By now, if you’re involved in government contracting professionally you’ve heard about the automatic defense spending cuts that are looming on the horizon. The automatic cuts, known formally as “sequestration,” will shuck about $1 trillion across-the-board from federal spending split evenly between defense and non-defense over 10 years. Automatic cuts of such severity are unprecedented but were the lynchpin in the Budget Control Act that raised the debt limit last summer. The automatic cuts are designed to be a penalty if the two parties could not agree to reduce the deficit by at least $1.2 trillion over 10 years.
But now, with the cuts 6 months from automatically slashing the defense budget back to 2007 levels it appears that Congress will be unable to undo their handiwork. The timing of the sequestration couldn’t be any worse as the country heads into a tough Presidential election season and the economy continues to falter. Worse yet, it’s completely unclear what sequestration will look like in practice.
What is known is that the Act exempts war costs and keeps personnel levels and military off limits. The remainder of the DoD budget would face steep cuts of about 13% overall to make up for these exclusions. Everything else, such as operations and maintenance, research and development, procurement, fuel, and military construction will see immediate and significant cuts should sequestration go into effect. These cuts would represent a significant blow to the government contracting industry.
In an article in yesterday’s Washington Post, the CEO’s of Lockheed Martin, Northrop Grumman and The Aerospace Industries Association all said that sequestration would have a very significant effects on their businesses requiring both process changes and likely layoffs. Northrop in particular has already reduced its staff by 11% and yet when asked, Chief Executive Wes Bush said, “If faced with a cliff where the next day you’ve got to take X percent out . . . it will not be pretty.”
Perhaps the most painful part of this process, beyond the fact that elections will prevent Congress from cleaning up the mess they made and the tough realities contractors will face as budgets are slashed is that no one really knows how this will work from military to industry to the lawmakers themselves. Preparing for eventual cuts is going to be difficult with implications ranging from contract law to employment law and the cuts first hitting the Prime’s and eventually flowing down to their subcontractors. It remains to be seen if Congress will act, but if not it will be up to contractors to make preparations on their own.
For more information about what to expect and how to prepare for the coming cuts, check out our webinar on sequestration.