Even if sequestration, or a reduction of about $1 trillion in federal spending from fiscal 2013 to 2021, were to occur, companies shouldn’t expect government contracting to come to a complete halt.
But they should be readying for a more difficult scenario in which the government is likely to negotiate more and may be less willing to start new projects or extend existing initiatives, according to industry experts. The Professional Services Council, an industry association, last week convened member companies to help them prepare.
At the event, speakers acknowledged that sequestration remains only a possibility. Though the law was put in place last year during disagreement over whether to increase the debt ceiling, Congress still could stop it from happening at any point, before or even after it goes into effect in early January 2013.
If sequestration were to occur, half of the cuts are mandated to hit defense spending, an area on which many local contractors depend, while the other half would hit all non-defense accounts.
“I don’t think [the outcome] can be predicted with any degree of accuracy,” said John Cooney, a partner at Venable.
Cooney has more experience than most with sequestration as a former counsel at the Office of Management and Budget who was there in the mid-1980s when sequestration was implemented.
Though the precise size of the cut is not yet known, current estimates show it reaching about $110 billion annually, Robert Keith, a former senior specialist at the Congressional Research Service, said at last week’s event.
Cooney warned contractors that sequestration would put agencies under considerable pressure. As a result, the government will likely try to avoid terminating contracts to avoid paying a variety of fees.
Additionally, agencies will likely look to cost reimbursement contracts, which allow them to set the total cost, or even delay awarding new contracts entirely.
Cooney said agencies may threaten not to renew a contract unless the price is lowered and Alan Chvotkin, executive vice president and counsel at the Professional Services Counsel, said contracting officers will likely set as low as possible the minimum revenue guaranteed under a contract vehicle.
They urged companies to immediately get more familiar with their contracts, including figuring out the ceiling value and how many option periods remain.
Additionally, companies should closely track the accuracy of their references in contracting databases used by government officials.
Still, Cooney cautioned that sequestration would be painful for agencies, contractors and Congress.
“It was a wrenching process for all concerned,” he said of the mid-1980s sequestration.