Should contractors fear sequestration?

If sequestration of federal funds kicks in, agencies will face making deep cuts to programs and that pain will flow down to contractors, experts say.

A sequestration causes automatic, indiscriminate, across-the-board budget cuts. The failure of the so-called supercommittee to find $1.2 trillion dollars in savings over a decade triggered the cuts. They're set to take effect Jan. 2, 2013.

As a result, contractors too “are hostages in a showdown between the president and Congress over fundamental decisions on taxing and spending,” said John Cooney, former general counsel at the Office of Management and Budget and now a partner at the Venable law firm.

He spoke Jan. 17 at a panel discussion hosted by the Professional Services Council that looked at sequestration in detail. Cooney broke down the possible routes federal officials may take to deal with the cuts.

Cooney expects agencies to:

• Try to avoid terminating contracts. Instead, officials will reduce the amount of money obligated under their contracts.
• Become less willing to extend contracts into their option years.
• Obligate money for one fiscal year at a time on task order and services contracts.
• Possibly use the prospect of the sequester's cuts to renegotiate contracts.

He also said agency officials will more often decide to not award new contracts.

“This will be a common agency practice in year one of a sequester. Procurements that can be put off will be put off,” he said during the discussion.

With available money, agency officials will maximize contracts that meet their agency’s core duties, said Alan Chvotkin, executive vice president and counsel for the Professional Services Council, who spoke on the panel as well.

Meanwhile he expects agencies to look for more flexibility to avoid hard-and-fast commitments, such as fixed-price contracts and minimum revenue guarantees. And on the other hand, officials may use more time-and-materials contracts, which are based on labor hours and materials.

However, Chvotkin said there are some policy constraints as the Obama administration has railed against this type of contract, which places a lot of risk on the government.

IDIQs and the General Services Administration’s Multiple Award Schedules program may become more attractive to agencies. They allow for more negotiations at the task order level, he said.

Cooney had several suggestions for companies in light of what may happen. Advocate for the importance of a program and stay in close contact with a contracting officer. Realize though that the officer may not know the fate of a program until very late in the process.

Businesses should also emphasize what they can do for the agency, including the options the company is willing to agree to that may even decrease its revenue, Chvotkin said.

He recommended checking the Past Performance Information Retrieval System (PPIRS) and the Federal Awardee Performance and Integrity Information System (FAPIIS). The information needs to be correct, and it should reflect as favorably as possible on the company’s performance.