Tips on Defense Contractor Survival During Lean Times
Gene Townsend
Financial guru Gene Townsend struggled to find silver linings amid the current funding environment surrounding military contracting.
The best he could conclude was this, “You’ve got such a mess in the world, defense is coming back. You’ve got to survive until then. Those who survive will come out stronger.”
And small firms, he added, will fare best in yet leaner financial times he predicts in the near term.
In this third of The Patuxent Partnership’s four-part series on navigating the increasingly choppy waters of government contracting, Mr. Townsend explained how rates are established. In the Budgeting and Rate Development Briefing, the former comptroller at Naval Warfare Center, Patuxent River, MD, showed how a defense contracting firm would go about budgeting for and bidding on a contract. He demonstrated how to calculate and categorize costs to (1) comply and (2) stand a chance at winning the contract.
Complying with the budget submission standards is imperative. Sloppiness as small as failing to assign some hours of some employee to an “unallowed” category if, for example, a company party occurred will be questioned. It will cost a great deal more than loss of some unallowed dollars, he said. “You need to be careful [with your] reputation capital, you lose that, you’re toast.”
As to winning the contract, that’s where the news starts to become grim. It’s not so much that defense funds are plummeting; so far they’re not. It’s that those dollars won’t be reaching mid-tier and larger contractors for at least the next few fiscal years. That said, Mr. Townsend noted, increasing foreign military sales keep both Lockheed and Boeing on his favored stocks list.
Small businesses are in a strengthened position. Still, he cautioned, “there are more contractors and less work.” That is the nut of it. No matter how varied budget pressures play out in the Pentagon, there will be fewer contracts. And those awarded will go to the lowest cost for technically acceptable work.
“If you bid the way you’ve normally been bidding, you probably won’t get it,” he said. “The government’s assumption is, you win with the low price, you’ll get those people [from the prior contract holder]. They’ll come over to you.”
This practice is already a year old in Southern Maryland, long enough for Mr. Townsend to note trends. Lower bid winners have picked up incumbents who have taken salary and fringe cuts. But the practice has also sent people back into a Washington D.C. commute.
The new defense contracting environment has resulted in “tons of people who want to start businesses.” And while Mr. Townsend looks to small businesses faring better than mid-tiers, he advises contractors to take a government job if the opportunity arises. He foresees DoD jobs more secure than contractor jobs, although there will be internal cuts throughout the military.
Without a Congressional consolidation of bases it will be up to the military to cut its facilities to accommodate shrinking shares of the budget. “In the absence of BRAC they have to look internally to cut costs.”
Similarly, when the Pentagon crafted a budget to maintain personnel and readiness it appended a prioritized list of weapon systems it would add if funds became available. Congress liked the list, Mr. Townsend says in the video below. So the legislators included them, but assigned back to the Pentagon the responsibility of coming up with the funds to pay for them.
So surviving in the near term will be tough, he concludes, but then named a few ongoing global crisis. “All you need is a spark. That’s all it will take,” he said.
“I think you’ll see the defense budget coming back. And it will be fast.”[youtube=https://www.youtube.com/watch?v=IWm07RBu_WA]
