Although he has been in office less than a month, President Trump has already started to identify those federal agencies that will potentially be the winners and those that will be the losers under his new administration. While some agencies, like the Department of Defense and the Department of Homeland Security, appear poised to benefit from the new administration, others, like the Department of Energy, the Department of Justice, and the Environmental Protection Agency, will likely find themselves on the short end of the appropriations stick. If your company has contracts with one of the agencies whose funding is likely to be cut over the next four years, there are a number of issues that could arise that your company should be aware of. This article highlights many of the actions that could occur and the steps your company can take to avoid, or at least lessen, their impact.
- Impact on New Contracts: The most significant impact any reduction in funding will likely have on the affected agency will be a decrease in the number of new contracts awarded, as agencies eliminate programs that are not critical to their mission. Reductions in funding may also potentially impact the types of contracts awarded, as agencies move away from contract vehicles that place the cost risk on the government and its budget. For example, agencies may 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 (IDIQ) contracts may become even more prevalent at the affected agencies, as these contract vehicles provide agencies with the ability to negotiate at the task-order level. Taking their limited resources into account, agencies could also turn away from best-value procurements, relying more heavily instead on lowest price, technically acceptable (LPTA) 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 and 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 and the extension of contract schedules to match funding. Finally, contractors could see an increased reluctance on the part of the government to exercise contract option periods, which in turn may cause contract renewal to become a negotiation point for contract pricing.
- Claims Litigation: Reduction in funding at affected agencies could bring a greater number of requests for equitable adjustment (REA) 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 will have to carefully consider how they address issues of "scope creep," whether they want to take a more passive approach simply to maintain the favor of an agency and get more work down the road, or whether it makes more financial sense to pursue their claims more aggressively. Conversely, budget cuts may force the government to use litigation as a means to recoup funds from government contractors.
- Bid Protests: Reductions in funding at the affected agencies could certainly bring an increase in bid protest litigation, as contractors compete for a limited number of contracts, especially in the first years of an agency's budget reductions. The protests will likely come from incumbents seeking to extend their performance of the contract, and offerors who need to receive the award to remain relevant with a particular agency, product or service until they can develop relationships with other agencies.
Increased Inertia: How Should Contractors Prepare for the Effects of Reductions in Funding at Their Client Agencies?
It is difficult to predict when the proposed budget and personnel cuts will occur. Notwithstanding this fact, the possibility that these reductions in funding and staffing are very likely to occur makes it important that government contractors take proactive steps now to address the future impacts of these proposed reductions.
- Watch for "scope creep." As agencies seek to obtain more for less, contractors must ensure that their personnel understand the company's obligations under their contract and notify upper management of any potential scope creep immediately. If it appears that the government has changed the contract, the company must give its personnel prompt notice of the change and take steps to ensure that it captures the costs associated with the changed work.
- Prepare for possible WARN Act implications. As many companies could be forced to significantly reduce personnel in response to the across-the-board federal budget cuts, contractors must also consider the applicability of the Worker Adjustment and Retraining Notification (WARN) Act and its protections. Generally, the WARN Act requires employers with 100 or more employees to provide 60 days' advance written notice to employees prior to the closing of a work site resulting in the loss of 50 or more employees, or mass company layoffs resulting in employment loss for 500 or more employees (or less if accounting for at least 33% of the total workforce). Unlike a sequestration scenario where agencies do not know whether sequestration will occur until the final hour, contractors arguably will be more likely to be able to obtain information regarding the future of a contract or task order. Thus, contractors should familiarize themselves with the WARN Act requirements, and be prepared to quickly notify covered employees if informed that their contracts are subject to termination or reduction, necessitating workforce cutbacks.
- Develop strategies for an increasingly competitive market. It is important that government contractors begin considering new means to attract government contracts and differentiate themselves from their competitors. For example, utilization of unique bidding strategies, such as price sharing, may give contractors an edge when competing for a limited number of contracts.
- Develop strategies to engage policy officials and trade associations. Given that agencies will begin to eliminate programs they deem to be noncritical, contractors should consistently advocate for the importance of the programs their contracts support, through interactions with policy officials and trade associations. On a more micro level, it is crucial for contractors to maintain personal contacts within agencies, within the context of the applicable ethics regulations, in an effort to foster a favorable relationship with the agency and to keep abreast of agency developments impacting their contracts.
- Know your rights in the event of a termination for convenience. Reductions in funding may lead some government agencies to terminate contracts for convenience. While the government has an inherent authority to terminate contracts for convenience, that authority is not unfettered; courts have determined that terminations for convenience are tantamount to contract breaches when they result from bad faith or a clear abuse of discretion. To establish bad faith, contractors don't have to prove the government acted with malice or the specific intent to injure. Courts have found evidence of bad faith in, for example, a "bait and switch" situation where the government contracted for services and specified the contractor had to hire two incumbent personnel, while simultaneously working to hire those individuals as federal employees. Bad faith comes down to whether the government honored its duty of good faith and fair dealing, which is fact-specific.
In some instances, government agencies may ask contractors agreeing to a termination for convenience to sign a bilateral modification including waiver language (e.g., language releasing the agency from any future claims for damages). Contractors need to be on their guard about agreeing to waiver language; as a recent Armed Services Board of Contract Appeals (ASBCA) decision demonstrated, waiver language can preclude the viability of any future claims when the language is plain and unambiguous.
- Prepare yourself for delays in the exercise of options and decisions not to exercise options. When funding is uncertain, government agencies may delay their decisions to exercise options. In order to be effective, an option must be exercised by the time identified in the option clause or, if no time is stated, during the performance period. When a contractor believes that an option exercise is ineffective, it must choose whether to perform the contract as if the option were validly exercised, perform the contract under protest, or refuse performance. While contractors generally cannot recover for the untimely exercise of an option, there are exceptions. For instance, a contractor is entitled to compensation when the delay results in the government's breach of the guaranteed minimum in an IDIQ contract (although the recovery may be limited to the contractor's estimated profit). Furthermore, a contractor may be allowed to recover for the untimely exercise of an option where a modification of the delivery schedule was the direct result of a government-caused delay. A contractor generally has no remedy if the government chooses not to exercise an option, with some limited exceptions (such as a showing of bad faith or abuse of discretion on the government's part).
- Prepare yourself for any decision by the government to cease issuing additional task orders under an IDIQ contract. As spending cuts start to affect agency budgets, agencies may decide to reduce the number of task orders issued under IDIQ contracts. Though agencies are not required to order up to the stated maximum, they are required to fulfill the guaranteed minimum—and since agencies create and record an obligation for the guaranteed minimum at the time of contract execution, they should have no excuse to forbear from issuing task orders in fulfillment of that amount.
- Respond quickly and effectively to stop-work orders. As programs change or funding becomes unavailable, government agencies may issue stop-work orders, which direct contractors to stop all or part of the work on a contract for up to 90 days. Contractors that receive stop-work orders must take steps to ensure that costs incurred after notice is received are kept to a minimum. Furthermore, contractors should do the following things: account for costs during the stop-work period, and keep those costs separate from other account costs; notify all subcontractors that a stop-work order has been issued; adjust any deadlines; and inquire about a possible cancellation or time extension of the stop-work order. Contractors' efforts should be compensated for in the form of an equitable adjustment, which can encompass management costs, idle time and facilities, unabsorbed overhead, additional staff, costs associated with preparing the claim, and so forth.
- Be aware of the danger of working "at risk." If funding dries up, government personnel may encourage contractors to work "at risk." Deciding to work at risk carries no guarantee of reimbursement; any ratification of costs incurred will be subject to the government's determination that funds were available at the time the unauthorized commitment was made. Contractors should be aware that the government cannot encourage companies to continue working in the absence of funds without incurring an Antideficiency Act violation. Companies should check their contracts for the Limitation of Cost or Limitation of Funds clauses, which place an affirmative obligation upon the contractor, not the government, to monitor its costs to ensure that it stays within allotted funding. Under these clauses, the government is not required to fund any overruns. Instead, if the government fails to increase the ceiling allotted under the contract, the contractor must halt performance or continue to work at its own risk, which carries no guarantee of recovery.