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If you’re a government contractor, the time to prepare for the across-the-board budget cuts contained in the Budget Control Act of 2011 (the “Act”), also known as the “sequestration,” is — well — yesterday. The Act requires the federal government to cut $1.2 trillion from the budget beginning in FY 2013 through FY 2021. Discussions of sequestration have begun to take a “boy who cried wolf” quality, leading some contractors to assume that at the last minute, Congress will work things out. But recent statements by policymakers and media outlets are more insistent than ever that this time, the sequestration will be a “go.” An article in the National Journal on February 11, 2013 announced that “[s]equestration is now the most likely scenario. . .” The Examiner.com predicts: “Sequestration is going to happen, or something like it.” This somewhat vague prediction makes an important point that even if Congress and the President were to agree on a sequestration “replacement” bill this fiscal year, the pressure for long-term reductions in discretionary government spending on which government contractors largely depend is unlikely to ease. Thus, contractors are likely to face a smaller pool of available funds one way or another.
Regardless of when it occurs, sequestration, or something like it, means the federal government is statutorily required to cut $1.2 trillion from the budget beginning this year and through FY 2021. Contrary to popular belief, these cuts are to be equally divided between defense and nondefense. Once the assumed debt service savings of $216 billion is subtracted from the $1.2 billion, we stand to see $492 billion each in defense and non-defense cuts. Thus, Department of Defense contractors who have been feeling rather secure in the knowledge that we are still at war should not sleep so soundly.
The impact of the budget cuts on government contractors will be significant. You can expect to see a reduction in the number of new contracts, as well as changes in procurement vehicles, with more IDIQ contracts, which give the Government more flexibility, and more fixed-price contracts, which shift more of the risk to the contractor. While existing fully-funded contracts are probably safe, future-year phases of existing incrementally-funded contracts are at risk, as are options under existing contracts that have not yet been renewed. Contractors may see IDIQ contracts become unprofitable, as no task orders are issued. Existing contracts that are out-of-scope risk being terminated. Contractors can expect to see decreases in GSA/Supply Schedule purchases. You can expect to see more bid protests, as the pot of money shrinks and more contractors are competing for fewer funds.
What should you do to prepare for these changes?
First, if you have a contract currently, get your contract in order. Don’t be late with your deliverables. Get your sub-contractor plans in place. Make sure you are in OFCCP compliance. Make sure your subcontractors are paid, unless you have a legitimate dispute. This is not the time to stand out to your Contracting Officer as a problem contract or contractor. Second, don’t overlook the importance of a good relationship with your Contracting Officer. Return calls promptly, be responsive to issues that arise, and treat the Contracting Officer as a valued customer. Third, if you can show your Contracting Officer some flexibility (for example, a willingness to restructure from a cost reimbursement to a fixed-price contract structure), your flexibility may enable your Contracting Officer with newly-limited funds to make sure you retain your contract. Fourth, correct deficiencies now so you have a good performance assessment. If the government is looking for a contract to terminate, you don’t want yours to be the obvious choice because of a bad performance assessment. Finally, you may want to take the opportunity to look to alternative markets — state and local, or even international if your products or services can be exported.
Internally, you need to be prepared to confront the possibility of changes in your workforce in response to a slowdown in task orders or the Government’s failure to renew an option. Reducing labor costs, particularly where such a reduction inevitably means reducing your workforce, takes careful planning and preparation. Consider everything on the table — from eliminating certain discretionary benefits or perquisites to furloughs to layoffs — but scrutinize each of these options carefully. If your workforce is unionized, pull out the collective bargaining agreement and see what your options are. If you are non-union, review your employment policies to make sure they are written to provide you the most flexibility possible. If you are considering furlough, engage employment counsel to help you structure the furlough to avoid wage and hour problems for your exempt employees. Engage benefits counsel to ensure that you don’t accidentally disqualify your workers from certain benefits because they fall below the minimum hours for eligibility.
Layoffs are the nuclear option but they may be a reality. But before you lay off anyone, figure out how to effect a layoff that will meet your particular company’s goals. Do you just need to retain enough warm bodies to meet your obligations under a contract? Or do you need to retain employees with special skills or clearances? Do you want to use the layoff to shed some underperforming employees? Whatever your goal, design your layoff to meet that goal. Decide whether you want to offer severance in exchange for employees’ release of claims against your company. Figure out what notice is required (whether you must comply with the Worker Adjustment and Retraining Notification Act (“WARN”) or one of the state “mini-WARN” laws), and what notice you feel morally obligated to provide to your workers. Don’t lose sight of the fact that the decisions you make will have a tremendous effect on the lives of your employees and their families — and therefore they must be made deliberately, carefully, and compassionately.
The sequestration — or something like it — will likely be painful for many government contractors, but planning now may reduce the pain later.