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The Bear, the Base and the Bull scenarios for the 2018 budget end game.

CQ IntelligenceSuite 200

1625 Eye St. NWWashington, DC 20006

Intelligence

The Bear, the Base and the Bull scenarios for the 2018 budget end game.

CQ IntelligenceSuite 200

1625 Eye St. NWWashington, DC 20006

The 2013 sequester gutted federal contract spend-ing by $59 billion, or 12 percent from 2012, the largest single-year loss in recent history. Could it happen again? CQ Intelligence says the odds are better today than at any time in the past four years.

Billions of dollars in revenue for federal contractors are at stake as Congress and the White House head to the wire on fiscal 2018 funding. On Dec. 8, the current con-tinuing resolution, or CR, funding federal agencies runs out. Negotiators must either raise or end spending caps. Failing that, a full-year CR triggers sequestration.

CQ Intelligence narrows the likely possibilities to three:

• The bull-case scenario could bring up to $38 billion more contract spending in 2018 than in 2017.

• The sequestration bear case would cut contract funds by $10 billion from the 2017 level.

• Our base case has history repeating itself with legislators loosening budget caps, as they have for the past four years, and pumping $12 billion more into 2018 contracts than in 2017.

This report from CQ Intelligence, the new consultative funding research and analysis division of the Economist Group’s CQ, offers a glimpse at our three fiscal 2018 endgame scenarios. We estimate $444 billion in contract spending for fiscal 2017. Based on that total, our model forecasts the 2018 bull case at $482 billion, the bear at $434 billion and the base at $456 billion.

We factored these scenarios by analyzing appropri-ations and contract spending over the past 10 years to understand how contract obligations respond to changes in budget authority.

The Growling Bear The 2011 Budget Control Act (BCA), which took effect

in fiscal 2013, applied federal spending caps from 2012 to 2021 to reduce the federal deficit. The law levied particu-larly tight caps in 2013, leading to sequestration.

The caps apply to overall discretionary budget authori-ty--federal agency spending on federal employee salaries, grants, payments to states, contracts and other expendi-tures. Since 2013, contract spending has been between 36 percent and 38 percent of discretionary budget authority. Changes in the caps affect the total amount of spending available to agencies. Cap-induced changes to contract spending vary.

If Congress fails to pass a budget deal by Dec. 8 this

Don’t Discount Sequestration

This report is excerpted from the CQ Intelligence white paper, “Don’t Discount

Sequestration: The Bear, the Base and the Bull scenarios for the 2018 budget

end game.”

$38

End-Game Scenarios for Contractors Budget Authority year-over-year change Contract Obligations year-over-year change

$37 billion

-$16-$10

$80

$12

Base BullBear

Source: CQ Intelligence estimates based on Federal Procurement Data System - Next Generation procurement data and budget data drawn from the Office of Management and Budget, Congressional Budget Office, House Appropriations Committee and Senate Appropriations Committee Contract Obligations year-over-year change

Anne LaurentSenior Director

year, and instead extends the current CR through the end of fiscal 2018, the spending level will exceed the capped amount and sequestration will occur in the new year. The CR includes across-the-board cuts amounting to $7.4 billion through FY2018. The Congressional Budget Of-fice estimates CR extension would lead to a further $4.8 billion sequester, bringing the total to $12. billion.

The resulting contract cuts will be far less Draconian than in 2013. CQ Intelligence calculates that a sequester of $12 billion from the 2017 level, will cause a 1 percent loss from the 2017 level across every defense and nonde-fense program and reduce contract spending by about 2 percent overall.

The Charging BullThe bull case would bump up contract spending by

$38 billion. Negotiators would allow a year-over-year increase in procurement to $482 billion, by giving de-fense an overall $50 billion increase, including base and overseas contingency operations, and adding $30 billion in nondefense spending.

The Balanced BaseCQ Intelligence considers the base case the most likely

outcome. It predicts Congress will reach a two-year bud-get agreement raising the overall budget caps, as it did in 2015 for 2016 and 2017 and in 2013 for 2014 and 2015. Negotiators would raise defense and nondefense spending caps equally, likely by about $25 billion each. Procure-ment expenditures would rise by $12 billion over 2017.

The Wild CardPresident Donald Trump’s election has thrown a wild

card into the budget endgame that threatens to upend even the most precise and data-based analyses. For example, Trump could strike another deal with Demo-crats, with whom he surprisingly sided in agreeing to the current CR, to buy their support by allowing nondefense appropriations growth in exchange for a defense hike.

Or, in his first full appropriations cycle, Trump could step back and allow the process to take its new normal course under the BCA: a two-year deal to raise the caps leading to a moderate rise in contract spending.

In the end, the best advice is to sharpen your scenarios, take stock of your contract portfolio and be ready to fol-low the funding of a charging bull, protect your programs from a growling bear or, most likely, precisely target the opportunities of a balanced base.

FY2018 contract spending scenarios

range from a $38 billion hike to a $10 billion

sequester loss

Lessons From the Last SequesterTo help develop a hypothesis for the potential impact of a 2018 sequester, CQ Intelligence assessed the 2013 sequester’s impact on contractors. Overall, procurement fell by 14.4 percent from 2012 levels, cutting $59 billion, the most ever in recent history. Defense took the brunt of the $59 billion reduction; Defense contract spending fell 14.4 percent. Civilian contracts fell about 2 percent. Military construction and Defense operation and maintenance accounts lost the most. Among non-defense accounts, Energy De-partment and NASA contracts took the largest reductions. Sequestration lessons include:

• Contracts paid from Defense O&M or construction accounts are in greatest danger.

• Contacts are not cut evenly. As agencies decide where to cut, contractors can make the case for exemption or reduced reductions.

• Contracts that are paid from work-ing capital funds are a hedge against sequestration.

What are some key issues government contractors should consider when leasing office space? While government contractors should certainly focus on many of the same issues as other office tenants — timing, risks of late delivery, buildout and costs, among others — there are a few topics of particular relevance to leasing in the government contracting space. By asking the right questions early in the process, companies might save themselves a fortune in unnecessary landlord fees down the road.

At a Glance

Key Points to Note When Leasing Office Space

Julia Kreyskop 8065 Leesburg Pike Fourth Floor Tysons Corner, VA 22182 Phone: 703.394.2265 Email: JKreyskop@wcsr.com

Government-focused companies in the Washington DC Metro area must be especially nimble to keep up with market dynamics. In this article, real estate leasing considerations are highlighted and summarized by local attorneys with Womble Carlyle Sandridge and Rice, LLP.

EXPANSION AND CONTRACTION

The nature of government contracting can lead to high unpredictability, which is in direct odds with signing five or ten year leases. If you will have to recompete future contracts or task orders, for example, you may want to negotiate a right to terminate the lease. Be specific with respect to the details of when termination rights may be exercised — do they apply to you losing a recompete? What about termination for convenience? A lack of follow-up work? On the flip side, consider how easily you would be able to expand within a proposed building. If the opportunities exist and you want to formalize your rights in the lease, then be sure to understand the differences among rights of first offer, rights of first refusal, and outright expansion rights. SHARING SPACE Is the nature of your projects such that you may share space with or host other companies or subcontactors? If so, or possibly in the future, be sure that the assignment provisions in your lease take this reality into account so that you aren’t seeking landlord consent or paying your landlord more money for the privilege of simply running your everyday business.

SECURITY CLEARANCE Do you work with highly confidential or classified information? If so, the procedures you implement to keep that information confidential should be reflected in the lease within those provisions which allow for landlord entry into your space, and also with respect to janitorial entry (if provided by the landlord). Should a landlord and its maintenance personnel have to sign in at your front desk? Have a chaperone? Should the janitorial personnel have passed any background checks? Remember that just because you’ve left your premises for the night, does not mean that others may not enter it in the performance of their duties in the building.

UTILITY INTERRUPTION

Is the nature of your business such that a utility interruption simply results in your employees working from home, or could it lead to a breach of your contracts with the government? If an electrical interruption could prove highly detrimental, consider getting the right to install your own generator. Consider all of these issues before you’re negotiating a lease, as all of them are of sufficient importance to raise at the time that you’re negotiating a letter of intent. CONTRIBUTORS

Daniel R. Mackesey 8065 Leesburg Pike Fourth Floor Tysons Corner, VA 22182 Phone: 703.790.4682 Email: DMackesey@wcsr.com

Whitney Smith 8065 Leesburg Pike Fourth Floor Tysons Corner, VA 22182 Phone: 703.394.2274 Email: WSmith@wcsr.com WCSR.COM

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