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Through the eyes of government contractors

Looking at Sequestration

By Marlon Bernal, Principal mbernal@uhy-us.com

Congress provides a plan creating $80 billion in alternative deficit reductions, and the plan becomes law, then the $1.2 trillion sequestra- tion will still occur, but the sequestra- tion will be reduced by $80 billion.

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W ith the March 1st deadline

Sequestration Effects on Government Contracting

If sequestration occurs, the Office of Management and Budget (OMB) will begin to issue apportionments to each agency. An apportionment con- stitutes a legally binding order that forbids an agency from spending more appropriated funds than OMB allocates to the particular agency.

In turn, agencies will have to reeval- uate and re-prioritize their agency and mission needs. While agencies w i l l l i k e l y re d u c e p e r s o n n e l i n response to budget cuts, the first year of sequestration will also prob- ably result in agencies significantly

Sequestration Effects on Government Contracting If sequestration occurs, the Office of Management and Budget (OMB) will
Sequestration Effects on Government Contracting If sequestration occurs, the Office of Management and Budget (OMB) will

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the-board budget cuts are imposed on government programs to force

reductions in spending and to meet

b u d g e t a r y g o a l s e s t a b l i s h e d b y

statute. If sequestration does occur,

$1.2 trillion in budget cuts originally

s c h e d u l e d t o t a k e e ff e c t o n o n January 2, 2013, will begin on March 1, 2013, and continue through the following nine years.

Generally, sequestration spending cuts are divided equally between e l ig i b l e de f e ns e and n o n-de f e ns e programs, though some domestic e n t i t l e m e n t p ro g r a m s ( n a m e l y, Social Security, federal retirement programs and Medicaid) are exempt from sequestration budget cuts.

The Budget Control Act of 2011 pro- vides a means to avoid sequestration if Congress successfully acts to achieve deficit reduction savings that match the anticipated $1.2 trillion in funds that will be subject to seques- tration. If Congress attains less deficit reduction savings than required, the sequestration cuts will be reduced by the amount in deficit reduction sav- ings actually realized. For example, if

weeks away, gov-

ernment agencies

and contractors

continue to specu-

late about the pos- s i b l e i m p a c t o f s e q u e s tr a ti o n . Whether sequestration will actually occur is unknown. As we have seen from past experience, Congress and the president can work to find alter- natives to deficit reductions that may curb, if not eliminate, the effects o f s e q u e s tr a ti o n . If s e q u e s tr a ti o n d o e s o c c u r, h o w e v e r, t h e C o n - gressional Budget Office estimates that eligible defense programs will be cut by 10 percent and eligible non-defense programs will be cut by 8 . 5 p e rc e n t i n FY 2 0 1 3 . C o n s e - quently, contractors should plan for the possibility of drastic cuts in fed- eral spending and prepare to operate in an environment of leaner budgets and increased competition.

What is Sequestration?

Sequestration is a process in which aut oma ti c , indi s c rimina te , a c ros s -

G e t

o u r

n e w s l e t t e r s

o n l i n e

a t

w w w . s c r i b d . c o m / U H Y C o l u m b i a M d

Looking at Sequestration continued from page 1 scaling back the number of new con- tracts for

Looking at Sequestration

continued from page 1

scaling back the number of new con- tracts for non-critical programs. Yet, even critical programs will likely be impacted by sequestration, as agen- cies will begin to restructure their procurement vehicles to find the m o s t e ff e c t i v e m e a n s t o u t i l i z e reduced funding.

A s s e q u e s t r a t i o n w i l l c e r t a i n l y impact the way in which the gov- e r n m e n t c h o o s e s t o s p e n d i t s m o n e y, g o v e r n m e n t c o n t r a c t o r s should consider the following key impacts sequestration will have on the procurement process:

Impact on New Contracts

Contractors should expect a reduction in the number of new contracts awarded as agencies eliminate pro- grams that are not critical to their mis- sions. Agencies will move away from contract vehicles which place the cost risk on the government and issue more firm-fixed-priced contracts rather than cost-reimbursable and/or labor-hour contracts. Indefinite Delivery/Indefinite Quantity con- tracts will also become more appeal- ing given their ability to negotiate cost at the task order level.

Impact on Existing Contracts

Limited funds will reduce the prod- ucts or services being purchased on existing contracts. Agencies may choose to “de-scope” the quantity, capability and breadth of contract

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p e r f o r m a n c e t h ro u g h d e d u c t i v e change orders as well as partial and, in some cases, complete contract ter- minations for convenience. Contrac- tors should also expect agencies to re s t ru c t u re t h e i r c o n t r a c t s i n a n effort to defer any possible costs to the future.

Claims Litigation

Sequestration could bring a greater number of requests for equitable a d j u s t m e n t (REA ) a n d c e rtifi e d c l a i m s a s c o n tr a c t o r s s e e k re i m - bursement for government-initiated actions impacting their contracts, such as constructive acceleration, s t o p - w o r k o rd e r s , g o v e r n m e n t delays and deductive change orders.

Bid Protests

Sequestration will certainly bring an increase in bid protest litigation, as contractors compete for a limited number of contracts.

How Should Contractors Prepare?

Predicting whether sequestration will actually occur in March, or per- haps in subsequent months, is diffi- cult because sequestration is entan- gled in the larger macroeconomic policy debate concerning taxes and spending, two topics that have gar- nered much debate in Congress for years and without resolution. Still, the possibility that sequestration will occur is sufficiently great, and it is

important that government contrac- tors take proactive steps to address the future impacts of sequestration.

L o o k o u t f o r “ s c o p e c re e p . ” A s agencies seek to obtain more for less, contractors must ensure that t h e i r e m p l o y e e s u n d e r s t a n d t h e company’ s obliga tions unde r the contract. Any contract changes must be c ommuni c a t ed t o ensure tha t costs associated with the changed work are captured.

Contractors must consider the appli- cability of the Worker Adjustment and Retraining Notification (WARN) Act and its protections. Generally, the WARN Act requires contractors with 100 or more employees to pro- vide 60 days’ advance written notice to employees prior to the closing of a work site resulting in the loss of 50 or more employees, or mass compa- ny layoffs resulting in employment loss for 500 or more employees. As a g e n c i e s w i l l n o t k n o w w h e t h e r sequestration will occur until the final hour, they are unlikely to pass information to contractors concern- ing impacted contracts prior to the actual date of sequestration.

S e q u e s t r a t i o n — i f i t o c c u r s — w i l l bring many changes with respect to government spending; consequent- ly, government contractors should begin to plan for sequestration and how they will address the impend- ing effects on the federal procure- ment process.

Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information con- tained herein is intended to serve as a solicitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other compe- tent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpay- er. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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