After sequestration, contractors consider what’s next

March 17, 2013

The uncertainty of whether sequestration will happen has now been replaced with how it will happen. Government contractors are asking a new set of questions: “Which of my contracts will be affected, when and by how much?”

The Office of Management and Budget recently published guidance on how agencies should implement sequestration. Some elements will send chills down the spine of company executives, such as Office of Management and Budget Controller Danny Werfel’s suggestion that agencies “consider de-scoping or terminating for convenience contracts that are no longer affordable” and only “enter into new contracts or exercise options when they support high-priority initiatives or where failure to do so would expose the government to significantly greater costs in the future.”

Contractors are surely in for a rough few months. Still, there are some glimmers of sunshine on the horizon.

For the balance of fiscal 2013, neither party seems to want to compound the effects of sequestration with a government shutdown.

The House has passed legislation to fund the government for the rest of the fiscal year.

It includes full-year appropriations for the Defense Department, the Department of Veterans Affairs and military construction and expands the budget areas exempt from sequestration, such as defense health, critical operations and maintenance funding and equipment procurement.

The Senate is working on an amended version of the same bill. The prospects for a funding bill passing both houses of Congress appear strong.

Beyond 2013, even with sequestration in effect, the caps on discretionary spending in the Budget Control Act allow for increases in 2014 and the next several years. In other words, 2013 is likely the leanest year, and discretionary budgets are likely to rise starting in 2014.

But for the rest of the year, companies need to prepare for a particularly challenging environment.

The first step is to take careful inventory and do a risk assessment of their contracts to understand the terms of termination, when option years come up and how essential those contracts are to government operations.

Contracts that are costly for the government to terminate or are critical operations — such as managing a call center or operating a data center — are probably safe from cancellation. Contracts for advisory services or computer upgrades that can be easily delayed with little impact are at risk.

The second is to be proactive in communications with customers. Contractors should talk to their government customers and ask whether their contracts will be affected. The OMB has indicated that agencies should provide answers. It may take some time before customers know the answer, but an open line of communication is essential.

Finally, companies with contracts at risk should consider being proactive in offering cost-cutting ideas to the customer. It is far better to get less revenue on a contract than none.

Kevin Plexico is vice president of federal information solutions at Herndon-based Deltek, which conducts research on the government contracting market.

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