Government Contractor

February 2013

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Through the eyes of government contractors

Looking at Sequestration
By Marlon Bernal, Principal mbernal@uhy-us.com

Congress provides a plan creating $80 billion in alternative deficit reductions, and the plan becomes law, then the $1.2 trillion sequestration will still occur, but the sequestration will be reduced by $80 billion.

ith the March 1st deadline weeks away, government agencies and contractors continue to speculate about the possible impact of sequestration. Whether sequestration will actually occur is unknown. As we have seen from past experience, Congress and the president can work to find alternatives to deficit reductions that may curb, if not eliminate, the effects of sequestration. If sequestration does occur, however, the Congressional Budget Office estimates that eligible defense programs will be cut by 10 percent and eligible non-defense programs will be cut by 8.5 percent in FY 2013. Consequently, contractors should plan for the possibility of drastic cuts in federal spending and prepare to operate in an environment of leaner budgets and increased competition.

the-board budget cuts are imposed on government programs to force reductions in spending and to meet budgetary goals established by statute. If sequestration does occur, $1.2 trillion in budget cuts originally scheduled to take effect on on January 2, 2013, will begin on March 1, 2013, and continue through the following nine years. Generally, sequestration spending cuts are divided equally between eligible defense and non-defense programs, though some domestic entitlement programs (namely, Social Security, federal retirement programs and Medicaid) are exempt from sequestration budget cuts. The Budget Control Act of 2011 provides a means to avoid sequestration if Congress successfully acts to achieve deficit reduction savings that match the anticipated $1.2 trillion in funds that will be subject to sequestration. If Congress attains less deficit reduction savings than required, the sequestration cuts will be reduced by the amount in deficit reduction savings actually realized. For example, if

Sequestration Effects on Government Contracting

If sequestration occurs, the Office of Management and Budget (OMB) will begin to issue apportionments to each agency. An apportionment constitutes a legally binding order that forbids an agency from spending more appropriated funds than OMB allocates to the particular agency. In turn, agencies will have to reevaluate and re-prioritize their agency and mission needs. While agencies will likely reduce personnel in response to budget cuts, the first year of sequestration will also probably result in agencies significantly continued on page 2

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What is Sequestration?
Sequestration is a process in which automatic, indiscriminate, across-

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February 2013

Looking at Sequestration
continued from page 1

scaling back the number of new contracts for non-critical programs. Yet, even critical programs will likely be impacted by sequestration, as agencies will begin to restructure their procurement vehicles to find the most effective means to utilize reduced funding. As sequestration will certainly impact the way in which the government chooses to spend its money, government contractors should consider the following key impacts sequestration will have on the procurement process: Impact on New Contracts Contractors should expect a reduction in the number of new contracts awarded as agencies eliminate programs that are not critical to their missions. Agencies will move away from contract vehicles which place the cost risk on the government and issue more firm-fixed-priced contracts rather than cost-reimbursable and/or labor-hour contracts. Indefinite Delivery/Indefinite Quantity contracts will also become more appealing given their ability to negotiate cost at the task order level.

performance through deductive change orders as well as partial and, in some cases, complete contract terminations for convenience. Contractors should also expect agencies to restructure their contracts in an effort to defer any possible costs to the future. Claims Litigation Sequestration could bring a greater number of requests for equitable adjustment (REA) and certified claims as contractors seek reimbursement for government-initiated actions impacting their contracts, such as constructive acceleration, stop-work orders, government delays and deductive change orders. Bid Protests Sequestration will certainly bring an increase in bid protest litigation, as contractors compete for a limited number of contracts.

important that government contractors take proactive steps to address the future impacts of sequestration. Look out for scope creep. As agencies seek to obtain more for less, contractors must ensure that their employees understand the companys obligations under the contract. Any contract changes must be communicated to ensure that costs associated with the changed work are captured. Contractors must consider the applicability of the Worker Adjustment and Retraining Notification (WARN) Act and its protections. Generally, the WARN Act requires contractors with 100 or more employees to provide 60 days advance written notice to employees prior to the closing of a work site resulting in the loss of 50 or more employees, or mass company layoffs resulting in employment loss for 500 or more employees. As agencies will not know whether sequestration will occur until the final hour, they are unlikely to pass information to contractors concerning impacted contracts prior to the actual date of sequestration. Sequestrationif it occurswill bring many changes with respect to government spending; consequently, government contractors should begin to plan for sequestration and how they will address the impending effects on the federal procurement process.

How Should Contractors Prepare?

Predicting whether sequestration will actually occur in March, or perhaps in subsequent months, is difficult because sequestration is entangled in the larger macroeconomic policy debate concerning taxes and spending, two topics that have garnered much debate in Congress for years and without resolution. Still, the possibility that sequestration will occur is sufficiently great, and it is

Impact on Existing Contracts Limited funds will reduce the products or services being purchased on existing contracts. Agencies may choose to de-scope the quantity, capability and breadth of contract

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