Government Contracts Update

With one month left before the end of the 2017 federal fiscal year (FY) on September 30th, the possibility of a government shutdown is beginning to loom larger, as Congress has not yet passed spending bills for FY 2018. The potential shutdown on October 1st comes on the heels of the shutdown that nearly occurred in May 2017, but which was avoided by Congress' passage of a $1 trillion spending bill that funded federal agencies through September 2017.

In anticipation of a potential shutdown, it is important for federal contractors to put themselves in the best possible position to limit costs and avoid the expensive delays that could occur beginning October 1st.

What Can Contractors Do to Prepare for a Government Shutdown?

Contractors can take a number of steps now to place themselves in a better position should a government shutdown occur at the end of September:

  • Assessment of Contracts: Whether contract performance will continue for individual contracts could depend largely on how the contract is funded. Incrementally funded contracts would likely be more susceptible to being put on hold if a shutdown occurs, whereas contracts that have been fully funded could continue. Contractors should also consider where their contracts are performed. Those performed at government facilities would likely be more affected by a lack of personnel due to furloughed government employees, limited hours of operation, or even complete closure.

    Moreover, if a shutdown occurs, the White House would make determinations of the agencies and personnel that are excepted by law, thus keeping them up and running. Contractors whose contracts are focused on national security or emergency preparedness, for example, would more likely be permitted to continue contract performance.

  • Communication with Contracting Officers: It is never too early for contractors to begin communicating with their contracting officers regarding a potential shutdown, such as by seeking guidance on whether their contracts are excepted by law, the closure of federal facilities, and the issuance of stop work orders (especially regarding which other government representatives will have the authority to issue a stop work order if the contracting officer becomes unavailable because of a furlough). Having a frequent dialogue with contracting officers as the potential shutdown draws closer will be critical to remaining informed and prepared if the shutdown occurs.
  • Continuance of Work: It is important for contractors to continue performing under their contracts unless and until they receive an official stop work order from the contracting officer. Contractors at federal facilities should continue to have their workforces report until they are turned away and are thus formally prevented from performing their assigned responsibilities.
  • Documentation Is Key: Contractors should document all aspects of their actions and communications with their government counterparts regarding the shutdown. If a contractor anticipates submitting a request for equitable adjustment, it is critical to have sufficient documentation of all incurred costs associated with the stop work order, reassignment of personnel, the restart of contract performance after the shutdown has ended, etc. Failure to provide adequate documentation will make it more difficult to receive reimbursement for the expenses and delays incurred in responding to the shutdown. It is also critical to document, in writing, all communications with contracting officers, other government representatives, subcontractors, and vendors. Doing so could help negate any possible assertion from the agency that the contractor did not follow instructions or failed to mitigate its damages.
  • Mitigation: Contractors should attempt to mitigate any unnecessary delays and expenses in responding to the shutdown. Mitigation efforts could include reassignment of personnel to other contracts or issuing stop work orders to subcontractors and vendors. To the extent a contractor can demonstrate that it sought to mitigate costs, the more likely it is to be reimbursed for its expenses in responding to the shutdown.

On July 27, 2017, the House of Representatives passed H.R. 3219, the Make America Secure Appropriations Act of 2018—also known as the "minibus"—that included funding for four of the twelve annual appropriations bills through FY 2018: Department of Defense (DoD), Military Construction and Veterans Affairs, Energy and Water, and the Legislative Branch. The minibus included $658 billion in funding for DoD from the Defense Appropriations bill—$68.1 billion over the FY 2017 enacted level. The Senate Appropriations Committee has approved six of the twelve annual appropriations bills. At this time, however, the full Congress has not passed, and the President has not signed, a spending bill for FY 2018.

Possible Sequestration

Further complicating the shutdown is the possibility of a sequestration. On August 11, 2017, the Congressional Budget Office (CBO) issued its Sequestration Update Report for August 2017, which determined that, "at this time, no sequestration will be required," based upon the Office of Management and Budget's (OMB) final FY 2017 sequestration report finding that total appropriations for this year were at or below the caps on discretionary budget and the fact that no additional appropriations have been made.

Yet, on August 18, 2017, OMB issued the OMB Sequestration Update Report to the President and Congress for Fiscal Year 2018, which indicated that if, for example, the House minibus bill were to become law, a sequestration would occur, which would result in substantial reductions in DoD appropriations. OMB Director Mick Mulvaney stated:

To date, no 2017 supplemental or 2018 appropriations bills have been enacted into law and, therefore, no changes are reflected to the current 2017 or 2018 caps. If the 2018 discretionary caps remain unchanged, this report estimates that, if enacted, the actions to date by the House of Representatives would result in a sequestration of $72.4 billion in the defense category. The report also finds that action or funding guidance in the Senate, if enacted, would result in a sequestration of $2.0 billion in the defense category and a sequestration of $3.8 billion in the non-defense category under the current 2018 spending limits.

Consequently, if the current spending bills were to become law, there would be cuts to federal spending, especially in the DoD budget.

How Could Sequestration Affect Government Contracting?

A sequestration would certainly impact the way in which federal agencies choose to spend their money, particularly DoD, which OMB predicted would lose $72.4 billion in funding under the House bills. Contractors should consider the following key impacts that sequestration could have on the procurement process:

  • Impact on New Contracts: The most significant impact that sequestration could have on federal contracting would be a decrease in the number of new contracts awarded in FY 2018, as agencies eliminate programs that are not critical to their missions. Sequestration would also potentially impact the types of contracts awarded, as agencies would likely move away from contract vehicles that place the cost risk on the government and its budget.

    For example, agencies would be less likely to use cost-reimbursement and labor-hour contracts, instead favoring firm-fixed-price contracts that provide the government with a greater degree of cost certainty. Indefinite delivery/indefinite quantity contracts would also become a more viable option, as these contract vehicles provide agencies with the ability to negotiate at the task order level. Taking their limited resources into account, agencies could move away from best-value procurements, relying more heavily instead on lowest-price, technically acceptable solutions.

  • Impact on Existing Contracts: Limited funds could also cause agencies to reduce the products or services being purchased on existing contracts. Agencies may choose to "de-scope" the quantity, capability, and breadth of contract performance through deductive change orders, as well as partial and, in some cases, complete contract terminations for convenience. Notably, the government could try to limit reliance on terminations for convenience to avoid or limit the recoveries of terminated contractors.

    Contractors should also expect agencies to restructure their contracts in an effort to defer any possible costs to the future. Such contract restructuring may result in the utilization of term contracts, extension of contract schedules to match funding, and the waiver of existing contractor claims. Finally, contractors could see an increased reluctance on the part of agencies to exercise their option periods, which in turn may cause contract renewal to become a negotiation point for contract pricing.

  • Claims Litigation: Sequestration could bring a greater number of requests for equitable adjustment and certified claims, as contractors seek reimbursement for government-initiated actions impacting their contracts, such as constructive acceleration, stop work orders, government delays, and deductive change orders. In addition, with less work on the foreseeable horizon, contractors may be less likely to accept "scope creep," in the hopes of maintaining the favor of an agency and attracting more work down the road, and instead pursue their claims more aggressively. Conversely, budget cuts may force the government to use litigation as a means to recoup funds from contractors. As compared to the past, where if the contractor prevailed on entitlement the government would likely negotiate a settlement, new fiscal realities could make the government more litigious in this area.
  • Bid Protests: Sequestration would certainly bring an increase in bid protest litigation, as contractors compete for a limited number of contracts, especially in the first year of sequestration. The protests will likely come from incumbents seeking to extend their performance of the contract, as well as offerors who need to receive the award to remain viable with a particular agency, product, or service.

Conclusion

The possibility of a government shutdown and sequestration could have important consequences for federal contractors that are counting on their programs continuing into FY 2018. Contractors should be certain that they are aware of how their particular companies and contracts could be affected and how they can best prepare to place themselves in the most favorable position, both leading up to the potential shutdown and when seeking reimbursement when they begin performing again.