BusinessSpending cuts force contractors to alter strategy

Projected federal spending cuts are upsetting the status quo in the world of government contracting, forcing firms to reevaluate their business strategies or determine whether they can do business at all.

The failure of the congressional “super committee” to agree on a package of federal spending cuts is scheduled to trigger $1.2 billion in automatic budget cuts, with approximately half coming out of the defense budget. Most analysts do not believe that the cuts prompted by the super committee’s failure will come to pass, but firms expect that at least some belt-tightening will be required.

Standard & Poor’s (S&P) Rating Services recently projected that most U.S. defense contractors will see flat or declining earnings in the future as a result of projected cuts.

“The ultimate impact on credit quality for the approximately forty aerospace and defense companies we rate will depend on each firm’s program diversity, financial resources, and response,” said S&P credit analyst Christopher DeNicolo. “In general, companies that rely on fewer, larger programs likely are more at risk.”

According to The Hill, many smaller defense contractors could be drivenout of the industry or out of business altogether as a result of steep cuts.

“Some of the smallest companies, they just don’t have the resources to wait it out, and in some cases they’ve closed their doors,” said Fred Downey, vice president of national security at the industry trade group Aerospace Industries Association. “Between the recession and the reduction, the cost of money is higher, and the ability of the smaller companies to raise capital has diminished.”

Competition for a limited number of contracts is likely to be fierce. As a result the U.S .Federal Contractor Registration recently urgedcontractors to make market research a higher priority in order to bid more effectively.

Spending on federal contractors actually decreased last fiscal year to $333 billion, down from $343 billion according to a report by the Center for Strategic and International Studies. This was the first time that spending had decreased in the decade covered by the study.

The U.S. military has begun reducing its spending on research and development for new weapons systems, instead demanding more “mature products” and asking contractors to assume greater risk in developing new technologies.

Firms are also looking to secure new deals repairing and maintaining existing equipment.

Science Applications International Corporation (SAIC) was recently awarded two contracts worth nearly $600 million to sustain the U.S. military’s Mine Resistant Ambush Protected vehicles, heavily armored trucks capable of withstanding attacks from improvised explosive devices (IEDs).

“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,” said David Melcher, the president and CEO of Mclean-based ITT Exelis.

In contrast cybersecurity is expected to see significant growth. The IT consulting firm Deltek recently predicted that cybersecurity spending would grow 9 percent annually over the next five years.

Some of the big firms are already working to capitalize on the trend by building new cyber centers near the National Security Agency and U.S. Cyber Command, located at Fort Meade.

In 2010 SAIC opened its “Cyber Innovation Center” which according to its website is designed to provide a “common, shared physical and virtual computing infrastructure used to optimize typical acquisition costs associated with R&D initialization, and minimize start-up delays.”This October Boeing also opened a 32,000-square foot Cyber Engagement Center in Annapolis, Maryland.