Simonson Says: The Federal Shutdown and its Aftermath - Implications for Contractors

The partial federal government shutdown added to an already heavy toll on construction from federal spending cuts. Unfortunately, contractors should expect more blows ahead, even if Congress avoids another shutdown. The closure of so many offices drove home the many ways contractors interact with the federal government. Most directly, contractors working on federal sites may have experienced delayed approvals or lockouts as facilities such as national parks were blockaded in some cases. Contracting officers were unable to process bids or prepare tenders. The Government Accountability Office stopped reviewing and accepting bid protests on federal awards. Even contractors that weren’t working for federal agencies were affected in a variety of ways. The closure of the E-Verify program kept some from checking workers’ immigration status. Other companies may have faced a holdup in getting permits from the Army Corps of Engineers or Environmental Protection Agency. The Small Business Administration could not process loan applications by contractors or firms that wanted to hire them. Developers of single- and multifamily housing may have postponed construction if they could not verify the tax returns of mortgage applicants with the Internal Revenue Service or get loans processed by the Federal Housing Administration. Uncertainty over the length of the shutdown and the possibility that the U.S. would not be able to issue new debt to pay its bills may have led investors and owners to put off plans to build plants and income-producing properties. The shutdown did not directly affect the flow of funds to states from the federal Highway Trust Fund. But trust fund receipts are likely to suffer minor reductions from two sources. Gasoline and perhaps diesel fuel purchases may have dropped as furloughed workers and related businesses used their vehicles less. IRS audits, court cases and other enforcement measures that brought in additional revenue halted. The greatest damage—to the economy as a whole and, therefore, to construction—may be from the mistrust and uncertainty that the shutdown created. The “resolution” of the shutdown set additional deadlines and a precedent that Congress is likely to go well past them before reaching even a short-term compromise again. Such short-term solutions make businesses hesitant to commit to long-term investments, such as construction projects. Given that the House and Senate passed separate budget resolutions that both call for further reductions in federal spending for “discretionary” items through next September, it appears certain that federal dollars for construction will continue to decline—and most likely beyond 2014. The ongoing drama over the budget and the debt ceiling will further take policy makers’ time and attention away from tax and immigration reform and writing a replacement for “MAP-21,” the highway and transit funding bill that expires in September. The ever-shrinking tax base of the Highway Trust Fund means the federal contribution to these types of construction may fare even worse than federal funding for buildings, waterways and other infrastructure. Despite the grim outlook for federal funding, the overall economy should keep growing in 2014. That means construction will again be a tale of three industries: strong single- and multifamily home building and mixed private nonresidential prospects will more than offset the decreases in public works.