Sequestration Checklist: Are You Ready?

By Sandra I. Erwin
President Obama must report to Congress no later than Sept. 6 on how federal agencies will implement $1.2 trillion in budget cuts that are scheduled to take place Jan. 2.
For many government contractors, a month is too long a wait considering thatbusinesses need time to prepare for a possible slowdown or shutdown of operations.
“Everyone is hoping that this will go away,” says Darrell J. Oyer, a government contracts specialist who works with defense suppliers. But with Congress in recess through August, now might be a good time for contractors to contemplate what-if scenarios, Oyer says.
When Congress is back next month,pressure will continue to mount on lawmakers to act to avoid the mandatory sequestration cuts that lawmakers approved a year ago in order to defuse a debt ceiling crisis.
Beginning in fiscal year 2013, the sequestration guillotine would chop $55 billion from defense and non-defense agencies annually through 2021. For Defense, it amounts to a 10 percent across-the-board cut.
The impact of sequestration on Defense Department suppliers varies depending on whether a company has projects already under contract or if it is awaiting Pentagon decisions on yet-to-be-made awards.
Companies whose financial prospects are tied to future contract awards are simply out of luck, Oyer says in a newsletter he writes monthly for clients.
Because of the uncertainty, agencies will delay major procurements, he says. “Contractors have no control over this action.”
Another possibility is that government procurement officials might attempt to negotiate a reduction from “probable cost and price” as a hedge, he suggests. “Contractors can use discretion in agreeing to such reductions.”
Companies that are working under existing contracts face a different set of challenges.
In contracts that have a “limitation of funding” clause, government officials can decide to stop making payments. Again, vendors have no control over this action, Oyer says.
Where there is a limitation of cost clause, he says, contractors should be more reluctant to do any work “at risk.”
Agencies also would be authorized to not exercise contract options. An even more dire possibility for industry would be the rescission of contracts to the maximum extent possible where permitted by regulation, says Oyer. “Contractors should be even more diligent in compliance and be prepared to defend any allegations that would justify rescission,” he says.
Increased use of “termination for default” is another potential action that agencies might take, he says. “Contractors should even more closely monitor performance and respond quickly to potential issues of default.”
If there is “termination for convenience,” he adds, contractors have no control over this action but should analyze the cost/benefit differential between continuing performance versus termination. “A termination may result in no delivery of product but expenditure of 90 percent of the funds for a completed item,” Oyer says.
Until there is more clarity on what programs will be affected by sequestration, all contractors can do is try to anticipate government actions and be prepared, Oyer tells National Defense. 
Oyer believes it is unfortunate that the debate over sequestration has centered on how many defense industry jobs might be lost, rather than on the potential impact on national security writ large. “That’s all I have heard senior defense executives talk about [during congressional hearings], jobs, jobs, jobs,” Oyer says. “That disappointed me.”
Photo Credit: iStockPhoto

Topics: Business Trends, Doing Business with the Government, Defense Department, DOD Budget, Procurement

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