Here in Washington, DC, sequestration (or the “fiscal cliff”) is the number one topic of conversation. But, what is it and what does it mean for federal contractors across the country? This is the first in a series of articles on sequestration and its impacts on federal contractors nationwide.
At its heart, sequestration is the result of political gamesmanship gone bad. Congress passed the Budget Control Act of 2011 in a well-meaning attempt to control the federal budget. That Act created the Joint Select Committee on Deficit Reduction. The Joint Select Committee was staffed with four Republicans and four Democrats. The purpose of the Joint Select Committee was to find a grand political compromise to reduce the federal budget deficit by $1.5 trillion for Fiscal Year 2012 through Fiscal Year 2021. To give the Joint Select Committee incentive to reach a deal, Congress created the ultimate doomsday scenario. If the Joint Select Committee was unable to reach a deal, then the doomsday scenario would be deep, automatic, and across the board budget cuts. No grand budget deal was reached in 2011 or 2012. Virtually all budget negotiations came to halt during the months leading up to the Presidential election. In the weeks after the election, there is much talk of bipartisanship, but still no deal. If no deal is reached by January 2, 2013, then the doomsday scenario of automatic budget cuts is supposed to kick in absent further Congressional action.
The automatic sequestration budget cuts will be severe. For Fiscal Year 2013 alone, the Budget Control Act of 2011 mandates that there be approximately $55 billion in cuts from security budgets (e.g., defense and homeland security) and approximately $55 billion in cuts from non-security budgets (e.g. domestic programs). These cuts will be necessary to stay under the Congressionally-mandated $546 billion security and $501 billion non-security budget caps. There are progressively severe budget caps scheduled for each fiscal year from 2014 through 2021, assuming no deal is reached.
To remain under the budget caps, across the board budget cuts must be implemented, subject to certain limited statutory exemptions. See 2 U.S.C. § 905(g). According to the Act, “[T]he same percentage sequestration shall apply to all programs, projects and activities within a budget account.” 2 USC § 906(k). This means that federal agencies will likely not have any discretion to completely “save” particular programs or federal contracts from the budget axe. Each program, project or activity must be reduced by the same percentage. Once the budget cuts go into place, the
dollars cut will be permanently cut. 2 USC § 906(k) (“Budgetary resources sequestered from any account shall be permanently cancelled.”).
If sequestration goes into effect, federal agencies will be caught between a rock and hard place when making funding and programmatic choices. The Impoundment Control Act of 1974 (2 U.S.C. §§ 681-688) effectively requires federal agencies to spend all appropriated money – leaving them with no discretion to “hold back” any appropriated funds. The Antideficiency Act (31 U.S.C. §§ 1341, 1342, 1517) effectively prohibits federal agencies from spending any more money on their programs than Congress appropriated for those programs. So, if federal agencies cannot spend money they do not have, cannot hold money back, and are faced with severe, across the board budget cuts, then federal agencies will likely be left with little choice other than to start cutting federal contracts to reflect their shrinking budgets.
To date, no federal agency has publicly disclosed its plans for how it will make tough decisions as to which federal contracts to cut and which ones to keep. Until such disclosures are made public, contractors are left in the position of making some educated guesses as to how federal agencies will conduct “triage” on their contracts and commitments. In the private sector, contractors generally view the contracts that generate the greatest profit or revenue as the “most important” contracts worthy of saving. While this is what private sector businesses typically do, it is not likely the course of action to be followed by federal agencies. Instead, federal agencies are likely to be driven by their self-determination of what is most “mission critical.” Federal contractors should look long and hard at their contracts with federal agencies and make their best determination of where those contracts rank on the agency’s list of critical functions. To the extent possible – and consistent with applicable federal laws – contractors should work with their agency contacts to determine how mission critical their work is or try to elevate the mission criticality of their contracts in the eyes of their customers. The higher priority the work, the more likely it is that those programs (and federal contracts) may be spared the full brunt of sequestration’s cuts.
Once a federal agency is forced to prioritize its mission critical programs, the next likely step will be for the agency to determine how much money it has available for those programs. While the budget caps will likely be clear, the value of existing contractual obligations to be applied against those budget caps is subject to some agency discretion. From a strict contractual obligation perspective, different types of federal contract vehicles provide agencies with more flexibility than others. The amount of agency obligations under a “firm fixed price” contract is the face value of the contract. FAR 16.202. Conversely, the amount of an agency obligation under a “requirements” contract is the dollar value of each order actually placed under that contract. FAR 16.503. Indefinite delivery, indefinite quantity (“IDIQ”) contracts have obligation values at the guaranteed minimum amounts and increase only as individual task orders or delivery orders are placed by the Government. FAR 16.504. Given these regulatory requirements for how to determine the value of an agency’s contractual obligations, it is reasonable to assume that federal agencies will prefer IDIQ and requirements contracts if for no other reason that they provides agencies with maximum flexibility in avoiding hard budget limits and in meeting mission critical requirements. It is also reasonable to assume that federal agencies may seek to terminate or modify existing firm fixed price contracts as a way of un-obligating limited budget resources and making those resources available for mission critical requirements.
Next: Additional steps federal procurement professionals are likely to take in the face of sequestration
Michael J. Schrier is the attorney responsible for the content of this article.