With budget cuts in the headlines and an election just around the corner, contractors once again face the threat of reduced funding for their contracts. The sequestration process established in the Budget Control Act of 2011 will impose automatic across-the-board spending cuts of more than $100 billion per year for each of the next ten years, significantly impacting contract expenditures by the Department of Defense and other agencies. As agencies look for ways to pare down their spending, contractors may find themselves hearing that there is not enough money to go around. Fortunately, contractors can take comfort in the fact that a lack of funding does not normally excuse the government’s payment obligations.

The Supreme Court’s decision in Salazar v. Ramah Navajo Chapter, No. 11-551 (U.S. June 18, 2012) addresses this subject. The government sought to avoid its contractual promise to pay the full amount of “contract support costs” to Indian tribes that contracted with the Department of the Interior to provide federally-funded services such as education, health services, and law enforcement. The contracts with the tribes were authorized by the Indian Self-Determination and Education Assistance Act, which requires the Secretary of the Interior to pay the full amount of a tribe’s contract support costs (e.g. auditing costs, workers’ compensation insurance, and start-up costs) subject to the availability of appropriations. But if the contract support costs are not paid, the tribal contractors can pursue money damages under the Contract Disputes Act and obtain payment through the Judgment Fund, which does not have any fiscal year limitations and is not subject to Congressional appropriations.

In its annual approprations to the Bureau of Indian Affairs for fiscal years 1994 to 2001, Congress provided specific “not to exceed” amounts for paying tribal contractors’ support costs that were not sufficient to cover all of the tribal contractors. As a result, the agency paid contract support costs on a uniform pro rata basis until appropriations were exhausted. When the contractors sued for breach of contract, the agency argued that its failure to pay the full amount of contract support costs was excused by the statutory language making government liability “subject to the availability of appropriations.” According to the agency, the government was not liable because Congress had not provided sufficient funds to pay the full amount of contract support costs.

In a 5-4 decision by Justice Sotomayor, the Supreme Court rejected the agency’s view. The Court held that contractors should not have to bear the burden of a funding shortfall in a lump sum appropriation. The “not to exceed” amount provided in the appropriation was more than sufficient to cover the contract support costs for any individual tribal contractor and “it is not reasonable to expect each contractor to know how much of that appropriation remained available for it at any given time.” Contractors need only know that the appropriation is large enough to cover their contract. If it is, the government must honor its obligation to pay:

Contractors are responsible for knowing the size of the pie, not how the agency elects to slice it. Thus, so long as Congress appropriates adequate funds to cover a prospective contract, contractors need not keep track of agencies’ shifting priorities and competing obligations; rather, they may trust that the Government will honor its contractual promises.

The Court’s opinion highlights the long-term financial benefits of holding the government to its promises. If the government can refuse to pay a contractor because it thinks the money is better spent elsewhere, contractors will be less likely to enter into contracts or will do so only at prices that are high enough to compensate for the risk of the government running out on the bill.