“Unintended consequences” will start to take place if the federal government shutdown reaches the two or three week timeframe, according to the chief executive of a mid-tier defense contractor.
Exelis [XLS] President and CEO David Melcher said Wednesday as a business that supplies both products and services with fixed-price and “cost-plus” contracts, Exelis has a “little bit of resiliency” to keep the workforce engaged going forward.
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| Exelis President and CEO David Melcher. Photo: Exelis. |
But if the government shutdown continues for two or three weeks, Melcher said contracts won’t be paid, cash flows will begin to be affected and “customers (will not be) in their workspaces, and therefore, (government) employees who may work beside them (will not be) going into their workspaces, particularly on ‘cost-plus’ contracts.”
There are three types of “cost-plus,” or cost-sharing, contracts, which put the burden of cost overruns on the government: cost-plus-incentive-fee provides for an initial- negotiated fee to a contractor to be adjusted later by a formula based on total allowable costs to total target costs; cost-plus-award-fee provides a fee consisting of a base amount (which could be zero), an award amount based upon a judgmental evaluation by the government to provide motivation for excellence in contract performance; and cost-plus-fixed-fee, which provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract.
Firm-fixed-price contracts, on the other hand, place upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss due to a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract.
“I think there is a definite and real impact if this shutdown lasts more than a couple of weeks for every company in this industry,” Melcher said at the Atlantic Council think tank in Washington.
Melcher said, over the long term, he’s definitely concerned about the “debt ceiling,” which will come into play no later than Oct. 17 when the U.S. Treasury believes it will exhaust its ability to pay the nation’s bills, Treasury Secretary Jack Lew told House Speaker John Boehner (R-Ohio) in an Oct. 1 letter. The debt limit is the total amount of money that the federal government is authorized to borrow to meet its existing legal obligations, including entitlement programs, military salaries, interest on the national debt and other payments.
If Congress fails to increase the debt limit, the government would default on its legal observations for the first time, which could roil financial markets and challenge the economy. It is possible the government shutdown could last as late as Oct. 17 when Congress could force a showdown over the possibility of defaulting.
“(The debt ceiling) is going to be very symbolic with respect to this nation’s credibility,” Melcher said. “It’s going to be…real in terms of the financial markets and I’m not a big fan of the brinksmanship that’s being used around the issue.”