How firms think about sequestration

From Bloomberg, a glimpse at a (gated) “how to” guide for preparing for sequestration:

  • Many companies would face a steady decline in new opportunities, rather than a precipitous drop.
  • The Pentagon may find it more difficult to apply across-the-board cuts to all programs rather than make larger reductions to fewer programs. It may be prudent for the Pentagon to delay signing contracts that would require spending funds that may be sequestered.
  • Most companies will have to respond to sequestration by Oct. 1, if not sooner, by taking actions such as reducing workforces or cutting back on capital expenditures. Federal fiscal year 2013 begins on that date, and contract revenue may drop then if the Office of Management and Budget holds back funds in anticipation of sequestration.
  • Small prime contractors and subcontractors may not have enough cash or credit to sustain operations in the hope that sequestration will be reversed or halted.
  • How subcontractors respond will depend largely on what prime contractors do. The further removed a subcontractor is from the government customer, the fewer choices it may have.
  • Companies can limit exposure to sequestration by getting fiscal 2013 and prior years’ funds on contract, exempting them from sequester.
  • The Pentagon may add contract contingencies to deal with the uncertainty of sequestration.

This is a firm-level view of contract failure.