For government contractors, no end in sight to budget uncertainty

From The Washington Post:

For most in Washington, last week’s short-lived government shutdown seemed to be mostly an annoyance, causing little more disruption than a passing snowstorm. For federal contractors, though, the stoppage brought fresh worries that the industry’s funding problems are likely to get worse before they get better.

Congress remedied the shutdown not with a grand bargain but with a three-week temporary budget measure that carries last year’s spending levels over to 2018 while lawmakers look for a more permanent solution. Continuing resolutions have been the law of the land for most of the last decade, and many contractors say the stopgaps hamper long-range planning.

The latest partisan battles in Congress have only added new uncertainty, they say, putting a damper on economic activity in the Washington area.

David Berteau, president and chief executive of the contractors’ trade group Professional Services Council, told reporters in a conference call last week that he expects at least one more continuing resolution to follow the current one that is set to expire Feb. 8.

This means contractors will have to wait at least another month to find out what their biggest customer might spend in 2018. In some cases, new contract awards on important programs are being held up as federal agencies wait to see whether they will have the resources to fund them.

“Companies are planning for a very slow start to the year because of this,” Berteau said. “How do you plan for a [federal spending] number that not only do you not know what it is, but you don’t even know what direction it’s going in?”

Such delays threaten to ripple beyond contractors as the region’s biggest economic engine pumps its breaks. About a third of the region’s economy flows directly from the federal government, the Stephen S. Fuller Institute at George Mason University reported last week, with the federal government procuring $78 billion in goods and services in the D.C. region last year.

In calls with investors, government contractors said the temporary measures are not only slowing the pace of business, but also could hurt U.S. national security.

Northrop Grumman chief executive Wes Bush warned investors in a Thursday conference call that continuing resolutions could cause the Falls Church-based company to miss its financial targets for the year. He also said it could hurt the military’s preparedness for future conflicts and make it harder to update old systems.

“Industry stands ready to invest and innovate for next generation technologies and capabilities,” Bush said. “But our Department of Defense customers struggle to efficiently plan and execute our national defense investment strategy in the face of perpetual continuing resolutions.”

Executives from the Waltham, Mass.-based missile manufacturer Raytheon said Thursday the continuing resolution is holding up an expected contract award for the Naval Strike Missile, a sea-launched missile that can be aimed at targets over the horizon.

“It does take the [continuing resolution] to be removed for us to be awarded . . . a contract here,” Raytheon chief executive Thomas A. Kennedy said in a Thursday call with investors. “So we are very, I’d say, motivated to see the [continuing resolution] finally resolved here in the February time frame.”

The Naval Strike Missile promises to be an $8 billion opportunity over 10 years for Raytheon, which developed the missile in partnership with a Norwegian aerospace firm called Kongsberg. The missile is to replace the Navy’s aging Harpoon missile, which has been in service since 1977.

“It already exists and it’s ready to enter production almost immediately upon award of the contract,” Kennedy said Thursday.

In a Wednesday morning call with investors, General Dynamics chief executive Phebe N. Novakovic said continuing resolutions have contributed to a slowdown in contract awards that subsequently hurt her company’s information technology business, much of it based in Fairfax. Revenue in that segment fell by 2.8 percent from the previous year, though operating margins improved.

“The combination of the [continuing resolution] and a new administration slowed the pace of awards, particularly in our [federal civilian agencies] business,” Novakovic said.

Executives at L3 Technologies, a New York-based firm with a substantial Washington presence, said sales of security scanners to the Transportation and Security Administration have been held up because of the continuing resolution.

“The recent vote to end the shutdown and fund the government for three weeks shows some progress, but it is still temporary,” L3 Technologies chief executive Chris Kubasik said. “Like the rest of the industry, we’re concerned about how the continuing resolution impacts the U.S. military’s ability to plan and execute its mission.”

Some lawmakers say funding issues are playing a role in federal hiring. The government faces a growing backlog of people waiting for background checks to be completed, a critical sign-off that clears new hires for classified work. That process sometimes takes a year or more as clearances are held up at the Office of Personnel Management and can delay contractors’ ability to put people to work even after a contract is successfully awarded.

“There’s still a lot of uncertainty in the government contracting space, and we also hear about challenges finding workers,” said Sonya Ravindranath Waddell, a researcher with the Richmond Federal Reserve Bank.

For many contractors, the latest shutdown stirred memories of an earlier 2013 budget breakdown, when Congress ultimately approved a deep set of automatic spending cuts as part of the “sequestration” process. The reductions hamstrung the local job market for years. The defense spending caps that emerged from that budget deal are still in place despite the Trump administration’s promises to boost military funding.

A report released last week by the think tank Center for Strategic and International Studies detailed how that drawdown affected nearly every portion of the defense contracting base. Companies working with military aircraft saw a certain “whipsaw effect,” in which funding dropped quickly following years of steady growth. Companies that service and supply the Army’s land vehicles saw half of their contract obligations disappear.

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