Prepare for a bumpy ride for federal contracting in the final six months of 2012, with dramatic spending cuts threatened under sequestration in January 2013, specialists are advising.

Congress set the sequestration process into motion last July as part of the Budget Control Act to cut the deficit while raising the debt ceiling. Sequestration, if it goes forward, would result in automatic, across-the-board severe spending reductions to federal agencies.

Meanwhile, with the approach of national elections in November followed by a “lame duck” legislative session, there is great uncertainty about whether Congress and the Obama administration will take action to postpone, limit or cancel sequestration before it goes into effect on Jan. 2, 2013.

If sequestration is carried out, the first $109 billion in spending cuts would take effect immediately.

Based on spending cap figures released by the Congressional Budget Office, Venable law firm estimates that eligible defense programs would be cut by 10% and eligible non-defense programs would be cut by 8.5% in fiscal 2013. Since the fiscal year begins on Oct.1, 2012, the decrease will hit expenditures in the remaining nine months of the year disproportionately.

Large defense contractors are forecasting layoffs and chaos under sequestration, with the National Association of Manufacturers warning on June 21 that across-the-board cuts would result in nearly 1 million job losses by 2014. Virginia, California and Texas would be hardest hit. However, some observers, including a watchdog group, Project on Government Oversight, have accused some of the contractors of exaggerating the potential job losses.

Even if sequestration is avoided or mitigated, sharp spending reductions are anticipated regardless.

“Contractors should commence preparations for the possibility of drastic cuts in federal spending and position themselves to navigate in an environment of tighter budgets and increased competition,” Venable law firm advised on June 22.

Venable predicts that sequestration would cause agencies to award fewer new contracts and eliminate non-mission-critical programs. It could also cause agencies to reduce buying under existing contracts.

Kevin Plexico, vice president of federal information solutions for Deltek Inc. research firm, said that while sequestration is unlikely, contracting for federal information technology products and services will drop for the first time in years.

Overall, Deltek forecasted that federal IT spending will “hit bottom” in 2013 followed by a “new normal” of smaller budgets and slow growth for several years, he said.

Deltek predicts defense IT will drop from $77 billion in fiscal 2012 to $58 billion in fiscal 2017, which is a -3.4% compounded annual growth rate.

Civilian IT spending would dip slightly, from $41 billion to $40 billion, over that same period.

However, intelligence community IT spend would rise, from $10.5 billion to $12 billion.

Despite the bad news, there are bright spots of growth and the White House has pushed agencies to adopt new technologies and advance small vendor participation.

The hot growth areas include cybersecurity, health care, analytics, cloud computing and mobile, according to Plexico.

In the short term, through Sept. 30, federal agencies are wrapping up fiscal year 2012 procurements.

At least one agency recently forecasted the usual end-of-year windfalls of spending.

Kevin Boshears, OSDBU director for the Homeland Security Department, told an industry conference last month that the department had obligated $6 billion to date this fiscal year and would spend $8 billion more by Sept. 30.