Contractors Look to Set New Course After Federal Shutdown

The disruption brought by the partial shutdown of the federal government has compelled many contractors to rethink their strategies in the face of potential future shutdowns. Not only are some reconsidering their customer base, many also are facing external pressures in areas such as hiring that may force changes in their business models. Their future may depend on actions taken by government to mitigate the effects of future shutdowns, say industry leaders.

“I don’t think anyone’s going to forget this shutdown anytime soon,” says Rebecca Andino, CEO of Highlight Technologies. “This is really at the top of [contractors’] minds.”

Sukumar Iyer, CEO of Brillient Corporation, says the shutdown will have both short- and long-term effects on the relationship between contractor and government customer. It also will be felt on the federal employee and contractor workforce. His company has lost three people in the past few days, probably to take jobs in the private sector. The memory of the shutdown may inhibit people taking jobs in the federal sector, even as contractors, he suggests.

The net losers in the end will be federal agencies in their abilities to execute their missions, as well as the citizens who depend on government services. While public reports suggest 800,000 government employees were affected by the partial shutdown, Iyer estimates that 3.5 million federal contractors were not able to work.

Diversification may be the leading option for companies to mitigate their losses in any future shutdown. “Contractors in the future are going to be focused on making sure they have a diverse portfolio to reduce their risk of a shutdown—whether it’s the Defense Department or civilian agencies—to minimize the impact a shutdown would have on their business operations,” Andino offers.

Contractors are likely to incorporate diversity as they strategically develop their account plans and pipelines, she suggests. Instead of focusing on two or three agencies, they might develop account plans across five or six. This goes against conventional wisdom for small businesses to concentrate on one or two agencies, she adds.

Andino notes that her own company was fortunate to have a diverse portfolio of contracts across roughly 20 different federal agencies. So this partial shutdown only affected about 20 percent of its contracts.

Iyer notes that his firm transitioned from 50-50 private sector/government contracts in 2009 to its current makeup of 100 percent government because of contract reliability. “There are sizeable contracts, stability—you can run five-year contracts—Uncle Sam is good for his money and you get paid promptly.” Now, however, “that mutual trust and belief are a little shaken by the extent of the shutdown.”

He echoes Andino’s observation that conventional wisdom suggests small businesses concentrate their efforts on focused targets. This makes it harder to diversify within government. State and local governments offer entirely different environments with less spending authority than their federal counterpart. “The only thing [they have] in common is the word ‘government,” he claims. He urges diversification toward non-governmental sources, although he notes that the private sector is more susceptible to negative influences from the economy or the stock market. His own firm will stay focused on government.

As they develop their strategic goals, executives will be considering government budgeting and funding bills along with traditional factors such as agency forecasts, Andino says. “It is hard to make tactical bidding decisions with one eye on Congress and what you think they will vote on,” she points out. “But, one additional input into the pipeline and bidding process is going to be the likelihood that an agency is going to get its funding or possibly shut down.”

Andino allows that her company made the decision to focus 100 percent on the federal government. But she can see how other companies—especially those just starting out or revamping their customers—might think about considering state and local government agencies, or even industry, to build their customer base. “They could insure themselves against a federal shutdown by having those other revenue streams in their back pockets,” she offers.

Another way companies can insure against severe shutdown effects is to target mission-critical work that is more likely to be deemed essential in a shutdown, Andino says. Firms also might target fee-funded agencies that are not dependent on congressionally appropriated funding. Two of these are the Department of State Bureau of Consular Affairs and the U.S. Patent and Trademark Office.

Companies are likely to look differently at the way contracts are written. Andino suggests that the firm fixed price contract may be safer than time and materials contracts. In a time and materials or labor-hour-based contract, if the government supervisor is not able to work, then the contractor likely is not allowed to work either. But firm fixed price contracts provide for less of a supervisory relationship, she notes, so there is a better chance that contracts and work can continue unabated during a shutdown. Andino cites an ongoing trend in government contracting to move toward firm fixed price contracts, so this might be a way to minimize shutdown risk.

Iyer says no panacea exists for this issue. However, a firm fixed price contract to provide deliverables may be more attractive as a less risky venture for contractors, he suggests.

Andino notes that some contractors may try to influence contract structuring during the request for information phase. That’s when the government is open to suggestions about an upcoming contract, and companies may offer ways of taking into account potential shutdowns.

Iyer suggests that contractors should try to influence changes in Federal Acquisition Regulation (FAR). They should communicate with their elected representatives and suggest crafting a bill providing back pay for federal contractors as well as changes to the FAR.

Another negative side effect of the shutdown will be its impact on Contract Performance Assessment Reporting System (CPARS) ratings, which can make or break a small business. Contractors may receive lower ratings simply because they were unable to perform necessary work during the shutdown. Iyer says it may boil down to the relationship between the customer and the client. “Some of [the clients] may be understanding and say ‘the shutdown was not your mistake’ and cut you some slack, whereas some other contracting officers might be ‘I don’t care, this is a fee for service, and we will hold you accountable for your CPARS.’ This is most definitely a concern,” he warns. He offers that his company will seek dialogue with the government on approaches such as compensatory hours to make up timelines.

Andino says the one thing contractors will take away from this shutdown is, “Federal contracting isn’t as stable as it used to be.

“It used to be taken for granted that the government always would be there as a customer and the government pays on time—and that’s actually not the case right now,” she says. “Things aren’t the way they used to be.”

Iyer agrees that this traditional belief has been shaken. However, he says, the biggest challenge emerging from this shutdown may be a war for talent, especially among smaller businesses. Small companies will find it harder to entice young people to work on government contracts that could leave them high and dry in a future shutdown.