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Sequestration's toll on industry is difficult to measure. Federal News Radio's special report, The Private Side of Sequestration, gauges the impact and ongoing effect of the Budget Control Act on the contractors that sell more than $500 billion worth of goods and services to agencies each year. We take an in-depth look at large, small and medium-sized companies, and investigate how government contracting is different today compared with previous fiscal years; which sectors are being hit the hardest; how business development is changing under sequestration; and how companies are planning for the future.
Contractor hiring, morale take sequestration hit
Tuesday - 7/30/2013, 4:26am EDT
Much of the discussion around sequestration to date has focused on the impact it's had on federal workers, many of whom are facing multiple furlough days due to the automatic budget cuts.
But what about those other people in federal offices — the contractors? How is sequestration impacting them?
In an exclusive Federal News Radio online survey of vendors, 47 percent of respondents said their companies have stopped hiring when asked how businesses have been negatively impacted by sequestration. 21 percent said their companies have furloughed employees, 44 percent have instituted layoffs and 34 percent said training has been reduced.
The results of the survey are part of Federal News Radio's multi-day special report, Private Side of Sequestration .
From a morale perspective, things don't look too good either. Of the respondents, 59 percent rated the morale of their colleagues who work on federal contracts as "poor." When asked how much sequestration has attributed to their colleagues morale levels, 89 percent said sequestration has contributed "a lot" or "somewhat."
"Without a doubt, nothing makes people get up and get moving with regards to their career like a furlough day," said Evan Lesser, managing director at ClearanceJobs.com, a website that helps job seekers with federal security clearances. "It's something we've seen increasing over the last year, and it truly has a snowballing effect."
Lesser's company saw an increase in the number of job seekers leading up to sequestration, a trend that has continued after its implementation.
"The majority have a job, but they're facing a furlough or have had furlough days already and are really trying to keep their options open," Lesser said. "If you take a look at the 2014 budget request, you're looking at $52 billion that will be cut from sequestration. So, the first round has happened, but the 2014 fiscal year is starting up soon, and it really is going to have another pretty large effect."
A year ago, Stephen Fuller, director of the Center for Regional Analysis at George Mason University, wrote a study that predicted dire consequences for the federal civilian workforce if sequestration were to take place.
"The original reduction of federal spending under the Budget Control Act of 2011 was supposed to have been for somewhere in the neighborhood of $115 billion this fiscal year," Fuller said. "When sequestration was pushed back to March 1, that amount was changed to $85 billion, and then the continuing resolution that was passed in mid-March for the fiscal year budget 2013 altered the strictness of how that reduction in spending was to be achieved. It gave agencies more flexibility. And so, the magnitude of impact was reduced, and then the consequences of the reductions were changed by how they were to be achieved."
The earliest consequences of the spending reductions have shown up in the federal payroll, mainly through furloughs and a slow down in hiring.
"There's a 5 percent turnover or some percentage turnover every year, and a lot of that's retirements," Fuller said. "They just didn't replace those jobs. So nationally, we're down about 120,000 federal jobs, and in the Washington (D.C.) area, from the last two years, we're down 11,000 federal positions. ... I think there were just people that left and their jobs were held open so that payroll budget was offered up as savings."
When it comes to sequestration's impact on the federal contractor community, Ward Carroll, editor of Military.com, said the biggest impact will be felt in 2014 and beyond.
"That landscape is very chaotic right now and nobody knows quite what to do, and they're certainly not going to invest in the future by hiring people for things that are going to happen or that they perceive or anticipate will happen around programs in years beyond 2013," Carroll said.
When asked how their companies are preparing for expected budget reductions in the coming years, 63 percent of respondents said their companies would be "reducing salaries and benefits, including bonuses" and 64 percent said they would be cutting either "sales/business development people" or "technical experts."
Carroll compared the current contracting climate to that of a slalom skier.
"The gate you're next to is not an issue anymore," he said. "You're not staring at that gate as you go by it. You're looking down the hill at the next three that are coming up. And so, in the contracting world, if you are under contract, then that's old money. That's what you're using to keep the lights on and everything else. But, to keep the company growing and to keep the company in existence in perpetuity, you need to worry about the contracts that you haven't won yet. When you invest in those, that's where hiring happens. That's where focus comes. That's where infrastructure is increased. Those things aren't happening."
Cameron Leuthy, defense and space analyst at Bloomberg Government, said the federal contracting community is hedging its bets when it comes to handling sequestration.
"That means they're being cautious about hiring, but they're also not being particularly dramatic about layoffs," he said.
Leuthy added that the situation is traumatic to the individuals involved, which he can identify with since he was laid off by a "major" federal contractor last year.
"The numbers in terms of a percentage of the company's total workforce are relatively modest in most cases," he said. "There are exceptions. For example, Oshkosh, which builds vehicles for the military, their layoffs as a percentage of their total workforce are significant. But, in general, both on the hiring side and on the layoff side, the moves being made by big federal contractors are modest. They're kind of in that 'wait-and-see' mode with regards to federal spending because there's this enormous uncertainty, particularly for contractors whose primary revenue source is on the defense side. ... On the civilian side, the spending by the federal government has been flat for a number of years."
Bob Lohefeld, president and CEO of Lohfeld Consulting, said he is seeing something companies react in a variety of ways.
"We're seeing it in all forms, everything they can to reduce indirect costs within the companies," he said. "And it manifests itself as layoffs, in some cases, or options for early outs, where you can sign up and say, 'I volunteer to leave,' and you get a going away package. Others are just generally tightening down in the structure and are not hiring, doing all they can to reduce those costs. Every major company across the market has done that with maybe the exception of a few, but all the headliners were there — Lockheed Martin, Booz Allen, General Dynamics. Those companies all made the press by reducing staff."
Companies pursue new venues for contracts
Beyond adjusting the size of their workforces, companies are also looking for new opportunities to diversify their businesses. That presents its own set of hurdles.
"We are continually expanding into new civilian agencies and marketing to new agencies and responding to proposals in organizations where we do not currently have a foothold," said Mary Beth Romani, chief strategy officer at Integrity Management Consulting. "What we don't know, at this time, is which of those agencies are willing to pay more for our services and recognize the value that a true management consulting firm that has true partners that advise strategically, who's willing to pay for those subject matter experts, who's looking for the more junior folks and they're looking for the lower cost individuals. And that's what we're having a hard time gauging right now because we have so much in source selection."
Chris Romani, Integrity's president and CEO, said his company historically has a high win rate when it comes to sourcing, but if all its current bids proved successful, it would more than double the size of the company's operation.
"The impact is we have to be smarter from an HR recruiting perspective," he said. "We have to keep people what we call 'warmer longer.' We have to make sure infrastructure is scalable so that if we do end up having to onboard 50 percent, let's say, of our operations in the next 90 days that we can effectively onboard people, assimilate them into our company and be successful standing up to a new project. It is presenting challenges that we've never faced before. We could be in what we call a 'happy dilemma' of we're growing by gangbusters, but the challenge to go with that is to keep our quality standards, everybody as high as it's ever been and making sure that the people feel like they're part of our Integrity family to the same degree that our current employees feel that."
One of the challenges Integrity faces is what to tell job candidates who can't be hired until the agency awards a contract.
"For some proposals, we have very specific skillsets that are required or domain expertise," Romani said. "Those require us to get contingent offers in place with very specific people. But as a general practice, we're always building our pipeline of candidates so that we always have a good pool of people that we can draw on when we win these awards. So we do have some people specifically slotted for some awards, but then we also have a pool of people that we know meet our standards, that fit in well with our culture, they match our core values in everything that they do and we know that those are the folks we can pick up and get deployed on a project really quickly, because we've in advance of a whole lot of folks and brought a whole lot of folks in for interviews even though we didn't have awards in hand."
Changes began before sequestration started
The big damage to jobs in the contracting community actually predates sequestration, Fuller said. It goes bact to 2008-09, when companies began diversifying their businesses and adjusting the size of their workforces in anticipation of tighter federal budgets due to the drawdown in Afghanistan and Iraq.
"The companies that were doing lots of contracting, not necessarily the big ones, but smaller ones knew that the gravy train was coming to an end," he said. "They'd been told. So they started diversifying or repositioning their companies. And certainly some people lost their jobs. And some of those people may have moved. In Texas, Dallas and Houston are adding over 100,000 jobs on an annual basis. Somebody may have moved there to take one of those jobs."
By repositioning themselves, some of the larger companies have been able to ride the sequestration wave out.
"Some of the subcontractors and the smaller businesses have had a much harder time doing that," Fuller said. "They're just not as adaptable and they shifted around. There are certain areas of Defense and other agencies that are growing and certain areas that are contracting, so there's much more competition and the contractors are all saying that the lowest-priced bid now is sort of the bid that gets accepted, not a better bid, and that subcontractors are finding that the work is being cut short because the primes are taking the work to keep their billings up. It's going to be tough for another year or so, and then they will all have rightsized. They've done this before, which is also an important concept. They know how to do it. Some companies will go out of business and some people will lose their jobs and it's not wholesale to the extent that people will notice it, except for those that are directly affected."
Executive Editor Jason Miller helped with the reporting of this story.
MORE FROM OUR SPECIAL REPORT, PRIVATE SIDE OF SEQUESTRATION:
Data Analytics: Sequestration's impact on contractors by-the-numbers
Audio Interview: Government market ground zero