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With spending cuts likely, contractors look to repair work, cybersecurity

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The big question in 2012 is what happens to federal spending. With the supercommittee’s failure comes the promise of big cuts, but some contractors are skeptical those will actually happen. Regardless, companies that depend on federal spending are expecting more challenging times, and a few areas will be of particular focus.

Cybersecurity

It’s been the buzz in 2011, and don’t expect that to change in 2012. But every company that wants to win work will have to consider its strategy. In recent years, many contractors have opted to open cyber centers near Fort Meade, home of the National Security Agency and U.S. Cyber Command. Science Applications International Corp., for instance, opened its seven-story cyber innovation center in Columbia in late 2010, while Boeing unveiled a new cyber engagement center in Annapolis Junction in October.

Still, some firms are pushing back against the trend. Speaking at an aerospace and defense conference last month, Horacio Rozanski, chief operating officer at McLean-based Booz Allen Hamilton, said his firm isn’t particularly interested in a physical cyber center.

“We have built our cyber network not as a cyber center in the middle of Maryland, but as a virtual network of connected nodes with unique technology that allows us to service clients from multiple places,” he said. “We’re serving clients on the West Coast out of Red Bank, N.J.; we’re serving [Federal Aviation Administration] clients out of Huntsville, [Ala.], and... having that capability, we believe, is going to be market-driving.”

New products vs. repair

Contractors acknowledge that the outlook for building new military equipment isn’t as rosy as it once was, but they’re finding the silver lining, building up their expertise in maintaining and repairing older trucks, aircraft and other equipment.

SAIC is forecasting that what officials call “readiness and sustainment” will be a key growth area.

In a call with investors last week, the contractor touted two task order wins worth nearly $600 million to sustain blastproof trucks known as Mine Resistant Ambush Protected vehicles, or MRAPs, in Kuwait and Afghanistan.

The award “demonstrates the kind of progress SAIC is making” in the strategic growth area, said Walter P. Havenstein, SAIC’s chief executive.

At a defense and aerospace conference earlier this month, David F. Melcher, chief executive and president at McLean-based ITT Exelis, said the company is well-positioned because its products are used on many different pieces of equipment.

Though he acknowledged that new program cuts could hurt the company, Melcher was upbeat about Exelis’s prospects.

“If you’re going to cut out the new systems, what are you going to do? You’re going to fix up the old systems,” he said.

Subcontractor-prime contractor relationships

Tightened government spending has contractors giving their proposals a harder look to ensure they offer a low enough price and still leave room for profit.

In some cases, that has prime contractors seeking to do more work themselves — rather than subcontract it out — to retain revenue.

This “will put even more intense pressure on subcontractors,” said Bob Kipps, managing director of the McLean-based investment firm KippsDeSanto.

Subcontractors will need to ensure they provide needed capabilities and aren’t expendable, he said.

Dolly Oberoi, chief executive at C-Squared Technologies in Tysons Corner, said the company has already lost some of its subcontracting work to prime contractors.

“Even though there are subcontracting agreements and teaming agreements signed, nothing holds” when times are tough, Oberoi said.

Luckily, she added, C-Squared is the prime contractor in 90 percent of its contracts.

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