Sequestration And The Continuing Resolution’s Effect On Government Contracting

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On March 26, 2013,  President Obama signed the Continuing Resolution, which will fund government operations through the end of Fiscal Year 2013 or September 30.  While this may assuage some of the uncertainty ofsequestration, we are not out of the danger zone yet.  The spending cuts are still firmly in place and government contracts are not as plentiful as they have been in the past.

As a government contractor, there are a number of events and possibilities that your company should be prepared for in the remainder of FY13.  With sequestration tightening the governmental purse strings, agencies are issuing fewer solicitations, awarding even less contract awards, and even going so far as to cancel numerous solicitations.  Competition between contractors drastically increases as the available contracting opportunities fade away.  This means that the 33 percent rise in bid protest filings that the Government Accountability Office (GAO) has seen over the last 5 years is likely to increase.

Government contractors must now fight even harder and scrutinize any adverse actions against their company in the bidding process.  This higher level of diligence is necessary  to protect your rights as a contractor and ensure your claim is made timely.  In the majority of instances, a contractor only has five calendar days to submit a bid protest under the Federal Acquisition Regulations (FAR) if the contractor wishes to obtain an automatic stay under the Competition in Contracting Act (CICA).

The effects of sequestration do not end with diminished contracting opportunities and increased bid protest activity.  Even if your company has a contract in full swing, the government may find it necessary to change, delay or even terminate the contract.  Here are four areas current contractors should be aware of and how to manage each situation. 

  1. Termination for Convenience:  Under all government contracts, the agency maintains the right to terminate the contract for convenience under one of several positions of the FAR.  The agency may partially or fully terminate the contract.  When this happens, contractors are entitled to recover reasonable termination costs including reasonable overhead and profits for completed work.  Coupled with terminations for convenience, contractors with contracts including option years may find that agencies are no longer willing to exercise those options because the agency may be unsure if the FY2014 budget will be large enough to justify the option year.
  1. Managing a Termination for Convenience: Be sure to review your contract to ensure you (or your attorney) are familiar with the applicable termination clause.  In order to reach an appropriate settlement, it is recommended you involve your attorney to negotiate with the contracting officer.  The time available to negotiate a settlement is limited and establishing a working relationship with the contracting officer can make for a smoother settlement process.
  1. Changes to the Contract – also known as “re-scoping:” The agency may attempt to direct performance of additional work without additional compensation.
  1. Managing Changes: Follow the terms of a contract’s change order clause, which usually requires notification to the contracting officer within 30 days (although this time period can vary, depending on your specific contract) and seek an equitable adjustment in price, delivery schedule, or both.  Notifying the contracting officer within this time should minimize delays in receiving compensation for any increased costs resulting from the change of work.
  1. Stop-Work Orders or Delays: Instead of outright terminating a contract, the contracting officer may instead issue a stop-work order. Stop-work orders are likely to be related to other acquisition activities and furloughs of the agency’s civilian employees.  It is possible that stop-work orders may occur because of sequestration effects outside of the agency.
  1. Managing a Stop-Work Order:  As soon as your company receives a stop-work order, communicate with the contracting officer in writing to determine the length of the stop-work order and whether you must remain on stand-by during the stop-work period. A contractor may be able to receive schedule adjustments and possible compensation depending on the nature of the stop-work order. Keeping in touch with the contracting officer and keeping your attorney aware of the situation increases the likelihood of a favorable outcome.
  1. Termination for Default:  As agencies are directed to decrease spending under sequestration, contracting officers are becoming more stringent with performance requirements of contracts.
  1. Avoiding Termination for Default: Contractors should be aware of all performance requirements under their contracts and continue to perform and meet milestones when required. Ensure that your contracts continue to stay within budget, while providing the highest level of products or service to the agency.  As with the stop-work order situation, maintaining open lines of communication and a good working relationship with the contracting officer will benefit your company immensely. Do not be the contractor that the contracting officer dreads working with.

The key to surviving sequestration and any potential contracting setbacks is to maintain an open line of communication between your company and the contracting officer.  These lines of communication should include written communication and written confirmation of telephone or in person conversations.  Often a good working relationship between contractor and contracting officer can prevent disputes and keep your company working during this time of financial uncertainty.

As with responding to adverse actions during the bidding process, the time to respond to adverse actions during performance may be limited, and contractors are encouraged to contact their attorneys as soon as they become aware of these situations.

Alecia M. Schmuhl is an associate with Bean, Kinney & Korman, P.C. in Arlington, Virginia. She practices in the areas of intellectual property, business transactions, government contracts and employment law. She can be reached at 703.525.4000 or aschmuhl@beankinney.com.