In 2013 I wrote a cover story for Washington Business Journal that was called “The Shutdown Hangover.” The federal government had just reopened after 16 days, landing on a deal after a hard-fought battle between the Obama administration and Republicans over the Affordable Care Act and the debt ceiling.
I spoke to a number of contractors for that article, mostly small businesses. One saw work for about a quarter of its 200 employees disappear during the shutdown, resulting in roughly $200,000 in lost revenue. Five percent of those losses were in net profit. Another opted to pay the 30 employees impacted by stop-work orders during the shutdown from cash reserves. That meant that the $300,000 in lost revenue all came off the top. Other companies couldn’t pay employees, some of whom therefore qualified for unemployment, since unlike federal workers, they don’t get back pay. That would of course bring more expenses back to the company, as the tab for unemployment rises based on the number of claims made. There was a feel-good story, too, where one company established a program to allow colleagues to donate their own available vacation time into a pool, which was then evenly distributed among those at risk of losing paychecks because of stop-work orders. Hardly unscathed of course, but an inspiring case of employees protecting their own.
So what did we learn in the five years since that debacle? Politics about a border wall aside, what laws have been put in place to prevent this sort of fallout from government ineptitude? How have operations during a shutdown shifted to ensure small businesses aren’t left holding the bag, unable to be made whole again, and questioning whether they will be able to keep their doors open long term?
Nothing. No new laws were implemented to prevent this sort of industry pain. Congress has proposed some rules to officially ensure federal employees get back pay (something that has indeed always happened, by the way, but they figure is best to legislate). But contractors are different. It’s on them to manage their cash flow, find some means to hold onto their employees and not go out of business.
A fair number of these situations hit services companies the most — those that rely on the proverbial butts in seats to generate revenue. They also are primarily small and medium businesses that don’t have the cash flow of a Lockheed Martin or Boeing to ride out the disruption. Rest assured, Wall Street will in the long term at least forgive the modest dip that those large prime contractors might see in earnings, understanding that this is all just part of business with the federal government and that they’ll make up for it once payments begin flowing again, even if it takes a quarter or two. CEOs of those companies will ultimately call the impact to their bottom line “modest,” as Marillyn Hewson did in 2013.
But even the largest prime contractors take a hit when small suppliers and subcontractors can’t manage through. And delayed contract awards hurt the whole industry, as does an exodus of talent that is not willing to bank on government learning from its mistakes and finding some means to do its job and actually operate. That may not happen tomorrow, but it will happen, especially if yesterday’s debt ceiling and today’s border wall is followed by some other political firestorm that leads to yet another prolonged standoff. And how might this play out in the minds of those Silicon Valley types that the Pentagon is so motivated to attract? Nothing epitomizes a clash of cultures like a shutdown by the customer that speaks emphatically about the satisfaction that comes from public service.
So again, what is different this time? I’d guess that the story I wrote in 2013 could nearly be cut and pasted, and then rerun by simply changing some company names and dollar figures. The biggest difference is that in 2013, the shutdown lasted 16 days — so the one assurance we have this time around is that hurt for many of these companies will be a whole lot worse.
Jill Aitoro is editor of Defense News. She is also executive editor of Sightline Media's Business-to-Government group, including Defense News, C4ISRNET, Federal Times and Fifth Domain. She brings over 15 years’ experience in editing and reporting on defense and federal programs, policy, procurement, and technology.