For Washington law firms, there’s no business like the government contracts business — even when the government is doing less business.
Unlike other firm practices that benefit most when the federal bureaucracy grows, government contracts lawyers were pleased when massive spending cuts were enacted as part of the debt-ceiling bill passed by Congress earlier this month.
The less money the government is able to spend, the more scant government contracts become. With fewer contracts available, competition for them increases.
“The government contracts practice actually picks up when there are spending cuts,” said John Chierichella, a partner in Sheppard, Mullin, Richter & Hampton’s D.C.-based government contracts and regulated industries practice group. “What happens is that companies have to fight for every dollar. They protest more frequently and more aggressively at a time when there are not as many pieces of the pie.”
Federal agencies are a significant part of the client base for Washington-based contractors. They provide steady work and pay their bills. One in six dollars spent by the federal government goes to contractors, which do everything from building battleships to cutting the grass outside federal agencies.
Many of these businesses will be hit hard by the federal spending cuts, which total $2.1 trillion. But the client’s pain, in this case, is the firm’s gain. Top D.C. practitioners say government contracts practices will likely see an uptick in termination and fee disputes. Termination disputes occur when a contract is eliminated but there’s a dispute about how much work was conducted by the contractor before then.
Historically, these disputes have been resolved through settlements rather than fighting in court. But given the tight fiscal times, attorneys believe parties in these disputes will be scrapping for every dollar they believe they’ve earned.
“Times of crisis are times of opportunities,” said Mark Colley, a partner at Arnold & Porter and chairman of the firm’s government contracts practice. “As the dollars get more scarce, contractors might be less inclined to cave on a disputed point.”
Even with the threat of spending cuts, McLean, Va.-based government contractor and consulting firm Booz Allen Hamilton seems to be minimally affected. On Tuesday, the company reported first-quarter earnings of $1.45 billion for the 2012 fiscal year, which began April 1. That number is a 7.8% increase from last year’s first-quarter earnings of $1.34 billion. According to Sam Strickland, Booz Allen’s executive vice president and chief financial officer, the government hasn’t slowed its award process for contracts.
“We are seeing what we expected, which is that the pace of awards is quickening,” Strickland told investors during an Aug. 9 conference call. “Clearly the discussions around the debt ceiling didn’t help, because as you know, with the government contracting shops, when there is uncertainty, they’ll tend to hold their fire a bit, but we are seeing an increase in the number of awards.”
Booz Allen Chairman and CEO Ralph Shrader told investors during the call that the firm is focused on areas that he said are growing rapidly, such as health and financial services. Uncertainty lies largely within the U.S. Department of Defense, where some of the deeper spending cuts are expected to occur.
“So while the overall budget gets impacted, the places we are is not,” Shrader said during the conference call. “I think in DOD, there has been a general cautious attitude that there is so much hand waving and so much consternation about, oh, what might happen and everything else, it’s actually just caused a slowdown in contracting activity.”
Spending cutbacks also could result in a shifting focus for firm government contracts practices, attorneys predict. For example, there could be renewed efforts to grow business partnerships between contractors and state and local governments. “One area that may see a surge…might be in the public-private partnership arena, particularly growth at the state and local level,” Colley said.
In a public-private partnership, a company might invest in a toll road and share the expense with a state or local government. The company would construct the road largely with its own funds. In exchange, the company would profit from maintenance revenues as well as the tolls charged to motorists. Typically, after the company is reimbursed for its initial investment, the road is handed back to the public authority.
Over the past decade, the government has increasingly outsourced more of its work to contractors. “There are some things the government just can’t do,” said Joseph West, a partner at Gibson, Dunn & Crutcher and co-chair of the firm’s government and commercial contracts practice. “It doesn’t have the research and development capabilities that some private companies possess. It has to rely on contractors to do many things.”
Recent alleged improprieties against some government contractors, however, have hurt the image of the industry. Though the indictments were thrown out in 2009, five former employees of the security contractor Blackwater were implicated in a Baghdad shooting that left 17 dead. The public outcry raised the question of which jobs should be performed by the government and which should be left for contractors.
Regardless of that scandal — and despite the recent federal spending cuts — attorneys maintain that government contracts will continue to be a reliable source of income, both for contractors and for them.
“Relative to a lot of commercial business, government contracts don’t always have the best profit margins, but they’ve been more stable,” Colley said. “You can count on the government as a steady customer.”
Matthew Huisman can be contacted at firstname.lastname@example.org.