Possible default scares contractors

Contractors are desperate for information on what’s going to happen if the battle over the debt ceiling continues beyond Aug. 2, but there is little to be had. In a time when markets were already weak, the prospect of a wrenching change to agencies' ability to pay for work adds another layer of uncertainty.

“Companies have a voracious need for information, but there’s not much out there,” Alan Chvotkin, executive vice president and counsel at the Professional Services Council, said in an interview July 28.


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Contractors can't prepare for what comes next if they don't know what that is, and no one does. Contractors don’t know who or which programs will get money from the Treasury Department, or if companies will be paid at all.

Chvotkin said it may come down to a “first-in, first-out” approach to getting paid.

Whichever way it goes, contractors will feel the brunt of an unresolved debt-ceiling debate, said Elizabeth Ferrell, partner with McKenna Long and Aldridge’s government contracts practice.

“The likely candidates for having payments deferred are contractors,” Ferrell said.

In his address to the nation July 25 about the debt-ceiling debate, President Barack Obama pointed to contractors.

“If that happens and we default, we would not have enough money to pay all of our bills — bills that include monthly Social Security checks, veterans’ benefits, and the government contracts we’ve signed with thousands of businesses,” Obama said.

Officials at the Office of Management and Budget and the Treasury Department have been meeting to prepare in the event the debt ceiling is not raised. However, officials have been tight-lipped about plans, Chvotkin and Ferrell said.

“They’ve been silent,” Ferrell said.

Recommendations

Companies are running on empty in these economic times, and for federal contractors their incoming revenue may dry up if the government can’t make its obligated payments on contracts. But experts have several recommendations.

In a beat-the-clock move, Chvotkin recommended companies submit invoices to the agency as soon as possible before Aug. 2. The hope is that the government would pay them before someone else.

And if the House, Senate and the White House reach an agreement before the deadline, he said, “You will just get paid that much earlier.”

Companies need to figure out how long they can operate with no money coming in and how their subcontractors expect to fair in the midst of the troubled federal market, Ferrell said.

Ferrell said there may be provisions in the procurement regulations regarding disputes that may help a company that expects it would struggle to survive through a crisis.

She also said contractors should negotiate with the contracting officers about any work that can be deferred, suspended or even delayed while the funding is gone.

In short, she said, “Be creative.”

Looking from a different perspective, companies may find empty offices as they continue to work. Ferrell and Chvotkin said agencies may take a hit too. They may have to furlough federal employees because they can’t work for free.

There may be no contracting officer to reach out to. There may not even be anyone to process invoices.

Even if the crisis strikes for just a day or two, the effects will ripple through to contractors.

Chvotkin said it would not be the same as the averted budget crisis earlier this year when Congress and the president struggled to pass a spending bill. In passing the bill, the funds were presumed as automatically available. With the debt ceiling issue, the Treasury Department must still auction off and sell its securities to raise money to pay the United States’ bills.

Chvotkin said it's an additional step necessary to pay the bills in this situation.

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Reader comments

Fri, Jul 29, 2011

The agency upon which my livelihood currently depends shows the symptoms of an organization that is conserving cash: payments seem to be delayed for unknown reasons; headquarters seems to be hoarding FY2011 funds: departments don't have FY2011 budgets, but rather are simply told to not spend money; and, departments are reluctant to sign new contracts, in part because they either don't have a FY2011 budget or because they don't have the full budget that they had expected. Of course, as an outsider it is hard to tell whether these are symptoms of an agency trying to conserve cash, or simply typical disorganization. But, I would expect companies facing a potential shortage of funds to start conserving cash well before funds run out, so maybe the Feds have too.

Fri, Jul 29, 2011 Jeff S Rockville

The GOP believes cutting gov't spending is good for business. Some even believe a default will save the country. Is't that the party that corporate America wanted in office? Now quit wining and take your medicine.

Fri, Jul 29, 2011 ContractRiskManagement

Did someone say contractors overblow the risk associated with Federal Contracting? Let's see - there are processes in place to SUE the USG for your rights under the FAR (let me know how that works out), you can negotiate with your CO (if they even know about your contract and return your calls), you can ask your prime if they'll eat it (slightly less chance than suing the USG). Amusing. Feds increase risk every day and use their asymetrical buying power and lack of recourse to extort concessions on contracts they signed. I love this business! Actually.

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