Federal cuts would take heavy toll on small contractors


Maria Proestou, head of Delta Resources, an Alexandria-based defense contractor with about 280 employees, said she’s never seen the business so cutthroat. “Larger companies are fighting for work they never would have fought for before,” she said. (Marvin Joseph/The Washington Post)
November 16, 2012

The threat of dramatic federal spending cuts at the start of next year is already taking a toll on small defense contractors, who say they’ve been grappling for months with a major slowdown in the awarding of contracts and steeper competition from large firms.

The economy of Northern Virginia, where defense contracting is a crucial sector, is especially vulnerable.

If policymakers fail to reach a deal to stop the cuts in defense and domestic spending, small firms fear they will be the hardest hit. Economists and industry experts agree. Although federal contractors of all sizes could take an enormous blow, smaller businesses are at a disadvantage because they lack larger firms’ capacity to respond.

Big firms in the Washington region have already begun preparing for the spending cuts in ways unavailable to smaller companies. Some giants are moving workers, divesting some of their businesses and taking work back from subcontractors. Smaller firms, though, say they are doing little, mostly because there is little they can do.

“We’re hoarding cash,” said Brad Schwartz, president and chief executive of Blue Canopy Group, a Reston-based contractor that specializes in cybersecurity and intelligence.

“We’re as well-positioned as any small company, but we’re still anticipating major setbacks,” he said.

Maria Proestou, head of Delta Resources, an Alexandria-based defense contractor with about 280 employees, said she’s never seen the business so cutthroat. “Larger companies are fighting for work they never would have fought for before,” she said.

Proestou said she didn’t appreciate how nervous many large contractors were until last month, when one that employs her company as a subcontractor told her that it was taking the business back.

“I have to find new work for 10 people by Christmas,” Proestou said, adding that she has already laid off a few employees and downsized through attrition. She has also moved workers into less-expensive office space.

The heads of some small contracting firms said they would not be able to stay afloat for more than a few months if the spending cuts happen.

At a recent meeting in Fairfax County, a representative from the contracting giant SAIC said his company is among those taking work back from some subcontractors.

“You know what that’s called, don’t you?” County Supervisor Pat Herrity (R-Springfield), who is chief financial officer of a Reston-based federal contractor, said after the meeting. “It’s called ‘killing small business.’ ”

A spokesman for SAIC did not respond to subsequent requests for comment.

Tom Dority, president and chief executive of Tech-Marine Business, a Navy contractor with about 85 employees, said the problem is twofold: Not only do smaller businesses lack options for softening the blow, they also have little room to absorb losses. “The smaller the company, the smaller the margin for error,” he said.

Dority and others described government contracts slowing to a trickle well ahead of the year-end deadline because federal agencies are unsure how much money they will have — a phenomenon that’s been dubbed “soft sequestration.”

This has had the biggest impact on firms so far, business leaders said.

“At a small business, you need to continually feed your pipeline,” Dority said.

Neil Albert, vice chairman of the board of directors for MCR, a McLean-based contractor, said: “We’re losing a lot of financial flexibility with banks and other organizations that want to know, ‘Are you a thriving company?’ . . . If you’re not winning new work, the answer to that question is ‘No.’ ”

Smaller businesses are also suffering because increasingly, the government is opting for the lowest price over the best value, said Stan Soloway, head of the Professional Services Council, a trade association. When cost is the only criterion, he said, “smaller companies are simply less able to compete.”

Economist Stephen Fuller, director of the Center for Regional Analysis at George Mason University, said small businesses beyond those in federal contracting will also feel the pinch if the government cuts are not averted.

“It’s retailers, beauty parlors, everyone,” Fuller said. Nearly 60 percent of the private-sector jobs that would be lost nationwide because of the cuts, he calculated, would be those in small companies.

A big factor in which companies survive, Fuller said, is whether they’re diversified. Matthew Dean, president of Falls Church-based Markon, which has about 100 employees, said he’s less worried than many because his company is involved with more than two-dozen contracts with nine federal agencies.

“There are a lot of small companies who’ve grown up around one agency, and they’re just taking their chances,” he said.

Dority’s business falls into that category. All of Tech-Marine’s contracts are with the Navy. Dority said he is considering making an acquisition to diversify, but so far he’s not gone through with it.

Many small-business leaders, like Dority, are growing exasperated with the failure of the White House and Congress to reach a compromise over government debt and offer some certainty about whether federal contracts will be available next year.

“I’m seeing it in people,” he said. “Eventually, the best people will be driven into something else, and our political leaders need to know there will be a price to pay.”

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