The government contracting community is concerned about the repercussions of the failure of the Joint Select Committee on Deficit Reduction (aka "the Super Committee") to reach an agreement before the November 23rd deadline. In light of this failure, the question of the day is what happens now on deficit reduction and what impact this will have on government contractors.

The Budget Control Act of 2011 provides a mechanism for automatic budget cuts that will go into effect if the Super Committee fails to reach an agreement. This process, known as sequestration, provides for automatic across-the-board cuts to government spending. Under sequestration, federal spending will be decreased by $1.2 trillion over 10 years. Beginning on January 2, 2013, there would be $109.3 billion in spending cuts each year for 10 years. With some notable exceptions, $54.7 billion per year would come from reductions in defense spending and an equal amount would come from reductions in other government spending.

For contractors seeking to quantify and reduce the uncertainty resulting from the impending cuts, two factors are worthy of consideration. First, the automatic cuts imposed by the Budget Control Act are a relatively small percentage of overall federal spending. According to the Office of Management and Budget's historical expenditures table [pdf], 2011 federal expenditures were approximately $3.8 trillion. According to USASpending.gov, federal spending on contracts was $457.6 billion, while federal grant spending was $541.7 billion.

Second, the automatic cuts specified in the Budget Control Act will not go into effect until January 1, 2013. With more than a year before that deadline and a Presidential election in the interim, there is a significant possibility that Congress will seek to modify, delay, or eliminate the cuts before they go into effect. Although the Obama Administration may seek to avoid any such changes, some members of Congress will likely seek to reduce cuts in defense spending.