Budget battle leaves defense industry's confidence shaken

Even with FY 2011 budget passed, pain from months of continuing resolutions remains

The budget battles this spring have been a frightening reminder for some about the delicate financial balance that is essential to the health of the defense IT community.

Earlier this month, as the federal government faced a potential shutdown, Defense Department officials were prepared to invoke various statutes to keep DOD functioning. It was a difficult situation to begin with because they had already been operating under the constraints of a continuing resolution.

But that was small comfort to defense contractors, for whom uncertainty about the DOD budget has translated into anxiety about the viability of their businesses. Even with the budget problems resolved for now, that anxiety will not be easily shaken off.

Despite the Pentagon's special exemptions for upholding national security, industry began battening down the hatches, and a ripple effect took hold, particularly among the small businesses that rely on federal spending. Many of them fear the shutdown threat will have lasting effects even after the government resolves its budget crisis.

"After this, I don't think there will be a 'business as usual' for a while,” said Robert Guerra, a partner at consulting firm Guerra Kiviat. “This entire situation kind of makes the idea that there is security in working for the government no longer a factor for quite a while."

Several DOD officials declined to comment on the shutdown threat's direct impact on IT and operations, although many have publicly decried the mounting difficulties of operating under a continuing resolution.

Although the public sector has clammed up, industry experts and small-business contractors are voicing their concerns.

"The continuing resolution, or lack thereof, has direct impact on all” of the defense contracting industry, said Shaun Amini, president and CEO of C5i Federal, a small-business defense contractor based in Sterling, Va. “We're very worried because of the lack of certainty in both current opportunities and future opportunities. The delays impact all of us from a financial perspective as well as in terms of quality of work.”

The uncertainty is also having an effect on employees, who are experiencing increasing confusion and diminished morale.

"It's very difficult," Amini said. “We can't let staff go because we're under the strong assumption that work will resume. But at the same time, we have to carry the load of payroll. I have a very concerned staff.”

Although his company is lucky enough to have a credit line to draw against, many small businesses don't operate with large cash reserves and might not be able to survive a long government shutdown, he added.

"No one in the public or private sector is going to compromise on defense and national security-related activities," Guerra said. “Conversely, everyone, both in the private and public sectors, is preoccupied with the [budget crisis], and that is absolutely affecting productivity across the board.”

A drag on an already flagging economy

According to industry insiders, that lag in productivity could continue to affect businesses after the government resumes normal operations. A surge in activity will occur as companies that had been in limbo under the continuing resolution race to use budgeted funding by the end of the fiscal year.

"There will be a major rush, and ultimately, that will impact the quality of work as well," Amini said.

Another lasting effect is the blow delivered to the shaky U.S. economy. Citing his top economic advisers, President Barack Obama warned in a budget briefing of a possible renewed recession that could be exacerbated by the closure of businesses linked to the federal budget.

"We've been working very hard over the last two years to get this economy back on its feet," he said. “For us to go backward because Washington couldn't get its act together is unacceptable.”

That concern is not lost on the defense contracting community, particularly small businesses.

"Here we are talking about an economy that's finally on the mend, and what we're going to do is give it a nice shot in the head with a hammer," Tony Jimenez, CEO of MicroTech, told CNN. "This is just not something you build into your business plan."

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Reader comments

Tue, Apr 19, 2011 Bill

If anyone related to working for the Federal government is overpaid, it is defense contractors! I'll never cry a tear for them. They have ripped off the treasury for decades with their greed and poor quality products. Now, they even outsource many of the products they make (bullet-proof vest making moved from New England to off-shore, for example). I am ex-Navy and ex-Navy civil service (at a shipyard). I can tell you that sailors hated taking ships overhauled by contract shipyards out for sea trials because they knew there were more problems than if a Navy shipyard had performed the work. I've always thought that the place to start cutting the budget is the fat contracts the defense industries get. Beware of the military-industrial complex, they are out to drain the treasury without giving a damn about those brave men and women who are serving.

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