It’s unclear how nearly $500 billion in looming defense spending cuts will be implemented and what the exact consequences will be, but there will be changes to the defense industrial base as a result, Bob Stevens, chairman and CEO of Lockheed Martin, said yesterday.
The impact of sequestration will be like a “blunt force trauma to the industry and I’m concerned that it will tear the fabric of the supply chain and change the industrial base in a significant way,” Stevens said at the company’s annual media day.
Stevens said that for all involved that “mechanics” of how sequestration will play out are “murky,” and the situation is making any planning around that difficult at best. He said that the company’s suppliers are already trying to figure out how to price and provision their bids against the bleak potential of some work being canceled as a result of the potential budget cuts.
“We have not yet envisioned, with this breakage of these contracts, how many requests for equitable adjustment there will be when all these contracts get reformed,” Stevens said. We have suppliers asking us, ‘How should we price our work if we’re bidding a job with you and the job goes on for three years in the future and that starts in 2013. Should we include the consequences our best estimate of what sequestration will do to our cost structure in that bid or should we propose a reopener provision?’”
Stevens said that as a prime contractor Lockheed Martin would be “compelled” to pass those adjustment claims along to its government customers.
If Congress and the Obama administration can’t agree on a federal budget package that combines spending cuts and revenue increases, likely through taxes, then sequestration is slated to take effect in January and roll out over 10 years. In the first year, defense spending would suffer about a $53 billion cut.
Stevens said that the $53 billion could include provisions for dealing with equitable adjustments but noted that he hasn’t heard one way or another about this. This puts suppliers under “enormous pressure,” he said.
Stevens in March warned of the potential impacts to the defense industry from sequestration including the prospects for job cuts and putting some small firms out of business (Defense Daily, March 15). He said yesterday that Lockheed Martin, like other companies, does have legal responsibilities to warn its employees and suppliers of forthcoming plant closings and layoffs, noting that these constituencies want to know what will happen come January.
“The answer from us today is we’re not clear about that,” Stevens said. “What we think we know is sequestration somehow looks like a 10 percent, plus or minus, across the board reduction and we have to prepare for that reduction and because it’s the law we think you should look constructively as to whether you need to prepare for that environment.”
However, Stevens pointed out, the lack of clarity makes any modeling about how to react to sequestration “abstract.”
In response to existing plans to rein in defense spending, Lockheed Martin and its suppliers have already been finding ways to reduce costs and improve affordability, with an “expectation” of the future business environment that doesn’t account for sequestration, Stevens said. Those expectations would be gone if sequestration occurs, he said.