Early May saw US Treasury Secretary Janet Yellen warn that the US could run out of cash by June 1 this year if Congress fails to raise or suspend the debt ceiling.
Among the widely discussed consequences of a potential failure to carve a path forward that does not include raising the debt ceiling is the impact on government contractors. As our focus falls primarily on such companies, we examine what that would mean for them.
What will the Repercussions be for Federal Contractors?
It is expected that federal contractors would be among the first to experience serious financial consequences should Congress not raise the debt limit. As we approach the government’s fourth fiscal quarter, which is the busiest part of a government contractor’s year, with agencies spending about one-third of their annual procurement dollars in July, August, and September, contract disruptions could be devastating for the federal vendor base.
Canceled contracts, and frozen, delayed, or reduced contract payments would be an immediate consequence if the debt ceiling is not lifted. As a result, vendors - particularly those with low cash reserves - would see dwindling bank accounts and be forced to take immediate action to reduce losses.
Small-business owners, for example, are likely to be hit particularly severely. During the past fiscal year, they were awarded nearly $155bn in federal government contracts, which amounts to some 27% of the total number of federal contracts.
Which Sectors will be Affected?
An analysis by Fitch in February suggests that defense spending is unlikely to be reduced, which is confirmed by the Pentagon’s $842bn budget request made in March - a request first and foremost about procurement and not so much about R&D. However, the healthcare and the pharmaceutical sectors might be more heavily affected.
Furthermore, while operations of essential agencies like the TSA or FAA would likely continue, TSA agents and air-traffic controllers forced to work without pay could call in sick, as during past shutdowns. This could affect air travel and the airline industry’s continued recovery from the pandemic.
Moving on to the equipment manufacturing industry, it is expected that the biggest impact will be soaring interest rates and the availability of capital. In fact, equipment manufacturers are already forecasting a 6.4% profit margin loss in 2023 due to the effects of rising interest rates coupled with significant price hikes on inputs.
Why Should You Use TenderAlpha’s Data?
TenderAlpha’s forward-looking receivables data allows you to view the outstanding amount of money a government contractor is yet to receive under a specific contract.
How can this information help your work? First of all, the government receivables data shows the dependence of companies on government contracting, which is a powerful tool when assessing the future prospects of a company in such an unstable environment.
Secondly, you will be able to calculate how much a government supplier will be bound NOT to receive in time for all the contracts they have been awarded for the next 3, 6, 12, 36, and 60 months. Therefore, you can assess the potential implications for the business as you understand the share of government contract awards out of total company revenue.
Last but not least, TenderAlpha’s government receivables data can provide a good starting point for a more in-depth analysis of how much each sector will have been affected by a potential inability of the US Government to pay its suppliers. As the data shows how much money ought to be obligated in the future, it is possible to aggregate the sums by industry to get an idea of potential disruptions in any given sector due to delayed or frozen payments.
Final Remarks
Whilst the risk of US defaulting looks dangerous, it is fair to say that this is not an uncharted territory for the country. The debt ceiling has been raised, extended or revised 78 times since 1960. Therefore, it would not be a surprise if it is raised again this time around.
Of course, it remains subject to negotiation and agreement between the Republicans and the Democrats, with the former insisting on dramatic spending cuts in exchange for votes to raise the debt ceiling.
Whatever happens, there will always be value in gaining insights into who receives government contract awards, when, where, and how much. And the best place to get all this information is TenderAlpha.
Get in touch now and let’s discuss how you can get the public procurement data most valuable to your business.