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Congress is responsible for passing annual appropriations to fund government agencies. If Congress neglects to pass funding bills, government agencies are forced to shut down. Follow all of Federal News Radio's government shutdown coverage from the past several years.
Six months later, contractors still feeling aftershocks of shutdown
Thursday - 5/1/2014, 4:08am EDT
The Ambit Group is a service disabled veteran-owned small business. The government shutdown cost it about $1 million in revenue.
Integrity Management Consulting is a small business working in the federal civilian and Defense spaces. It lost about $300,000 because of the October work stoppage.
Ambit and Integrity Management Consulting are just two of thousands of companies facing not just revenue decreases, but delays in contract awards and projects to help agencies meet their missions, and a slowed pipeline of solicitations coming out.
Six months later, government contractors say they still are recovering from the two-week government shutdown.
"If you look at the average government contractor, it has a profit margin of, let's say, 10 percent. If you look at the shutdown that lasted two weeks, that's about 4 percent. If you are making 10 percent and you lose 4 percent of that revenue, and it's not a direct one-to-one comparison, but you can see there's a significant impact and it cuts into your profit," said Mike Hettinger, the senior vice president for public sector for TechAmerica, an industry association. "Things that I've heard from folks, there are clearly lingering effects of the shutdown. We've seen tightening budgets. We've seen some continuing layoffs and not really a big increase of RFPs. As we go into the latter half of the year, things will start to free up a little bit. But there clearly are lingering effects of the shutdown on government contractors at this point."
Federal News Radio caught up with several vendors it talked with in October during the shutdown and some new ones to find out about these lingering impacts.
Large and small vendors say a mix of lost or lower revenues, delayed contract awards and request for proposals, less hiring and the trickledown effect to programs they support are among the main aftershocks of the first government shutdown since 1995-96.
New contracts slow to come out
The most obvious impact for vendors is the slow return of RFPs and awards.
Govini, a data and market research firm, found when looking at year-over-year spending in the first quarter of fiscal 2014 — comparing October 2013 with October 2012 — agencies spent almost $14 billion less on contracts. In November, federal procurement spending was $6 billion less, and in December, agency procurement spending declined by more than $31 billion.
Click image to view full-size chart.
Not all of the decrease can be attributed to the shutdown, but vendors anecdotally agreed they saw fewer awards and fewer request for proposals in early 2014.
"October produced only 14 RFPs that met our criteria for being greater than $50 million. That is the lowest number of RFPs released by the government since we started counting in 2011. Certainly a disastrous month," said Bob Lohfeld, CEO of Lohfeld Consulting, which helps vendors win full and open contracts. "And what we saw when the government returned, a lot of them returned physically to their workstation, but not mentally because November and December weren't a whole lot better, producing 21 and 24 RFPs, respectively, for those months, so we had a terrible quarter."
Lohfeld Consulting and Market Connections also combined on a survey in December that further shows the impact of the shutdown on contracts. The survey of 220 government contractors found 31 percent said their revenue declined more than 10 percent in 2013 due to sequestration and the shutdown, and another 30 percent declared moderate revenue declines of up to 10 percent. Additionally, 15 percent of the respondents said they experienced moderate to significant growth, while 16 percent said revenue remained flat.
Lohfeld said typically his company sees about 30 RFPs per month worth more than $50 million. Even with the budget cuts and sequestration, he said the number of solicitations for early 2014 were way down.
"It's not completely clear what we saw evaporate will actually come back. Some of the deals will just go away. Some of the new programs that were planned just will not happen," he said. "I think others find different ways to get into the market. Instead of doing the $50 million full and open procurement, they will find their way into task order contracts and maybe the GSA schedules, so they are finding other avenues to market, so they bypass the metrics we are seeing."
A very rough time
The loss of opportunities and the corresponding delays in awards are among the main causes for revenue losses and other lingering effects.
"One of the things that most amazed me is folks would say, 'you had no real impact because they compensated the government workers.' I said, 'not the contractors, it didn't work that way,'" said Kim Hayes, the CEO of the Ambit Group. "We kept our staff. My business partner John Condon and I made several decisions to invest in our staff during the shutdown, including allowing people to use their leave, extending their benefits, covering their costs and that is where some of our losses came in. It was a rough time, a very, very rough time."
She said Ambit couldn't hire new employees and had to, in some cases, almost double the hours of other employees who were working on contracts because hiring was so uncertain. And the market for certain types of federal experts hasn't gotten a whole lot better.
"I was just speaking with someone who is a senior executive in the process of doing the job hunt right now and he said to me, 'I didn't realize the shutdown would have such a long term impact. I thought once we had a budget, we would see a release,'" Hayes said. "I said to him, 'No, businesses are being much more conservative. They are holding back.' We are not sure what this year or next year could bring, so we are all holding those reserves back as much as possible."
Chris Romani, the president and CEO of Integrity Management Consulting, said his company is facing many of the same challenges as the Ambit Group and seeing the ripple effects on contractors from the shutdown.
"We are seeing unprecedented award delays. I don't know how much of that quite frankly is attributed to the shutdown or how much is part of that broader picture," he said. "Things that historically have been awarded in 90 days are on the market for six months. We have some things in source selection for over a year. We believe the shutdown is a piece of the broader picture. I say the biggest impact on our business as a result of the shutdown is the contribution of those delayed award times."
At the same time, 45 percent of Integrity Management Consulting's billable work came to a halt because of the shutdown. So the company is seeing challenges on both ends of the procurement lifecycle.
Cash flow problems
Romani said Integrity Management Consulting worked closely with its customers to redo project timelines once the shutdown ended.
"We, quite frankly, surged some contracts and tried to provide additional support to keep pace on some. On other contracts, we had to spend time with the customers and renegotiate deliverable due dates and that type of thing," Romani said. "On a 10-person project, we might have had to put one or two people of additional support on there to get it back on track and get the customer where they needed to be."
Both Ambit and Integrity Management Consulting are services firms, which had a rougher time than companies providing products, said Steve Charles, the executive vice president and co-founder of the Immix Group, a reseller mostly of IT products to the government.
He said product vendors faced little negative impact in terms of contracts and awards from the shutdown. But there were other problems they had to deal with over the two-week shutdown.
"We had to increase the amount of credit capability in the company. Remember, we had just shipped hundreds of millions of dollars of stuff to the government, and then they shut down and were not able to receive it," Charles said. "And of course, we do not get paid until it's received and accepted. So what we had to do was make sure that we had the financial capability to pay our vendors for all that end-of-year spending the government did but was not able to pay in the normal timeframe."
Charles said the Immix Group spent more on interest payments than ever before. The company usually spends tens of thousands of dollars a year on interest but last year spent almost $1 million.
"Our vendors need to get paid. They are publicly held corporations. They expect payment by a date certain," he said. "The government shutdown left the government in somewhat of a disarray when they returned. So it was a real scramble with everyone in the supply chain working to help even out this dysfunction. But every day it costs money."
Because of that, Charles said the Immix Group saw its revenue increase but by a lower amount than in previous years.
After the shutdown ended, vendors praised the two-year budget deal Congress agreed upon for the certainty it brings to federal spending.
A big 3rd and 4th quarter expected
Lohfeld said the number of RFPs his company is tracking is on the rise.
"That January through March deal flow is up 44 percent over the earlier quarter, so it's roaring back with enthusiasm. But when you look at that January, February, March number of RFPs that played through, it turns out it's exactly the same number that we had a year earlier for that same period," he said. "We've come back to what a lot of us are calling a 'new normal,' where a year ago we were all complaining the deal flow was really down. Now we are back to the same number, and we are celebrating it as a landslide victory, and there are lots of deals out there."
He added the third and fourth quarter is expected to be just as good or better in terms of RFPs.
Integrity Management Consulting's Romani said he's putting more people and time into market research and business development to ensure his RFP pipeline remains filled.
Ambit's Hayes said there was a rush of task orders and RFPs soon after the shutdown. She said the company bid on about 30 different task orders in the late October to November timeframe. Then, she said, there was a lull.
Now, procurements are starting to ramp back up but with longer times to award.
Hayes said the shutdown was one piece of a bigger chaotic puzzle vendors and agencies are facing, "which includes sequestration, it includes the government shutdown, and it also includes the attrition of the workforce and the 1102 [contracting officer] workforce. It's the roundtable chair-changing that's happening in a lot of our federal seats. I think we've seen a lot of drop in the strategic vision, because there have been so many vacancies in leadership in a lot of the organizations. You have a lot of programs moving on and people trying to do their job every day, and I think a lot of times that there is a lot of chaos, and that chaos is cascading into the procurements that we see."
All of that and more is part of the new normal agencies and vendors will have to learn to accept and work in over the next few years.