116 3rd St SE
Cedar Rapids, Iowa 52401
Federal contracts are a two-edged sword
George C. Ford
Jun. 29, 2014 1:00 am, Updated: Jun. 29, 2014 12:51 pm
If the withdrawal of United States forces from Afghanistan and Iraq has been a headache for defense contractors such as Lockheed, Northrup Grumman and Rockwell Collins, it's become a migraine for small businesses like J-TEC Associates.
In 2007 and 2008, crosswind sensors used in American M-1 Abrams tanks throughout the Middle East accounted for 75 percent of the northeast Cedar Rapids company's business. As the nation's involvement in the Middle East wound down and the U.S. defense budget was slashed, J-TEC has watched that business evaporate.
'We're at the lowest point ever on the military side of our business,” said Gary Roling, president and CEO of J-TEC, which is down to 11 employees. 'We're down about 95 percent from where we were four or five years ago.
'Last summer, we reduced the amount of space that we lease in our building by 25 percent. It was more than $3 million of sales and automotive accounted for about $1 million.”
Iowa businesses were awarded federal contracts totaling $76.9 million in fiscal 2013 by the Departments of Defense, Veterans Affairs, Transportation, Health and Human Services and the General Services Administration, according to USASpending.gov.
So far in fiscal 2014, which ends Sept. 30, Iowa businesses have received $33.6 million worth of federal contracts from the same agencies, except for the Department of Health and Human Services.
Rockwell Collins, which generates 46 percent of its revenue from government contracts, has adjusted to the drop in military spending by pursuing more commercial business as well as stepping up growth in international markets.
The Cedar Rapids avionics and communications provider also bought ARINC Inc. of Annapolis, Md., for $1.39 billion from the Carlyle Group in March. ARINC, which has expanded Rockwell Collins' information management business, already has contributed more to revenue and earnings than earlier predictions.
Roling said J-TEC is working on products for the automotive market where it supplies blow-by flow meters used to increase fuel efficiency and power generation.
'We have a product that we are just getting out into the marketplace, so it's hard to tell how successful it will be,” Roling said. 'It will probably never come up to the level of the military business that we lost.”
The drop in government contracts is making it hard to keep J-TEC's employees busy, and Roling said that ultimately could affect retention.
”We have people who are running out of work,” he said. 'It's one thing if you can afford to keep on paying them and it's another whether they're interested in sitting around and doing nothing.
'They may find an opportunity where they can be more productive.”
At Crystal Group in Hiawatha, government contracts account for 95 percent of the company's sales, according to Britni Gookin, vice president of finance.
'Our contracts are usually with a prime contractor for the government, such as Boeing or Northrop Grumman,” Gookin said.
'We have definitely seen an impact (from the decline in military spending), but it's almost more that we've seen our level flatten out for a while. Hopefully we will see sales start going back up.”
Gookin said Crystal Group, which designs, manufactures and integrates rugged computer-based systems for intelligence, communications, reconnaissance, navigation and surveillance, is taking steps to increase commercial side of its business.
'We have a sales team dedicated to the commercial side of our business,” Gookin said. 'We are trying to figure out what commercial applications would be best for us.
'We are looking at things like oil and gas, transportation and those types of things. There's definitely a huge effort to diversify our business.”
In mid-April, Crystal Group was able to expand its production capacity in preparation for additional business. Gookin said Dexter Apache Holdings of Fairfield, corporate parent of Crystal Group, agreed to share a nearby building in Hiawatha.
'Dexter Financial Services and Century Laundry are in that building along with us,” she said. 'We were able to move our CNC (computer numerical control) machine operations and other equipment into about 10,000 square feet of space.”
While Crystal Group, J-TEC and Rockwell Collins will continue to pursue government business, Craig Dostal, owner and president of D.A. Bunch Co., is not sure he will seek additional federal business for the Cedar Rapids commercial and industrial painting contractor.
'It's kind of a tough market to go after,” Dostal said. 'You have to have certain credentials, such as minority or women ownership, and unfortunately we don't fall into that category. That kind of tilts the playing field a little bit.”
D.A. Bunch was awarded a $29,625 contract in February 2013 as a subcontractor in connection with the renovation of a floor of the Iowa City Veterans Affairs Health Care System. Dostal said his company feels an indirect effect of federal contracts.
'If a company that we do business with gets a lot of federal or state contracts, I can eventually pick up work on their facilities,” he said. 'In that respect, it's a very important part of my business.”
Dostal's reference to minority and women ownership is part of Federal Acquisition Regulation, a substantial and complex set of rules governing the federal government's purchasing process. FAR's purpose is to ensure purchasing procedures are standard and consistent, and conducted in a fair and impartial manner.
Many new contractors - especially small businesses - often are unprepared for the regulations they must follow, which can lead to costly errors and potential legal problems.
The U.S. Small Business Administration offers a website, http://www.sba.gov/content/federal-acquisition-regulations-far, that provides information on FAR with the aim of helping small- business owners successfully bid for federal contracts and navigate appropriate regulations.
Dale Riha removes an aluminum part after it was milled at Crystal Group in Hiawatha. The company, which derives 95 percent of its business from government contracts, has felt the effects of federal defense budget cuts. (Liz Martin/The Gazette)
Dan Andrews stacks aluminum plates after they were milled at Crystal Group in Hiawatha. The company, which depends on government contracts for 95 percent of its business, is looking for commercial applications of its technology. (Liz Martin/The Gazette)
Dale Riha stacks aluminum plates after they were milled at Crystal Group in Hiawatha. With the national military spending budget cut, the company is seeking to increase its commercial and industrial business. (Liz Martin/The Gazette)
Aluminum computer fronts will be powder-coated and used in rugged computers at Crystal Group in Hiawatha. The company, which depends on government contracts for 95 percent of its business, is looking for commercial applications of its technology. (Liz Martin/The Gazette)
Mitchell Thomas calibrates a blow-by meter at J-TEC Associates in Cedar Rapids. J-TEC, which primarily manufactures crosswind sensors for the M1 Abrams tank, also makes exhaust testing sensors for automotive engines. (The Gazette)
Chrystal Strauss assembles the parts of a crosswind sensor for the M1 Abrams tank at J-TEC Associates in Cedar Rapids. The company downsized after the government cut the defense budget. (Justin Wan/The Gazette)
The cables of a crosswind sensor for an M1 Abrams tank are shown on the assembly line at J-TEC Associates in Cedar Rapids. As the nation's involvement in the Middle East wound down and the U, S. defense budget was slashed, J-TEC has experienced a significant loss of business. (Justin Wan/The Gazette)