Small Government Contractors May Be Negatively Impacted by Fiscal Cliff Legislation

While the recent legislation passed to avert the fiscal cliff has been reassuring for small businesses overall, it has actually prolonged the uncertainty for many small government contractors. This is because the tax legislation effectively delayed until March 1 planned government spending cuts across the board (also known as sequestration). Essentially, unless Congress is able to reach a comprehensive deal on federal deficit reduction in the next several weeks, automatic cuts will kick in that total $1.2 trillion over the next 10 years, possibly freezing up or eliminating altogether a significant portion of government contractor funding.

The way the cuts are set to go forth at this time, the initial $110 billion in cuts will significantly impact the U.S. Department of Defense, basically slashing 11 percent of its budget primarily in the areas of research and development, equipment, and facilities. If this deficit reduction plan goes through, it’s expected to leave small contractors particularly vulnerable, as they are dealing with fewer active contracts and will really take a hit if some of these contracts drop out. It’s also expected that with the reduction of available contract work, bigger contractors will go after smaller projects, increasing the competition significantly. In addition, many small government contractors are specialists in specific military applications and may have less to offer the private market, making a shift to the commercial sector much more difficult. Adding to all this is the fact that the wars in Iraq and Afghanistan are soon coming to a close, which will have a large impact on military spending overall.

On the up side, President Obama just signed into legislation the lifting of a dollar amount on government contracts that are supposed to be set aside for woman-owned small businesses. Contracts that applied to the Women-Owned Small Business Set Aside program had previously been capped at $4 million for goods and services, and $6.5 million for manufacturing. In the past, this has posed a significant barrier to women entrepreneurs seeking government contract work, but with this cap lifted, opportunities are expected to significantly expand for these businesses.

In addition, many experts are optimistic about the future of small government contractors. Lourdes Martin-Rosa, government contracting adviser at American Express OPEN, points out that the federal government is the largest purchaser of goods and services in the world, and it will certainly need small contractors in order to continue to function.

Reference:

Klein, Karen E. “Tax Laws Leave Small Government Contractors in Limbo.” Bloomberg Businessweek. 1/17/13.