We don’t even have to look back as far as the 2008 crisis to predict the scale of potential losses. When sequestration hit in 2013, defense budget reductions led about 17,000 firms to exit defense contracting, reducing the military’s vendor base by about 20 percent, and these firms haven’t yet returned. The current crisis could have a similar effect on defense supply chains.
That was the excellent Andrew Hunter writing over at The Hill. 20 percent decline in defense firms due to sequestration and the shutdown in 2013 is quite a lot. But what happened to the amount of contract obligations?
I collected total DoD contract obligations by month to create a model that would predict the impact of the 2013 shutdown, and what a similar magnitude could mean for the COVID-19 crisis. The coefficient on the shutdown indicates a $13 billion reduction in obligations per month. That’s nearly a 40 percent reduction. If the COVID-19 crisis lasts 6 months at an impact level of the 2013 shutdown, then contract obligations could be $115 billion compared to a baseline of $189.
(By the way, the coefficient on the September dummy variable representing the last month of the fiscal year was $36 billion higher than the average coefficient for the other months. In other words, the dollar value of contract obligations in September is 224 percent higher than normal.)
Of course, the 2013 shutdown is probably not a good predictor of COVID-19 impacts. During the shutdown, government workers were furloughed and new contracts would not be obligated. However, existing contract work continued.
For COVID-19, defense was called “critical infrastructure” by Ellen Lord and asked to continue working. Contracts should be getting processed by the government, and substantial stimulus to HHS, DoD, and the VA should increase contracts. It may take months to start turning appropriations into contract obligations.
The real question is whether contractors can perform. Textron furloughed over 7,000 workers. Where contract performance doesn’t permit telework, such as in manufacturing, there could be a large reduction in work and thus cash flow. Even if work continues, there could be extra costs for cleaning, protection, and anything else. I think our first indication will be the actual cost burn rate reported through the contractors’ Earned Value Management.
textron furloughs were for its business jet business, not defense which is primarily Bell