Bloomberg News

Defense Contracts Plunged 67% in January as U.S. Cuts Loomed

February 05, 2013

Pentagon contracts plunged 67 percent last month, a sign the military is reining in spending before automatic budget cuts set to begin in March.

The awards tumbled to $12.1 billion in January from $36.3 billion announced in December, according to data compiled by Bloomberg. These reductions follow a drop in fourth-quarter defense spending that contributed to the first reported decline in the nation’s economy since 2009.

The slowdown coincides with the military winding down two wars and preparing to absorb $487 billion in reductions over a decade. Washington’s deadlock over the automatic cuts, which would further slice the budget, has forced defense officials to postpone routine spending, said Dan Jacobs, chief executive officer of the Federal Market Group, a Warrenton, Virginia-based consulting firm.

“Everybody is in limbo,” Jacobs said in a phone interview. “They’re holding off until there’s some decision made by Congress and the administration.”

U.S. lawmakers and the administration of President Barack Obama face a March 1 deadline to avoid the start of about $1.2 trillion in decade-long automatic budget cuts known as sequestration, with half coming from national-security programs. The reductions would reduce defense spending by $45 billion in the fiscal year that began Oct. 1, according to Pentagon officials.

Budget Deadline

The January decline followed a surge of contracting in the last days of 2012. Defense Department awards in December rose 73 percent from November, a boost that may have stemmed from the year-end deadline to avoid the effects of sequestration, said Brian Friel, an analyst at Bloomberg Government. In a last- minute deal between the White House and Congress, the reductions were delayed for two months.

Awards announced in January were also 44 percent less than the $21.6 billion in contracts issued in the year-earlier period, and 42 percent below November’s $21 billion total, according to the data.

A group of seven closely held companies, including Bethesda, Maryland-based Digital Management Inc., won the biggest contract last month, a $1.42 billion award to help manage a communications network called the Global Information Grid.

Nine closely held firms, including Huntsville, Alabama- based Analytical Services Inc., received the second-largest contract, a $997 million deal to provide engineering services to the Army’s Space and Missile Defense Command.

Lockheed Missiles

Lockheed Martin Corp. (LMT:US), the world’s biggest defense company, landed the third-largest contract, a $755 million award for Patriot Advanced Capability-3 missiles.

By comparison, Lockheed in late December won a contract for 31 F-35 fighter jets valued as high as $3.68 billion, the biggest Pentagon deal that month.

The government’s stopgap funding measure “could cause funds to run short in some accounts and adversely impact programs that are otherwise executing efficiently,” said Jennifer Allen, a spokeswoman for Bethesda, Maryland-based Lockheed.

The risk of automatic cuts is also an area of budget uncertainty, Allen said in an e-mail.

The slump in contracts last month followed a 22 percent decline in the annualized rate of defense spending in the fourth quarter that was the biggest drop since 1972, according to Commerce Department statistics.

Defense Outlays

That figure overstates the actual decline in part because of a third-quarter jump in defense outlays, according to Robert Levinson, an analyst at Bloomberg Government.

Defense spending in the fourth quarter declined just 3.4 percent from the same period in 2011, U.S. Treasury Department figures show.

The Pentagon wants to reduce commitments to better prepare for the possibility of automatic cuts, which would require making steep reductions to the annual budget over just six months, according to Larry Allen, president of Allen Federal Business Partners, a consulting firm in McLean, Virginia.

“Slowing spending on anything other than what is absolutely essential saves on contract cancellation costs,” he said in an e-mail.

The Defense Department has approved cost-cutting measures such as canceling scheduled maintenance for ships and planes, and added an extra layer of review for large contracts. Frank Kendall, the Pentagon’s top weapons buyer, in a Jan. 15 memo said he will personally clear all awards of more than $500 million.

Job Cuts

The step is being taken in part “to mitigate the impacts” of sequestration, as well as a stopgap budget measure that funds the government through March 27, Kendall wrote.

The department will be forced by mid-February to start dismissing some or all of its 46,000 temporary workers, Deputy Defense Secretary Ashton Carter has said. It’s also likely to begin notifying its 800,000 civilian employees that they face mandatory unpaid leave one day a week starting in April unless sequestration is averted, he said.

The plans are probably weighing on the workforce, and may have contributed to the reduction in announced awards last month, according to Allen.

“With so much talk about possible furloughs, you have to figure that morale” at the Pentagon is low, especially among civilian workers, he said. “People worried about their jobs tend not to do their jobs.”

To contact the reporters on this story: Brendan McGarry in Washington at bmcgarry2@bloomberg.net; Nick Taborek in Washington at ntaborek@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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