Pentagon Now a `Sideshow’ in Sequester Debate, Defense Official Says

During the runup to sequestration, Pentagon leaders thought everyone would be paying attention to them, “but now the issue of revenue is the big game in Congress, and we’re a sideshow,” Mike McCord, principle deputy Defense comptroller, said Thursday.

“It took a little time to filter through, but we’re a little underwhelmed,” he told a group of contractors. “And Wall Street clearly knows that the world didn’t end.”

Still, across-the-board budget cuts will harm readiness, and furloughs “are a morale as well as a performance and productivity problem,” McCord told the panel sponsored by Bloomberg Government, the Public Contracting Institute and the Professional Services Council. “We have a real problem but also a messaging problem in that we must communicate our sequester issues but we don’t want the North Koreas of the world to think we would have trouble responding” to a provocation.

McCord also told contractors that maintaining the industrial base during the defense drawdown “is a concern, but to be frank, not our main concern.” The consensus among several panelists was that contractors need to plan for heightened competition for reduced federal spending. They should collaborate with agency contracting officers on a case-by-case basis to identify ways to deliver more product for less in outlays, he said.

The current fiscal situation is “about as confused as I’ve seen, and I’m my 29th year,” said McCord, a former Senate staffer. That take was echoed by the moderator and his former Capitol Hill colleague, Jon Etherton, the principal at Etherton & Associates who said in his 30 years in Washington he’d “never seen this level of uncertainty.”

No one can tell whether sequestration will endure, even though budgets by the House, Senate and the president -- submitted out of the usual order -- all assume it will not, the panelists said.

“That’s the right place to be based on our defense strategy,” McCord said, adding that this month’s release of the fiscal 2014 budget “did not make a lot of news” because key decisions were made during a strategic review just after passage of the 2011 Budget Control Act. The department felt obligated to resubmit some “unpopular proposals” such as a new round of base closures and hikes in premiums for the military’s Tricare health plan “because the fiscal situation hasn’t changed.” he said.

McCord predicted that the fight over raising the debt ceiling anticipated for this summer, seen as logical time for Congress and the White House to again seek a “grand bargain” on long-term taxes and spending. It “will come too late” to head off damage to such Pentagon activities as training events and ship maintenance, he continued, damage that “will spill over into fiscal 2014." The way ahead on furloughs should be clear by June, officials say.

Decisions affecting contractors will “be made through case-by-case discussions between program managers and vendors -- no one size fits all,” McCord said. Termination of contracts will be a last resort, but there will be reductions in quantities of products ordered and shortened time frames even though “that’s not good for unit costs,” he said. “There’s only so much flexibility given the across-the-board nature of the beast.”

Sequestration, several panelists noted, remains a long-term threat despite the impression among many that its effects have thus far been modest. “Many thought the sequester would be swift with immediate moves by the government for contract terminations and plant closures, but government has taken a more reasoned approach,” said Beth Ferrell, a partner with the contract consulting firm McKenna Long & Aldridge. “The industry did a good job of curbing hiring, but there are still potential losses.”

Stan Soloway, president and CEO of the Professional Services Council, said the figure of two million contractor job losses frequently mentioned by the aerospace industry is “a long-term forecast but sequestration’s impact is already visible. He cited a company that was told that its contracting agency could no longer pay them, so the company drafted a sample claim, and the contracting officer then found some money. Though he has some sympathy for employee unions that argue contractors are getting off “scot-free” when it comes to staff furloughs, “you don’t need a statute to affect contractors” because the reductions happens on the spending front, Soloway said.

“In the 1990s drawdown, we had to winnow down overhead and get lean, but now we’re doing it to the point of anorexia,” Soloway said. “Sequestration is just a legal term for what we’ll see anyway. It’s just a question of how much flexibility there is in what pots the money goes.”

Contractors will have to collaborate with agencies, said Robert Toth, senior vice president for contracts and administration at the private ICF International. “The sequester headcount makes news but for contractors the risks are more than just revenue.” In making adjustments, companies could violate key personnel clauses that allow work across contracts, he said, while disruptions in longtime collaboration with small businesses could harm past performance records. “The indirect costs can affect other contracts,” Toth said, citing damage to specialized training and security clearances that could lead to a brain drain or defection from the government to the commercial marketplace. “Long lead-time projects such as conferences involving planning for hotel contracts” could also be thrown into confusion by the continued fiscal uncertainty.

Contractors will be told they have to “deliver at a lower price to be effective, but this should be a two-way street, with companies pushing back on doing new things at no cost,” Ferrell said. She noted that some agencies are already unable to receive contractor product delivery because they lack the staff for inspections.

Companies should review their own “vulnerabilities -- are you behind schedule, over budget, not meeting specifications?” she said. They should “develop a claims mentality” and then model their future bids differently from usual -- keeping track of available funds, monitoring suppliers that “may not weather the economic storm” and taking a long-term view that factors in more changes in contract scope along the way.

Soloway said ultimately the defense community “has to winnow down, and this is probably a good thing in that it will lead to tighter competition and the most agile can win.” But he warned that contractors’ talent management could be degraded by demands for salary cuts and lowered minimal experience and education requirements specified in proposals for the winning bidder’s workforce. “The interests of industry can’t be the Defense Department’s top concern,” he said, “but it should still look five years out at its supplier base.”

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Clarification: The original version of this story quoted Mike McCord, principle deputy Defense comptroller as saying, “Furloughs will be a fact on the ground by June 1." According to Defense Department officials, it's more accurate to say the way ahead on furloughs should be clear by June.