Spending cuts mean squeezing the already-squeezed

There was a fair bit of hand wringing last week over the fate of the defense budget. Just about everyone agrees that spending must be cut, but the House Armed Services Committee voted to save a fleet of warplanes and a nuclear aircraft carrier the Pentagon proposed to do without.

Even more costly, it also agreed to boost military pay beyond what the president suggested.

Now, such wrangling has been going on for years. It’s one of the reasons why the word “sequestration” has become part of the local vernacular.

Eventually, those cuts have to come from somewhere, and many a government contractor can tell you what it looks like in the trenches where work worth so much one day must be delivered for so much less the next.

Engility chief executive Anthony Smeraglinolo offered a glimpse recently in a quarterly conference call. His Chantilly company boasts it is a “a pure-play government services contractor providing highly skilled personnel wherever, whenever they are needed in a cost-effective manner.”

In practice, this means Engility often bids to take on work at a lower price than an incumbent, and if it wins, it may even hire or “re-badge” the incumbent’s employees as its own.

Wells Fargo Securities analyst Edward S. Caso Jr. asked Smeraglinolo how many of those re-badged workers would have to take a pay cut.

“We’re not winning jobs by cutting people’s salaries,” Smeraglinolo said, according to a transcript. “What has happened is you see many times with an incumbent, they hired a senior engineer 10 years ago for $76,000. The requirement is still for a senior engineer, but he now makes $165,000. The government still wants a senior engineer at $76,000 or $80,000. So we are not cutting necessarily that $165,000 employee down to $80,000. What we’re doing is fulfilling the requirement of the statement of work that calls for a senior engineer and paying the fair market wage for that. So there is a difference. There is a nuance of just slashing salaries as opposed to staffing it at the appropriate levels.”

This squeeze is not necessarily applied evenly across the board. Sometimes the government wants to retain a certain engineer, even if the contract changes hands. “There’s some key people that the customer wants,” Smeraglinolo said. “We seek those out and give them jobs and staff the remainder at appropriate levels.”

In other words, the squeezed get squeezed a little more.

Dan Beyers is the founding editor of Capital Business, The Washington Post’s go-to source for news about the region’s business community.
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