Defense Contractors Casualty of Shutdown

Lockheed Martin picks 3,000 workers to be furloughed starting Monday.

Lockheed Martin (NYSE: LMT) today opened its NexGen Cyber Innovation and Technology Center, a world-class research and development center for customer and partner collaboration located in Gaithersburg, Maryland.  (PRNewsFoto/Lockheed Martin)
National Journal
Sara Sorcher
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Sara Sorcher
Oct. 4, 2013, 12:24 p.m.

De­fense work­ers are the next vic­tims of Wash­ing­ton spend­ing battles, and it’s not just the 400,000 De­fense De­part­ment ci­vil­ians fur­loughed this week. As Wash­ing­ton braces for a pro­longed gov­ern­ment shut­down, de­fense con­tract­ors are start­ing to send work­ers on un­paid leave as the Pentagon does not have enough on-duty work­ers to per­form in­spec­tions on pro­gress of gov­ern­ment con­tracts.

De­fense gi­ant Lock­heed Mar­tin an­nounced on Fri­day it will fur­lough about 3,000 em­ploy­ees from across all its busi­ness areas start­ing on Monday.

Many de­fense con­tracts, tech­nic­ally, should not have been sig­ni­fic­antly af­fected by a shut­down, since the money that funds their con­tracts was largely ob­lig­ated in pri­or years. However, since the De­fense Con­tract Man­age­ment Agency, which mon­it­ors those con­tracts, has fur­loughed 85 per­cent of its per­son­nel dur­ing the gov­ern­ment shut­down, com­pan­ies’ work has slowed since qual­ity con­trol and cer­ti­fic­a­tion pro­cesses have vir­tu­ally ceased in many factor­ies.

“This is a dom­ino ef­fect. Be­cause the De­fense ci­vil­ians were laid off, they can’t ap­prove pro­duc­tion at the ma­jor mil­it­ary con­tract­ors,” Lex­ing­ton In­sti­tute chief op­er­at­ing of­ficer Loren Thompson, also a con­sult­ant to Lock­heed, tells Na­tion­al Journ­al. “There­fore, the con­tract­ors start [tem­por­ar­ily] lay­ing off, and that im­pacts their sup­pli­ers.”

It also jeop­ard­izes pro­duc­tion of weapons sys­tems. “What would hap­pen to the saus­age in­dustry if all the meat in­spect­ors were laid off?” Thompson con­tin­ued. “It would grind to a halt, no pun in­ten­ded. That’s what’s hap­pen­ing here to the de­fense in­dustry. It’s gradu­ally slow­ing down.”

Lock­heed ex­pects the num­ber of em­ploy­ees af­fected by the shut­down to grow, Lock­heed CEO Marillyn Hewson said in a memo: “I’m dis­ap­poin­ted that we must take these ac­tions, and we con­tin­ue to en­cour­age our law­makers to come to­geth­er to pass a fund­ing bill that will end this shut­down.”

More com­pan­ies are ex­pec­ted to fol­low suit; 1,000 con­tract­ors who work in BAE Sys­tems’ in­tel­li­gence and se­cur­ity sec­tors were sent home and up to 15 per­cent of its work­force could be im­pacted. “Our Gov­ern­ment Re­la­tions team is fol­low­ing this closely and is not op­tim­ist­ic for a near-term solu­tion,” CEO Linda Hud­son said in a memo. “Just as this is dis­rupt­ive to our cus­tom­ers… it is dis­rupt­ive to every­one in our com­pany.”

De­fense con­tract­ors in many cases have thou­sands of sup­pli­ers spread across the coun­try to sup­port their pro­grams, and dis­rup­tions in pro­duc­tion at the top of the food chain trickle down to small com­pan­ies already strug­gling with the con­sequences of se­quest­ra­tion and pro­gram can­cel­la­tions and delays. Na­tion­al Journ­al has re­por­ted pre­vi­ously about how the price of top weapons pro­grams could rise as man­u­fac­tur­ers lay off em­ploy­ees and costs are passed down the sup­ply chain. The Aerospace In­dus­tries As­so­ci­ation and the Na­tion­al De­fense In­dus­tri­al As­so­ci­ation penned a let­ter on Thursday to De­fense Sec­ret­ary Chuck Hagel wor­ry­ing that, like with se­quest­ra­tion cuts, “the prime con­tract­ors must pass along their re­duced spend­ing in or­ders to the thou­sands of small sub­con­tract­ors that make up the in­dus­tri­al base sup­ply chain.”

The in­dustry as­so­ci­ations are also con­cerned about com­pan­ies in­ab­il­ity to “re­con­sti­t­ute crit­ic­al tal­ent in the work­force when the shut­down is over.”

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