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Will Small Business Federal Contractors Suffer Most From Sequestration?

Mark Mohler
Mark Mohler

While furloughs were always part of the plan for sequestration, now that they’re in effect we can see their full impact. One of the unintended consequences of sequestration may be a direct challenge to the viability of some of the small businesses that serve the federal market.

It all comes down to timing.

The government bases its spending on the fiscal year, with its fourth quarter being July-September. In an article in the Federal Times at the end of the fourth quarter of 2012, Sarah Chacko wrote poetically, “As perennial as the cherry blossoms in spring, so is the annual late-September flurry of activity across the country by hordes of federal procurement staffs and their vendors.”

She goes on to explain, “Roughly one-third of the government’s contract spending happens in the last quarter, according to federal procurement data. That’s when agencies figure out what money wasn’t used on major projects throughout the year and hurry to use remaining dollars before year’s end.”

We know from studies by the Government Accountability Office (GAO) (such as this one about the Department of Defense) that more money is spent in the fourth quarter than any other, and that more procurement actions take place in the fourth quarter than in any other.

While bigger programs tend to be managed and planned very carefully over the course of the year, year-end procurement actions tend to be small in value (but large in number) – exactly the type of contracts that are typically done by small businesses.

In today’s post-sequestration reality, we see that many of the contracting and budgeting professionals are on furlough, and therefore not available to deal with what Chacko calls the inevitable “blizzard of orders.” While rumors abound about the availability of year-end funds resulting from withholds and cautious execution again this year, will the bottleneck of fourth quarter contracts be made worse by insufficient staff due to furloughs? Will this result in a reduced issuance of awards?

Without the civil servants in place to carry out the often complicated competition and procurement processes for these contracts, agencies will be scrambling for ways to preserve their funds (it’s a “use it or lose it” situation). While the remaining staff will strive mightily to meet competition goals, the only practical recourse may be to extend the current contracts they hold. One can see the appeal of this move. It’s much easier to modify (extend) an existing order than it is to review proposals, especially with the shortage of contracting staff due to sequestration furloughs.

The reality is that it is large businesses who usually hold these ongoing contracts, so small businesses will be shut out of any the opportunity to compete. So the “little guys” who’ve been waiting around to get these smaller pieces of work will be frustrated.

As Sean O’Keefe notes in his comprehensive article about sequestration, the “automatic salami-slicing of budget line items” was not the wisest move. He also raises the concern that, “Some of the ‘savings’ achieved by cuts in the immediate future will just drive up procurement costs just down the road.”

The government didn’t set out to shut down small businesses, but in reality it looks as though they will be disproportionately hurt by sequestration. Saying, “It’s only 5%,” or “It’s only 7%” might sound like a minor top-line reduction, but for a small business that could represent what it takes to be profitable this year or in some cases threaten their very survival.

Removing civil service staff to solve the sequestration problem creates new problems – particularly for small businesses. Almost all agencies are affected, except the few that got exceptions. This article at Government Executive outlines possible plans and effects for each agency.

With more furloughs and budget cuts planned each year until everyone agrees on a budget, now is the time to consider timely and sustainable solutions for this fourth quarter and beyond. In an upcoming blog post, we will examine several sequestration survival strategies, not only to get through the challenging months ahead, but also to position for future grow in a time of sequestration.