"Our national security could be at stake," said Olga Grkavac, executive vice president of the Information Technology Association of America, in a statement issued last week. Companies fulfilling vital contracts for the U.S. military or intelligence agencies "will not be able to finish the job without the ability to sustain the cleared personnel on the job and to bring in more when needed," she said.

The shock decision by the Defense Security Service -- the Pentagon agency that handles applications from contractors who need clearances to do classified work for the U.S. government -- was announced late last month, but has attracted surprisingly little notice, perhaps because the armed services committees of both chambers of Congress were busy last week marking up their gargantuan authorization bill.

In a statement e-mailed to contractors April 28, the agency blamed "funding constraints" and said they had "discontinued accepting industry requests for new personnel security clearances and periodic reinvestigations effective immediately and until further notice."

Officials later said the agency had received 103,000 applications in the six months between October 2005 and March 2006. By comparison, in 2001, it received 105,000 for the whole year.

The demand for clearances for private sector contractors has grown hugely since the Sept. 11 attacks, driven by the tsunami of spending that Congress has approved for U.S. military operations and the broader war on terror.

By 2005, officials said, the agency was receiving 142,000 applications a year, and the backlog was well over a quarter million.

Once a company is cleared to do classified work, anyone it wants to hire to work on such a project also requires a clearance. The paperwork, security checks and background investigation can take up to 18 months, and costs thousands of dollars -- a cost borne by the taxpayer.

The Defense Security Service processes the applications from contractors for the military and 23 other federal departments or agencies. But since the Intelligence Reform and Terrorism Prevention Act of 2004, the investigations are all done by the Office of Personnel Management, which bills the Defense Security Service for the work. Officials said the agency had run out of money to pay for the investigations and was already holding back some 3,000 applications.

Congressional staffers last week estimated the agency's shortfall at between $75 million and $100 million. Its budget was trimmed by $20 million last year.

Market analysts said the cut would likely turn out to be a false economy.

The Department of Defense "is probably paying multiple times in salary costs what it saves in starving (the Defense Security Service's) budget," Teal Group aerospace analyst Joel Johnson told MarketWatch News last week.

He said the bottleneck in getting new clearances distorted the labor market by driving up wages for those who already have them. Many companies in the sector already offer large signing bonuses to new hires with clearances.

"Like with oil, scarcity leads to speculation and high commodity prices -- e.g. salaries," Johnson said.

One person who works for a large contractor said they were hoping that the agency would continue to issue interim clearances -- as it typically does for applicants assessed as low risk while their background investigation is pending -- during the moratorium.

Without it, the ability of companies to fulfill their contracts with the U.S. military would quickly deteriorate.

"Almost anyone we send to Iraq needs (a clearance)," the person said. "There are people waiting to go" to do vital national security work. "It's a nightmare."

Rep. Tom Davis, R-Va., wrote to the agency after their announcement, calling the move "both baffling and disturbing." He asked for more information about the decision, and aides said he planned to hold hearings this month.

Some industry figures predicted that the move would be a precursor to a demand for contractors to help meet the costs of providing clearances. "That could be something that's behind this as a solution," Richard Piske, vice president and general manager of Kelly FedSecure, which provides cleared staff to contractors and the federal government, told Government Computer News.

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