Feature

Delayed payments, pitching doubts: what the shutdown means for the US government’s ad agencies

The majority of the government’s marketing agencies are cushioned financially from the ongoing shutdown – but smaller shops are beginning to question whether a lucrative federal contract is worth the instability that now comes with it.

The US government shutdown is now entering its sixth week. The disruption has wreaked well-documented havoc on the paycheques of federal employees – from TSA agents to National Park Service rangers.

But contractors for a number of government agencies have also been left without payment since December.

Private firms working for these agencies have more financial protections in place than federal employees. However, unlike members of staff, contracted firms are not guaranteed back-payment once the government reopens.

Whether or not an ad agency will be paid by its federal client for work carried out over this period depends entirely on the contract it signed. A number of departments – such as the military and Health & Human Services – had their funding cleared before the shutdown began, and therefore will feed their agency pipeline as usual.

Additionally, the nine federal agencies that have closed all publish contingency guidelines on back-payment deals in the event of a shutdown. They also have the power to insert a back-payment clause when signing a deal with a specific contractor such as an ad agency – although this agreement is not mandatory.

“Some clients are going to continue paying because they're still funded, some are going to pay their contractors after the shutdown's over, and some aren't,” explained Alison Pepper, senior vice-president, government relations at the 4A's. “It all depends on what your contract says, and what your contingency plan says.”

'Very concerned'

Grey New York currently services one of the larger agencies to shutter – the National Parks Service. The agency would not comment on its payment or contractual terms during the furloughed period, however a source close to the account confirmed it is continuing to work on projects for the department while the client is furloughed.

Smaller agencies with government business are also continuing to create work without a client on hand. Washington DC shop Yes& has been able to continue with ongoing projects so far, however its president and chief executive, Robert Sprague, said he was unsure how much longer it will be able to do so.

“When we run out of assignments or we need approvals, we'll have to stop work,” he said.

Yes& is currently absorbing the costs of the shutdown. Sprague said just one employee working full-time on a government account has had to be reassigned to another client.

Yet the agency chief is nervous about large government contracts due for renewal that cannot currently be reissued under the Antideficiency Act – the law that prevents a federal agency from being able to solicit or sign new contracts when it is experiencing a lapse in funding.

Sprague is also worried the situation will lead to a brain drain on government-heavy agencies. “If their pay is regularly interrupted like this, they're going to say, ‘I'm not going to hang around and work on your government contract anymore’,” he explained.

Additionally, he is growing “very concerned” about cashflow.

“When we start to send in invoices for all this work, how long is it going to take for them to be paid?” he asked. “The government ... has been pretty quick to pay in general – 30 to 45 days in our experience – but even after the shutdown ends, how long will it take them to get through the backlog?

“That could put a lot of pressure on us since we do depend on some pretty large government contracts.”

Raymond Crosby, the president and chief executive of fellow Washington DC agency Crosby, said he has implemented “strict financial controls” and kept “strong cash reserves on hand” to mitigate delayed or non-existent federal payments.

The agency has figuratively dodged the shutdown bullet (none of its federal agency clients have closed this time around), yet he noted that “choosing clients wisely” and diversifying the shop’s portfolio between government, non-profit and commercial accounts has been a prudent decision in the current DC climate.

Painful to win, difficult to manage?

Bigger agencies supported by a network or a holding company are ultimately better placed to weather a lapse in client cash. One former creative director, who did not wish to be named, noted that taking on a government brief is demanding at the best of times – and the current instability on the payment front may now deter smaller agencies from taking on such a client.

“It’s an absolutely massively lengthy process to get into this type of work,” the source said. “You have to [weigh] how big the opportunity is, because it’s going to be painful to win it and involve a lot of administrative oversight to manage it. But as a marketer you’re quite enticed by the idea of doing a campaign that is broad in its target audience.”

The source added that, in their experience, government clients often require an exclusive team to work on the account, meaning smaller agencies often flex up when federal business comes through the door. Without guaranteed stable payments, these shops may choose to turn away such clients.

“If you don’t have that payment coming in, and you don’t know when that payment’s coming in so that you could even procure a loan based upon it ... it would be off-putting.”

Additionally, the source noted that smaller agencies are often beholden to investors “looking at monthly or quarterly revenues” in contrast to holding companies, whose shareholders would likely overlook month-long lapses in federal payment at the end of the financial year. Private backers may not be so forgiving.

Stability vs fame

Smaller agencies tend to fall into two camps when contemplating the prospect of rejecting government pitches on the grounds of financial instability. There are some, such as Wolff Ollins, who believe that creating work for the likes of the shuttered Smithsonian – a former client – is more important than a perfectly clear debtor sheet.

“Arts and culture have been the backbone of our work since we began in the 60s working with the Beatles on Apple Records, and that will always be the case regardless of what is happening politically,” said Amy Lee, New York managing director of Wolff Ollins.

Crosby agrees. He noted that government accounts are really no more stable than those of the private sector, and “at the end of the day, helping federal agencies engage the American public on important issues and services is very rewarding for the Crosby team”.

But then there are the agency execs, such as Josh Kelly of Portland's Fine, whose existing reservations over taking on government work have only grown stronger since the current shutdown began.

“Government agencies often bring with them a level of administrative overhead and risk that always makes us think twice,” he said. “The irony of all those checks and balances is that the very things that provide assurances around use of public funds often add cost to the process.

“The risks of a shutdown or other payment issues add another level of risk for smaller vendors working with government.”

When they eventually reopen, federal agencies will likely have no issue finding talent to produce their campaigns: the recent fight over the army account can attest to the power of a juicy government brief. But it remains to be seen whether government clients will still find small shops wanting to compete with their networked counterparts once the mess has been cleared.

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