to navigate the most complex, chaotic, overregulated and overseen process in the world. And as they come to us, we can’t tell them any of the most basic questions all of that activity demands,” he said. “We can’t tell them what baseline to begin their program from, we can’t tell them what the changes will be or whether the continuing resolution will allow them to move money from one program to another. What we are able to tell them is that everything they’ve produced, sent up for review and put on the books until now is basically invalid, and they have to go back, do all the what-if drills and restructure those programs all over again. And when we send them back, we’re telling them that they probably are going to take a 20 percent pay cut for the rest of the year.”

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