9/12/2012
Sequestration: What It Is And
What It May Mean For Federal
Government Contractors
GovConNet Committee Meeting
September 12, 2012
Michael J. Schrier
Eric Whytsell
1875 Connecticut Avenue, NW, Suite. 1110
Washington, DC 20009
Phone: 202-973-0200
Disclaimer
• This presentation and the accompanying slides
are for informational purposes only and do not
contain or convey legal advice nor are they
intended to create any attorney-client
relationship. The information herein should not
be used or relied upon in regard to any particular
facts or circumstances without first consulting a
lawyer.
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9/12/2012
Sequestration?
• Nothing changed, today
• Only a guessing game for now
– No telling what Congress will do
– No telling how agencies will react
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Growing Concern And
Uncertainty
• Earlier this week it was announced that
Lockheed Martin, EADS North America
and BAE Systems intend to send
employee layoff notices
• Warn of potential impacts on
subcontractors and suppliers
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Budget Control Act Of 2011
Pub.L. 112-25
• Joint Select Committee on Deficit
Reduction
• Goal to reduce deficit by $1.5 trillion for FY
2012 through 2021
• If no “deal”, then the law set hard
“discretionary spending” caps for FY2013
through FY 2021
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Automatic Budget Cuts
• Automatic, Across The Board FY 2013
Cuts In Discretionary Spending Up To
– $55 Billion in Security Budgets
– $55 Billion in Non-Security Budgets
– Effective January 2, 2013
• This all depends on what kind of FY 2013
budget ultimately gets passed
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Effects Of Sequestration
• “[T]he same percentage sequestration
shall apply to all programs, projects and
activities within a budget account”
• “Budgetary resources sequestered from
any account shall be permanently
cancelled” (except in select cases of
revolving, trust, and special fund accounts)
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If Sequestration Happens . . .
• Most federal customers will be caught
between a rock and a hard place . . .
– Antideficiency Act
• 31 U.S.C. §§ 1341, 1342, 1517
– Impoundment Control Act of 1974
• 2 U.S.C. §§ 681-688
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Some Exempt Programs
• Social Security Benefits
• “All programs administered by the
Department of Veterans Affairs”
• “Unobligated balances of budget authority
carried over from prior fiscal years, except
balances in the defense category”
• Military personnel (with offsetting cuts)
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More Exempt Programs
• Certain Transportation Programs
• Certain Low Income Programs
• Other
– e.g. Office of Thrift Supervision, Freddie Mac,
Fannie Mae, various FDIC funds, federal
judge salaries
– See 2 U.S.C. § 905(g) for complete list
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Starting Point For Triage
Much of the Analysis Begins with
Existing Agency Obligations
Determining the Obligations
Depends on the Contract Type
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Determining Agency Obligations
• Firm Fixed Price Contract
– FAR 16.202
– Price stated in contract
• Fixed Price Incentive Contract
– FAR 16.403
– Target amount listed in contract
– Obligation upwardly adjusted as incentive
payments become due
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Determining Agency Obligations
• Cost Reimbursement, Cost-Plus-Fixed
Fee Contract
– FAR 16.301/16.306
– Ceiling amount stated in contract
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Determining Agency Obligations
• Indefinite Delivery, Indefinite Quantity
– FAR 16.504
– Start with minimum amounts
– Increased as task or delivery orders placed
• Requirements Contract
– FAR 16.503
– Amount of each order actually placed
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Types Of Potential Impacts
• Downsizing of Existing Contracts
• Less Spending on New Contracts
• More Demanding Contract Performance
In Each Case, Government Customers Will Likely
Be Forced to Do More with Fewer Resources
(including Government staff)
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Expected Impacts
On Existing Contracts
• Agencies in a New “Zero-Sum” Environment
• Forced to Make Choices about…
–
–
–
–
Terminating or Restructuring Programs & Contracts
Reducing Quantities
Extending Delivery Schedules
Reducing Use of T for C in Favor of Early
Re-Compete / T for D
– Bundling / Transferring Requirements
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Potential Impacts
On New Contracts
• Delays in Awards / Problematic Debriefings
• More…
– Sole Source Awards
– Low Cost Technically Acceptable Awards
– FFP Contracts (in More Situations)
– Cost-Sharing Contracts
– Use of GWAC and Larger Contract Vehicles
• Tougher Award Fee Standards
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Possible Impacts During
Contract Performance
• Increased Use of Options…
– Defensively to Manage Budget
– Offensively to Leverage Concessions
• Greater Resistance to Equitable
Adjustment
• Heightened Ethics Enforcement as a Tool
to Reduce Payments
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Overarching Impacts
•
•
•
•
Fewer Contract Awards and More Protests
Riskier Contracts; Lower Profits
More Regulation and Oversight
More Government Claims, Disallowances,
Withholds
• More Scrutiny and Exposure to Penalties
and Sanctions
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Preparing For The Worst
• Know Your Existing Contracts and
Program Life-Cycle
– Contract Type
– Severable vs. Non-Severable Services
– Remaining Period of Performance
– Available Option Periods / Funding Ceilings
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Preparing For The Worst
• Strengthen On-Going Performance
– Comply with Limitation of Funds/Costs Clause
– Verify Contract Requirements and Compare
Deliverables/Performance against Them
– Ensure PPIRS and FAPIIS Databases Are
Accurate and as Favorable as Possible
– Make Sure CCR/SAM Is Current / Accurate
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Preparing For The Worst
• Refine Key Systems
– Ethics and Business Conduct
– Quality Control
– Cost Accounting
– Government Property Management
• Evaluate Current / Expected Opportunities
• Prepare for Possible Downsizing
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The Way Forward
• Prepare for Better Change Management
– Quickly Identify Changes, Track Costs, and
Prepare Change Proposals
• Pro-Actively Engage with Customers
– Contracting Officers and End Users
• Offer Solutions to Their Problems
– Must Reflect Legal and Practical Realities
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Will Sequestration Really
Happen?
• No meaningful Congressional action on
budget or deficit reduction likely until after
November election
• You never know what a lame duck session
of Congress might accomplish
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9/12/2012
QUESTIONS?
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Michael J. Schrier
(202) 973-0213
mjschrier@jacksonkelly.com
Eric Whytsell
(202) 973-0221
ewhytsell@jacksonkelly.com
www.jacksonkelly.com
THANK YOU FOR YOUR TIME
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