By Mike Stone
WASHINGTON (Reuters) - A U.S. government shutdown will stall new defense department contracts and ultimately increase the costs of weapons, creating even more budgetary headaches as lawmakers grapple with a government funding crisis.
Defense companies and Pentagon officials lamented the potential federal spending woes, saying it will hurt small suppliers who feed into weapons production while hitting bigger firms when the contract process is put on hold.
Congress has been struggling for months to agree on long-term government funding levels that may also include protections from deportation for 700,000 young undocumented immigrants. The federal government is operating on a third temporary funding measure since the new fiscal year began in October.
While the impact of the shutdown will be felt across the government, the Pentagon has the biggest portion of discretionary spending in the federal budget and is closely watched given its role in national security.
Since weapons makers can pass along some costs from a government shutdown on to the Department of Defense, according to the Secretary of the Navy, the prospect for higher procurements costs over the long term is very real.
Navy Secretary Richard Spencer told Reuters a shutdown sends the "signal that we're going to interrupt cash flow, that's devastating to industry. That does us no good whatsoever." He added that the increased costs "come back to us in the form of more expensive equipment."
The Pentagon's largest supplier, Lockheed Martin Corp (NYSE:LMT), told Reuters in a statement that "a government shutdown could result in costly schedule delays and breaks in production that will increase overall program costs and interrupt the delivery of critical equipment to our customers."
Depending on the length of the shutdown it could cost hundreds of millions of dollars for the Pentagon, or even billions government-wide in terms of legal disputes over contracts, procurement delays and downstream litigation costs said Franklin Turner, a partner in the government contracts and export control practice at McCarter & English LLP.
While the Navy's biggest shipbuilder, Huntington Ingalls Industries, said the near-term impact would be "minimal", its nearly 5,000-strong supply chain would likely feel the most impact because the lack of a federal budget creates uncertainty. That in turn inhibits their ability to hire and make capital investments.
During a 16-day shutdown in 2013, small business contracts with the Department of Defense dropped by almost one-third and spending dropped 40 percent, according to Office of Management and Budget.
The Pentagon's former chief weapons buyer Frank Kendall said "Industry may bear some of these costs, but will pass as much of those costs to the taxpayers as possible." Kendall, who is currently an advisor with Renaissance Strategic Advisors, worked through the 2013 shutdown.