By Kevin Brancato and Rob Levinson
On Jan. 2, 2013, $54.7 billion will be sequestered from the defense budget. The cuts, which can be undone only by a new law, are unaffected by other government spending reductions or revenue increases. The cut to the fiscal 2013 budget will be about 9.1 percent. That’s about 12.2 percent of funds remaining on Jan. 2, one quarter into the fiscal year. War funding would be sequestered, but military personnel probably will be exempt.
The Bloomberg Government Study titled, “Sequestration Planning: Scenarios and Options for Defense Contractors,” by Defense Analysts Kevin Brancato and Robert Levinson (subscription required), outlines issues to help companies that contract with the federal government prepare for sequestration. It finds:
- Many companies would face a steady decline in new opportunities, rather than a precipitous drop.
- The Pentagon may find it more difficult to apply across-the-board cuts to all programs rather than make larger reductions to fewer programs. It may be prudent for the Pentagon to delay signing contracts that would require spending funds that may be sequestered.
- Most companies will have to respond to sequestration by Oct. 1, if not sooner, by taking actions such as reducing workforces or cutting back on capital expenditures. Federal fiscal year 2013 begins on that date, and contract revenue may drop then if the Office of Management and Budget holds back funds in anticipation of sequestration.
- Small prime contractors and subcontractors may not have enough cash or credit to sustain operations in the hope that sequestration will be reversed or halted.
- How subcontractors respond will depend largely on what prime contractors do. The further removed a subcontractor is from the government customer, the fewer choices it may have.
- Companies can limit exposure to sequestration by getting fiscal 2013 and prior years’ funds on contract, exempting them from sequester.
- The Pentagon may add contract contingencies to deal with the uncertainty of sequestration.