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Contractors quietly optimistic following sequestration delay

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While the two-month delay in planned federal spending cuts that Congress approved last week provides short-term relief for government contractors, many companies said the move does little more than maintain the uncertainty that has plagued them for months.

Still, some are choosing to read the “fiscal cliff” deal, which pushed back the start of about $1 trillion in automatic cuts, as a sign that neither Congress nor the president has any intention of letting sequestration take effect.

“The implication is clear [that] the system will probably compromise on sequestration,” said Loren Thompson , a defense industry consultant. “Defense executives are beginning to suspect sequestration as they had feared it will not unfold and, although there will be some cuts, they’ll be more modest.”

Stan Soloway, president and chief executive of industry group the Professional Services Council, sounded a more cautious note. He said contractors will continue to struggle with the uncertainty surrounding the government’s long-term budget plans.

“You’ve got some very key core issues that have still not been dealt with,” said Soloway. “It’s less an issue of do we think sequestration . . . is going to happen . . . and more of a question of what is the real plan going forward.”

Last year, some of the largest contractors were vocal about the need to stop sequestration. They appeared on Capitol Hill and warned that they might have to issue layoff notices to employees. Some even hosted rallies attended by workers nervous about their jobs.

After postponement of the sequestration, many contractors were hesitant to say much. The Arlington-based U.S. unit of BAE Systems issued a statement that said the company was pleased by the delay.

However, “the prolonged uncertainty associated with sequestration, which has already made it virtually impossible to plan near- and long-term business decisions, will persist for yet another two months,” the company added.

Bethesda-based contracting giant Lockheed Martin released a similar statement, noting that it is encouraged by the first step. But “[u]ntil sequestration is permanently eliminated, there will be an overhang on our industry that stifles investment,” the company said.

Brad Antle, chief executive of Fairfax-based contractor Salient Federal Solutions, said the delay is a good sign, even though contractors would be far more relieved if sequestration had been put off for a longer period, such as a year.

“I think they’re going to find a way to provide a much gentler ramp to any kind of spending cuts, and I think [the cuts] will probably be less aggressive,” Antle said.

He said there’s little planning Salient can do in the meantime.

Sean O’Keefe, chief executive at Herndon-based EADS North America, said he is keeping employees aware that sequestration still could happen, but isn’t issuing any layoff notices.

He resisted concluding that the delay is a positive step, but said it “nonetheless demonstrates that if you’re going to reach spending limitations, there are a variety of ways to do it.”

Thompson, the consultant, argues that the delay — and perhaps eventual avoidance of most cuts — could prove a boon to companies who have been readying for much harsher cutbacks.

“This fiscal crisis may actually improve the profitability of the defense sector because companies have taken so many measures in anticipation of deep cuts,” he said. “When they don’t happen, the margins will actually be enhanced.”

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