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Government Spending Reduced by $350 Billion
Government contractors face a very uncertain future over the forthcoming two to three fiscal years. There have been several announcements from the media over the past few months regarding reductions in government spending. The Defense Department has stated that they plan to reduce spending, and the Republican controlled House of Representatives has also developed a plan for a radical reduction in government spending as it focuses on reducing the national debt. The current Continuing Resolution may not be converted to a final budget this government fiscal year.
Several commentators have indicated, that many, if not all, agencies will be required to reduce their overall spending to Fiscal Year 2008 levels. A recent announcement by the Office of Management and Budget ("OMB") directed Federal agencies to achieve a 15% reduction in costs for managing contracts over the next year so the government can save $6 Billion by the end of government fiscal year 2012 1.
Reducing spending to 2008 levels will shrink discretionary spending for products, services and other systems. Excluding the American Recovery and Reinvestment Act ("ARRA"), Government Fiscal Year spending for goods and services was $538.1Billion in Fiscal Year 2008 2. Fiscal Year 2011 spending is expected to be approximately the same amount as Fiscal Year 2008. An estimated spending amount for Government Fiscal Year 2012 is $554 Billion3, but it is not unreasonable to think that number may be reduced by Congress or be decreased as agencies cancel programs. At the end of Fiscal Year 2010, including the ARRA, the budget for contract spending was $885 Billion4, so the discretionary will be reduced by nearly $350 Billion in Fiscal Year 2011. This is an enormous reduction in government spending.
Programs Will Be Cancelled: Several programs that had been previously approved will be cancelled, or funding for these programs will be substantially reduced.
In the event that such reduction in spending does occur, agencies will have less discretionary spending for products, services, and systems, and contractors will be confronted with the problem of, deductive changes to their contracts or terminations of their contracts for the convenience of the government. Either condition will present difficulties for government contractors. An agency may terminate some contracts for Government Spending Reduced by $350 Billion
Government contractors face a very uncertain future over the forthcoming two to three fiscal years. There have been several announcements from the media over the past few months regarding reductions in government spending. The Defense Department has stated that they plan to reduce spending, and the Republican controlled House of Representatives has also developed a plan for a radical reduction in government spending as it focuses on reducing the national debt. The current Continuing Resolution may not be converted to a final budget this government fiscal year.
Several commentators have indicated, that many, if not all, agencies will be required to reduce their overall spending to Fiscal Year 2008 levels. A recent announcement by the Office of Management and Budget ("OMB") directed Federal agencies to achieve a 15% reduction in costs for managing contracts over the next year so the government can save $6 Billion by the end of government fiscal year 2012 1.
Reducing spending to 2008 levels will shrink discretionary spending for products, services and other systems. Excluding the American Recovery and Reinvestment Act ("ARRA"), Government Fiscal Year spending for goods and services was $538.1Billion in Fiscal Year 2008 2. Fiscal Year 2011 spending is expected to be approximately the same amount as Fiscal Year 2008. An estimated spending amount for Government Fiscal Year 2012 is $554 Billion3, but it is not unreasonable to think that number may be reduced by Congress or be decreased as agencies cancel programs. At the end of Fiscal Year 2010, including the ARRA, the budget for contract spending was $885 Billion4, so the discretionary will be reduced by nearly $350 Billion in Fiscal Year 2011. This is an enormous reduction in government spending.
Programs Will Be Cancelled: Several programs that had been previously approved will be cancelled, or funding for these programs will be substantially reduced.
In the event that such reduction in spending does occur, agencies will have less discretionary spending for products, services, and systems, and contractors will be confronted with the problem of, deductive changes to their contracts or terminations of their contracts for the convenience of the government. Either condition will present difficulties for government contractors. An agency may terminate some contracts for default which can be very injurious to the affected contractor. Many options will not be exercised.
Some agencies may temporarily discontinue the performance of contractors by issuing Suspension of Work orders, Stop Work orders, or a Government Delay of Work order. Contractors must, react quickly and preserve their rights under such orders.
How to Protect Your Company
Requests for Equitable Adjustments: If agencies reduce the statement of work or specifications on a contract, or terminate a contract, contractors need to react quickly and efficiently to preserve their rights under the contract. Contractors will need to prepare and submit a Request for Equitable Adjustment ("REA") in response to change orders to the Contracting Officer, or prepare and submit a Termination for Convenience Settlement Proposal to the Contracting Officer in the event their contract(s) is/are terminated. If an REA is denied or for some reason is not feasible, the contractor may need to prepare and submit a Claim under the Contract Disputes Act to the Contracting Officer. Regardless of the type of adjustment requested, the contractor must act quickly and decisively. The FAR imposes time limits on each type of action, and delays by contractors may result in loss of revenue.
Education of Deficiencies and Controlling Costs: In addition to the foregoing issues, the Department of Defense has issued a new rule regarding Contractor Business Systems as part of their effort to force contractors to reduce costs. If the contractor's business systems are found to be "deficient" by the DCAA, as much as 10% of the payments due the contractor may be withheld. The government, in general, is attempting to drive contract costs downward. So contractors should expect increasing pressure applied to them to reduce the costs of their contracts in order to reduce the costs to the government. There are systems that may be deficient, so a contractor must know what is acceptable to the auditors and what constitutes a deficiency.
If your contract is completely or partially terminated for the convenience of the government, not only do you have a limited time to prepare and submit the settlement proposal, your indirect rates will have to be adjusted for the new business over which the indirect costs are allocated, and there may be other issues under the contract that may arise and must be resolved.
The overall environment in government contracting is to reduce the amount of contracts and the number of contracts issued to contractors. In order to achieve this goal, the government also has the unilateral right to fail to exercise an option in a contract. If that occurs, there is not much a contractor can do, so it is imperative that a contractor control its costs.
A contractor's costs may also be affected by reductions in part of the performance work statement, but they may also be adversely affected by the action of government officials who are representatives of the Contracting Officer, such as Inspectors or Engineers, who cause delays, disruptions, acceleration of work, or other similar problems. In any of these conditions, a contractor will need to prepare and submit a REA to the government. The government may "de-scope" the statement of work in the contract that will cause a reduction in revenue.
Subcontractors Have Less Reaction Time: Subcontractors should be aware that the performance of work under their subcontract may also be reduced by a change order from the prime contractor, or their subcontract may be terminated in whole or in part by the prime contractor for its convenience. The prime contractor is passing along the change order or termination it receives from the government. The subcontractor has generally less time to file its REA, claim or termination settlement proposal to the prime contractor so the subcontractor must react very quickly.
Protect Your Intellectual Property: As a by-product of the government's effort to reduce spending, buyers may try to take or exploit a contractor's Intellectual Property ("IP"), so it is essential for all contractors to engage in extra-ordinary efforts to protect their IP. It is urgent that all contractors protect their trade secrets and other IP rights because they are valuable rights to you.
Contracts Unlimited Is Your Answer
If you are impacted by any such adverse circumstances, Contracts Unlimited can help you. We are experienced and trained at working expeditiously and efficiently to resolve these issues. to protect your company. Be vigilant! Don't assume that the loss of contract work can't happen to you.
The issues you are confronted with may require you to reserve your rights and obtain compensation for loss of work required by the contract after receipt of a deductive change or a termination for convenience or a stop work order or suspension of work order are not necessarily issues of law, but are usually issues of contract administration.
The reality is that being prepared for a possible loss of contract work and funding, and ensuring that adequate evidence and documentation necessary and required to support a claim to the government, regardless of the name utilized, are in your files and readily available is a matter of prudent contract administration and contract management. Compliance with the terms of your contract is critical! At this time, it is critical that you actively manage your risk! Your HR records, and accounting records, and purchasing records, and performance records, and so forth, all must be current, accurate and complete. Furthermore, your compliance records must also be up-to-date. If not, a claim against the government may fail to your detriment. Be prepared!
Tom Petruska
Contracts Unlimited, Inc.
The foregoing discussion is not intended to be legal advice or a legal opinion. Please see your attorney or we can provide a referral for legal help.
1. “Cut Contracting Costs By 15 Percent, Agencies Are Told” by Charles S. Clark, Government Executive Magazine, July 7, 2011.
2. “Interesting Times for Government Contractors” by Gregory A. Garrett and Frank J. Beatty, Contract Management Magazine, May 2011.
3. id.
4. id.
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