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Center for Strategic and Budgetary Assessments defense analyst Todd Harrison on the impact on the defense industry of potential Defense Dept. cuts.
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We have some breaking news according to wire sources air force leaders are about the big sweeping budget cuts in coming weeks if congress can't agree on it.
A budget and billions of dollars and automated cuts that are triggered.
In a memo obtained by Associated Press air force secretary Michael Donnelly laid out steps to slash spending including a civilian hiring freeze cancellation of fly overs and slashing -- base improvements.
Lot of construction jobs there by about 15% -- what happens if you're with a company.
That relies on military contracts Todd Harrison is the defense analyst at the center for -- strategic and budgetary assessments and he joins us now Todd thanks for coming in so.
Is this breaking air force news about to hit all of the branches equally.
I would definitely expect the other military services to be coming out -- similar memos.
If they haven't already been written I'm sure they're being written as we speak not what happens if I'm a company wins -- existing contract is is that in danger and anyway.
-- -- you've got an existing contract and the Department of Defense is already obligated money on that contract.
That obligated money is safe and it's not subject to sequestration.
But if you've got a contract and not all the money has been obligated there are additional option years to be exercised.
And that in my contract then that money will be subject to sequestration.
It'll be looking at about -- 9% cut across the board across every program project in activity.
So just about every.
Every program out there -- -- is going to be affected -- that's very interest in because a lot of these contracts do have these many stages to amend.
Companies have to of course planned years in advance and they plan.
On fulfilling the second and third and fourth parts of those of those contracts.
Many of which now may be -- -- they may have already companies may already spent the money trying to fulfill those contracts.
Well so what will happen is if DOD cannot they don't have sufficient funds to exercising its option years there have to go to back -- renegotiate of these companies and it's not that they're gonna be canceling programs out right.
It's just that they'll be short funding by about 9% for the remainder of the fiscal year.
So they'll have to go back and renegotiate costs.
It won't necessarily.
Be -- hurt for industry because you know they can still come out of that negotiation making a healthy profit.
But one thing they're gonna be clearly be heard at a certain commodities company spent a fortune on proposals I mean that's really where they spend a lot of a front end the money -- proposals make -- on what the best that those those are all that that money has been wasted right.
Well ultimately the government actually end up paying for all of that because they charge that money back in the form of overhead to the Department of Defense or even if it's a fixed price contract or if it's a cost reimbursement outline what I'm saying it's it is that a company that has just on the proposal -- has no contract with the government the government doesn't have to pay for those proposals.
Now they're not paying for it yet but down the road if those companies overhead costs are higher.
You can be sure it'll pass -- -- to the government if they keep -- their negotiation they're -- relationship with the government.
Now who's gonna get hit first because -- you have construction lot of construction jobs and I guess that.
If they're not more more housing being built that they would be affected of course you have big companies like Boeing that actually manufacture some equipment food services who's gonna get hit.
Well the service contractors and to be hit first because that money goes from being a tight budget.
Authorization.
To being an obligation -- -- -- much faster.
The companies that actually -- metal -- that make things.
That money procurement money is spent -- a much slower rates it'll take more time before you expect trickled through to them.
So I think the service sector as it's gotten more to be worried about than others OK so -- which of course ahead it's probably dreamliner that they don't have that they have a cushion built AM.
That the smaller companies don't have.
Right they've got nice healthy backlog of procurement coming they're -- if you take something like the -- joined strike fighter program at 35.
If you walk into that factory down in Fort Worth the day after sequestration takes effect -- won't see any change.
Because all the things are working on it's funded by money that's already been obligated previously they've got to -- pipeline of work got to keep them going for awhile.
It will eventually hit them just not right away Todd we got to run so you gotta make a quick but a deal what happens if there is no deal.
If there is no delay if there's just a deadlock.
If there's a deadlock in this goes into effect on March 1.
One of the first things we'll see our furloughs -- Department of Defense civilian employees either civil servant people we'll see.
Rolling furloughs throughout the year we'll see.
Deferred maintenance for major weapons systems.
We'll see you know like the air force canceling your shows canceling nonessential travel we'll see a lot of that and then we will see a flurry of contracting activity.
-- to renegotiate a lot of these contracts.
That the slowdown programs it's going to be a real mess and we'll see a lot more unemployment Todd Harrison good to see you my friend thank you very much appreciate it.
Thanks for having -- stuff.
