November 08, 2012

National Defense Magazine interviews Paul Debolt on future of defense contract industry and sequestration

3 min

Venable partner Paul Debolt was interviewed by National Defense Magazine for a November 7 article on the future of the defense contract industry following Tuesday’s election and the threat of sequestration. President Obama’s reelection likely means an end to the war in Afghanistan and nearly a half trillion in defense cuts over the next decade. On January 2 of next year, $1.2 trillion in spending cuts are set to kick in through sequestration with nearly half coming the Defense Department’s budget.

“What would happen to federal programs if the parties deadlock again and, despite everyone’s intentions, a sequestration actually occurs?” asked Debolt on the potential impact of sequestration. “The hardest part of a game of chicken is knowing when to quit,” he said. According to Debolt, defense contractors are “hostages in this showdown between the two parties over fundamental fiscal policy decisions on taxing and spending.” Debolt said the expiration of the Bush tax cuts in January gives the president leverage, however he is not optimistic about sequestration and says a short-term deferral is the best anyone can hope for in the process. Commenting on the overall impact on the defense industry, Debolt said, “Ultimately, the overall impact on industry will be driven by a final budget agreement,” adding, “They’ll have to make some cuts to government spending.”

Debolt was skeptical about the lame-duck Congress and its approach to sequestrations, saying,” People who didn’t get reelected will be moving out of their offices. Newly elected members will be painting offices and getting ready to move in. … It will be government by BlackBerry which I don’t think is conducive to taking major steps forward on these issues.” Debolt added, “The best they’ll do is delay the day sequestration takes effect so the new Congress can start working on it.” In the meantime, contracting businesses will suffer according to Debolt. “It’s much easier to eliminate a full time position than to restructure a manufacturing contract,” he said.

Debolt predicted that “A combination of real cuts and uncertainty about future funding will result in contract restructurings and even terminations.” He noted that defense suppliers have already seen a shift in the way winning contract bids are selected. “The key deciding factor is low price, not necessarily ‘best value,’” he said. “Our clients are reporting an increase in ‘low cost technically acceptable’ solicitations,” Debolt added. “Before the government even looks at the technical proposals, they look at who has the lowest price and if the technical proposal is acceptable, that company wins… In some cases, acceptability may be determined by no more than a resumé,” he said.