NEW YORK (CNNMoney)
Potential massive cuts in federal spending are still months away, but some small businesses that rely on government contracts are already feeling the pinch.
The looming cutbacks — part of the “fiscal cliff” — are causing firms to slow business or shrink production and could threaten jobs, according to company owners.
The $110 billion in cuts for 2013 will kick in on Jan. 2 unless Congress agrees on an alternative. They will hit defense spending particularly hard but also affect other popular non-defense programs funded by Washington.
Last year, small firms received $91 billion in federal contracts, slightly more than a fifth of all the money awarded by the federal government to private enterprise in 2011.
It’s not yet clear exactly which government agencies or programs would be affected, or how deeply the axe would slash at each.
But contractors say agencies have responded to the uncertainty by throttling back projects, delaying bids and terminating programs.
Among the businesses seeing it firsthand is Invertix in McLean, Va., located just outside Washington, D.C., with numerous other small companies that depend on government contracts. The firm develops software for the Army, Federal Emergency Management Agency and others.
“There’s just paralysis. People aren’t making long term strategic decisions. They’re inching along,” said Craig Parisot, the company’s chief operating officer.
That immobilization is not new. Small businesses that get government contracts say the system is fraught with uncertainty. Congress hasn’t passed a formal budget since 2009, relying instead on short-term extensions of current spending levels.
And now loom the so-called sequestration cuts, which Parisot calls “a line in the sand” where the problems will intensify.
Parisot cites a recent project in which three of his employees spent five months developing software for a federal agency — only to have the agency drop it after what he said was a successful pilot phase. He declined to name the agency.
For the 175-employee company, “the opportunity cost was massive,” Parisot said. “We have to pick and choose how we invest our time and money. We could have taken those same resources and put them on another project that would have gone forward and grown.”
Another firm already struggling with the slowdown is Port Tobacco Consulting in La Plata, Md. The firm’s vice president, Dennis Chappell, said projects with the Navy have been whittled down, and few projects are getting renewed. A year ago, the firm had six contracts up and running. Now, there are only two.
“The inability of Congress to compromise and arrive at decisions on how to conduct the business of the United States means we’re losing business,” Chappell said.
Many small firms that supply larger contractors also fear the oncoming “fiscal cliff.”
Williams-Pyro, a company in Fort Worth, Texas, that sells testing equipment to Lockheed Martin (LMT, Fortune 500) and Boeing, recently lost a top manager spooked by the cuts. The employee left a few weeks ago for a job outside the defense industry.
“How long can you keep people on like that?” said CEO Della Williams.
Related: Banks keep lending standards tight
Lockheed said the sequestration threat hasn’t affected its work with Williams-Pyro. Boeing (BA, Fortune 500) spokeswoman Sara Tournade, while declining to comment on its supplier, noted that “sequestration would have a devastating impact on the defense industrial base, including the many small and medium sized U.S. suppliers that make up this industry.”
In Franklin, Ohio, defense contractor Ferco Aerospace Group is bracing for what could be a complete transition to commercial buyers. Although military programs fund 25% of its yearly sales, drastic government cuts would mean more work with commercial airliners and less work on jet engines for the F-35 Lightning II.
The company’s chairman, Joe Murphy, said he would be forced to let go of 20 to 30 employees if the F-35 program is scaled back. Moving entirely to the commercial sector would also redefine the company. Serving the U.S. military was a cornerstone of the beliefs of its founder, a Cuban man who fled the communist island decades ago.
As noted by Deputy Secretary of Defense Ashton Carter in testimony on Capitol Hill last week, “The best thing that can happen for private companies” is for Congress to act soon to avoid the 2013 spending cuts.