Sequestration and Government Contractors

March 1, 2013 the federal government initiated $85 billion in automatic spending cuts, typically referred to as “sequestration”.  These automatic cuts were developed as a “fall back” in the Budget Control Act, which was part of the agreement to increase the federal government’s debt ceiling to prevent default on payments.

This fall back plan was only to be implemented if a joint Congressional committee failed to reach agreement on a long-term deficit reduction plan.  Needless to say, the joint committee failed. That means the fall back plan which calls for $1.2 trillion in cuts between FY 2013 and FY 2021 will be begin to be implemented today.  Sequestration was initially scheduled to occur January 1, 2013 but was delayed until today as part of the American Taxpayer Relief Act which was adopted to avert the fiscal cliff.

Sequestration cuts will be split evenly between defense and nondefense programs but about 1/3 of civilian cuts will come from nondiscretionary programs. This limits the impact on discretionary programs such as contracts.  On the defense side, the entire amount will come from discretionary accounts. To intensify the impact, military personnel are exempt from these cuts, so a greater percentage of the decreases in spending will fall on a smaller number of accounts.  Military construction, maintenance, base operations, security, IT, and other areas are all expected to be impacted.  On the other hand, road construction funded by the highway trust fund is not likely to be impacted.

The entire $85 billion is supposed to be cut in FY 2013 which runs through the end of September; however there currently is not an approved budget beyond March 27th of this year.  When Congress and the White House address funding for the second half of FY 2013, these issues may be addressed.

In the meantime expect cuts and disruptions.  On February 27, 2013 the White House Office of Management and Budget issued a memo to agencies providing implementation guidance.  In the section on acquisition the memo stated, “As a general matter, agencies should 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. Agencies may also consider de-scoping or terminating for convenience contracts that are no longer affordable within the funds available for Fiscal Year 2013, should no other options exist to reduce contracting costs in these instances.”

We’ll continue to follow the effects of sequestration and provide updates.