The shutdown’s effect on federal contractors is a huge source of uncertainty

October 1, 2013

There are currently millions of Americans working for companies that do business with the federal government, from health providers to military firms. All told, the federal government did about $516.3 billion worth of business with private contractors in 2012.


(The Washington Post)

That's $1.4 billion in contracts each day, on average. And right now, it's still wildly unclear how all these contracts will be affected by the ongoing government shutdown.

Companies will essentially have to find out as they go. And that's presently one of the largest sources of uncertainty on how the shutdown might affect the U.S. economy.

Some contractors and firms already have clarity. Health-care providers won't be affected much because the federal government will keep making payments through Medicare and Medicaid. The same goes for many Realtors, since the Federal Housing Administration, Fannie Mae, and Freddie Mac will continue to guarantee mortgages during the shutdown.

Yet the sprawling world of military contracting, worth $360 billion in fiscal year 2012 — or 70 percent of all federal contracts — remains a big question mark:

Under the rules of the shutdown, the Department of Defense will continue performing "essential" activities related to national security and the protection of life and property. Essential personnel — including 400,000 civilian workers and 1.4 million active-duty military — will keep getting paid, thanks to a defense bill signed late Monday night. Another 400,000 civilian workers will get sent home.

But it's unclear how this will all affect federal contracts. The bill that President Obama signed on Monday night allows the Department of Defense to pay any employees or contractors who are providing "support for members of the armed forces." But how that law gets interpreted is largely up to the Secretary of Defense. Will it include companies working on large weapons systems?

"We still don’t know exactly how many contracts count as 'essential' services," says Rob Levinson, a senior defense analyst at Bloomberg Government. "That's up to the Department of Defense. We’ve told contractors that they need to talk to the government to find out if they'll get paid for the work they're doing [during the shutdown]."

There's still another layer of uncertainty here. It's unknown whether contractors will be able to pay their employees if the contracts are put on hold. "If your contract is non-essential, those employees may be told to go home," says Levinson. "So then the question is, does a company like Booz Allen Hamilton or SAIC still pay them? That’s up to them. Big companies probably will. For smaller companies, they may not have the cash."

When contacted, many federal contractors simply couldn't say yet what portion of their businesses will be affected. Contracts that have already been signed will be honored. But many planned and future projects could well be disrupted. (My colleague Marjorie Censer has more on how these companies are adapting.)

Back during the 1995-'96 shutdown, about one-fifth of the $18 billion in federal contracts in the D.C. area were put on hold, with many employees furloughed. Many of those contractors were not reimbursed during the funding lapse — they simply lost that money.

The effects would be larger today, given that the number of private contractors has swelled over the past two decades. The top 40 federal contractors in the greater D.C. area  alone brought in about $104 billion in 2012. And Fairfax County, Va., currently has about 4,100 contractors that bring in about $26 billion per year.

Further reading:

--My colleague Lydia DePillis has been doing a series of interviews with federal contractors affected by the shutdown. See here and here.

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Lydia DePillis | October 1, 2013