Bracing for the Impact of SequestrationPosted: March 6, 2013
Last week I had lunch with Judy Bradt of Summit Insight (Judy contributed four excellent blog posts here about finding customers). We talked about many of the issues facing the small business community in the federal contracting sector, including the one I’m going to talk about today, which is sequestration.
A lot of attention has been given to how sequestration is affecting large businesses, what with layoffs and everyone wringing their hands. But sequestration and the looming impact of the March 1st deadline has been even more disruptive to small businesses, because it affects us in so many ways.
First of all, the government contracting community is waiting to see whether or not the threatened cuts are going to happen, which has meant that a lot of task order awards and contract awards are moving to the right, or being delayed. Obviously this has an immediate revenue effect on everybody. There have been reports that defense agencies will begin slowing payments to contractors as early as this week to address the approaching cuts.
The second thing is that certain intel community agencies have sent letters advising businesses NOT to proceed “at risk,” meaning that even if you have a verbal notification from the contracting officer that you will get a contract or task order, you should not expend any money until you receive the official paperwork.
The risk, of course, is that if the cuts go through and the contract is cancelled, you’ll have spent the money for a project that will no longer exist. Having to wait one or two weeks for the paperwork causes big delays (not to mention the stress) that affect productivity, time line and overall success of the contract.
The third thing that’s happening goes back to the issue of how sequestration is playing out in the business models in the large business community. If a large company has a big project that’s been cancelled, they may have 100 people or so that they hired for that project. They don’t want to lay them off, so they look for openings they can fill in their company.
If there are still people they need to find work for, where do they look next? Well, since there is no real enforcement of the small business percentages for subcontracting (the STAR Act is looking to fix that), it’s very easy for large businesses to get the feeling that they can just take the jobs that were set aside for their small business partners. They feel totally justified in doing that because they have all these people that are going to be out of work if they don’t.
After all, it’s not like they’re going to get any negative consequences for doing this. Sure, they’ll get flack from their small business partners, but no real suffering to their bottom line. So this is a real problem for the small businesses who are shut out of those contracts that were supposed to be set aside for them.
Another impact of sequestration and the looming threat of cuts is the growing number of contracts that are awarded based on LPTA criteria, or “lowest price technically acceptable,” which reduces all competitors to just one factor – who can do the job for the lowest price. Price is only one of three important dimensions of success, and this trend puts enormous pressure on small businesses to keep their prices down. This in turn affects the revenue and salaries of the small business.
All of these issues add up to make sequestration much more difficult for small businesses than for large businesses.