Sequestration: Preparing for the Inevitable

Guest Author: Elizabeth A. Ferrell, McKenna Long & Aldridge.

Last August, Congress passed the Budget Control Act of 2011.  This law authorized raising the debt ceiling, established caps on discretionary spending, and put a process in place to reduce the federal deficit by sequestering funds through automatic spending cuts beginning January 2, 2013, unless Congress passes a bill which the president signs to avert such a result.  Senior Executive Branch officials, members of Congress and industry leaders all predict catastrophe if sequestration is implemented.  If sequestration occurs, both the defense and non-defense portions of the federal budget would be subject to annual reductions of about $54.7 billion for FY2013. Many expected that OMB’s report to Congress pursuant to the Sequestration Transparency Act of 2012 would contain the details of how sequestration would be implemented across programs, projects and activities.  However, the Report (which was issued earlier this month) provides only top level information regarding sequestration at the account level.  For example, the Report states that the $21.4B budget request for Aircraft Procurement, Air Force, will be cut approximately $2B, without identifying which aircraft programs will be cut and by how much.  Budget reductions are expected to be about 9.4% for non-exempt defense discretionary spending (the President has exempted military personnel accounts) and about 8.2% for non-exempt nondefense discretionary programs.

Sequestration would not begin until January 2, 2013, so the funding reductions would be spread over only three quarters of that fiscal year.  Appropriated funds that have been obligated to contracts are not subject to the sequestration process.  However, appropriated fund balances that remain unobligated as of January 2, 2013 may be subject to sequestration.  While many on the Hill are hopeful that sequestration can be avoided, contractors should take steps now to prepare for the impact of sequestration.  Contractors should:  (1) Develop a procurement advocacy strategy; (2) Develop a claims mentality and aggressively mange the customer; (3) Assess contractual vulnerabilities, including performance status to avoid the possibility that a termination could be for default; (4) Recognize the critical importance of funds status (for incrementally funded and cost reimbursable contracts) and regularly track funds and calculate projected termination liability; (5) Prepare for possible termination by reconsidering the need for capital expenditures and additional workforce, assessing the need for WARN Act notices, and resolving outstanding prime and subcontract administration issues and claims; (6) Communicate with the C.O. and subcontractors.

We are entering a new age of procurement austerity, and sequestration makes a bad fiscal situation even worse.  Both the Government and contractors will have to be flexible and creatively meet needs within reduced funding levels.  Every program  is at risk for funding cuts, and many will face additional impact of sequestration.  Prepare now for the inevitable.

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