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Despite Panic, Large Contractors Evading Sequestration Hit

Just months after the federal sequester, which severely reduced government spending, the federal government is already experiencing its effects. One of the most notable cutbacks occurred in the Department of Defense’s (DoD) budget: the agency anticipated around $37 billion in cuts this fiscal year alone. A cut in an agency’s budget theoretically means a drawback in contracts. Indeed, many of the government’s largest contractors, particularly those working for the DoD, expressed serious concern before the sequester. Among other things, the contractors threatened Congress that they would issue Worker Adjustment and Retraining Notifications (WARN) to their employees, informing them of potential job losses. And yet, for all the fear-mongering, large contractors are actually doing pretty well as of late.

These contractors politicized the debate about the sequester, likely trying to pressure Congress in order to preserve their contract revenue. Many large contractors, such as Boeing and Lockheed Martin, warned that sequestration would devastate their businesses and harm their government customers. Citing Congress’s chronic—and particularly severe—uncertainty, Boeing said it expected “the worst” for its business.

Many of these large contractors further applied pressure to Congress by directly threatening their employees’ jobs, many calling sequestration a “job killer.” Lockheed Martin told The Hill that sequestration would cause “dramatic program and personnel dislocation within our industry… and will disrupt the lives of a significant portion of our 120,000 employees and their families.” After pressing Congress, Boeing issued WARN notices to its employees, alerting them to possible layoffs. BAE Systems and General Dynamics also notified Congress and the media that they would inform their employees of future downsizing, with BAE ultimately issuing these notices.

Many of the large contractors that threatened their employees’ jobs, though, have been relatively unharmed. Lockheed, one of the companies to threaten to issue WARN notices, actually saw a “strong” first quarter and further described the impact of sequestration as “limited.” Although Lockheed’s net sales diminished around two percent, its net earnings (as well as earnings per share) increased by at least 14 percent, and cash from operations grew considerably. Boeing also reported some gains earlier this year. Its core operating earnings increased five percent, core earnings per share increased 24 percent, and net income increased 20 percent from the first quarter of 2012. Boeing’s contract backlog grew $20 billion in the quarter to nearly $400 billion total, a record for the company.

A Government Executive article further detailed that the sequester did not dampen the outlooks of Boeing, Northrop Grumman, or General Dynamics (which reported “considerably better” cash performance in the first quarter of 2013 relative to the first quarter of 2012). In fact, not only are most large contractors mostly unscathed, but also they are actually growing in the face of a shrinking government. Furthermore, many contractors are not adjusting their future outlooks even after sequestration, particularly because many have huge backlogs of contracts with the federal government worth billions of taxpayer dollars.

Sequestration has only been in place for a few months—and many publications, including Federal News Radio, are still surveying its impact—but the Project On Government Oversight finds it interesting that the companies that once declared the sky was falling are still doing quite well. It seems that these companies may have been politicizing the sequestration debate to try both to keep their renewable contracts and to earn new contracts, particularly since many of the same companies that threatened the jobs of their employees are succeeding and keeping constant their future outlooks. POGO further believes that instead of threatening employee jobs, contractors could work to reduce exorbitant compensation and other excessive costs.

Indeed, POGO believes that contractors should not be necessarily shielded from the fiscal constraints felt by the rest of the government. Earlier this month, Secretary of Defense Chuck Hagel signaled that there will be contractor furloughs. POGO hopes, however, that the DoD also takes serious steps to consider whether federal employees can, at lower costs, perform some of the tasks that are currently contracted out. It remains to be seen if furloughs or any other measures will be put into effect and if so, what impact they will have.