Savvy contractors to capitalize on 2012 federal spending trends

The government's spending spree during the wars in Iraq and Afghanistan and through the American Recovery and Reinvestment Act of 2009 ("ARRA") have come to an end and contractors are left wondering how the government will allocate its significantly reduced budget for fiscal year 2012. Additionally, contractors remain anxious about how the government's mandated $1.2 trillion in budget cuts over the next 10 years will impact their current long-term contracts and future opportunities. In this tenuous climate, contractors can plan to see the following trends in 2012:

Increased small business contracting

Throughout 2011, the Obama Administration issued policies and regulations to provide small businesses with increased opportunities in federal government contracting and Congress was just as active. In an election year, both parties want to be seen as champions of small business development.

In April 2011, the Small Business Administration issued a rule permitting federal contracting officers to set-aside procurements in certain industries for certified Women-Owned Small Business ("WOSB") concerns. The rule also provides guidelines for the WOSB program aimed towards assisting federal agencies in achieving its 5 percent statutory goal for contracting with WOSB concerns.

In September 2011, the Office of Management and Budget stated that federal agencies should make payments to small businesses within 15 days of receipt of a proper invoice, as opposed to the 30 day payment terms required by the Prompt Payment Act. A rule issued in November 2011 expressly permits agencies to use small business set-aside contracts when placing orders under Multiple Award Schedule ("MAS") contracts. Small businesses may also benefit from two proposed rules issued in October 2011 that increase the penalties for a company's false small business certification and revise small business subcontract reporting requirements for large businesses to ensure that large businesses award subcontracts to small businesses identified in proposals submitted to the government.

Although not specifically aimed at small businesses, the repeal in 2011 of a 2005 law that would have withheld three percent of government payments to contractors for taxes represented a victory for the small business lobby.

We anticipate seeing an increase in small business contracting opportunities. Small businesses should be aware of, and take advantage of, these reforms.

Increased Use of MAS contracts

As a result of mandatory budget cuts, the government will call upon the private sector to invest in the development of new technologies. At the same time, the government will likely capitalize on existing commercial technologies, such as smartphones and solar panels.

General Services Administration ("GSA") MAS contracts provide all federal agencies the ability to purchase commonly used commercial goods and services easily and inexpensively. There are currently over 19,000 vendors with GSA MAS contracts that offer over 11 million types of products and services. Sales under GSA MAS contracts total nearly $40 billion per year.

As of March 2011, GSA MAS contracts are subject to competition requirements. Agencies must provide all schedule contractors offering a proposed good or service with notice and a fair opportunity to submit a proposal. Further, agencies cannot make purchases unless offers are received from at least three qualified offerors, or the contracting officer documents, in writing, why no additional qualified offerors were identified, despite reasonable efforts to do so. Agencies are encouraged to increase their use of GSA MAS contracts and review products and services offered by multiple vendors and not just incumbent contractors.

Contractors with GSA MAS contracts should capitalize on these new opportunities by actively marketing their products to federal agencies and vigilantly monitoring and responding to notices of intent to procure goods/services issued by federal agencies.

Although GSA MAS contracts come with onerous compliance requirements such as most favored customer pricing, price reduction and audit clauses, smart contractors negotiate their contracts to narrowly define the customer sales that would trigger a price reduction, thereby easing their compliance burden and providing pricing flexibility. All GSA MAS contractors must have robust compliance programs to avoid significant penalties.

Increased enforcement actions and suspension/debarment proceedings

In a climate of intense budget cuts, contractors will similarly look to cut costs where possible. They should not, however, cut costs in the area of compliance. As the government's wartime efforts wind down, it will begin analyzing its significant expenditure of funds in Iraq and Afghanistan and under the ARRA by performing post-award audits and investigating allegations of fraud, waste, and abuse. Additionally, as identified by the National Commission on Fiscal Responsibility and Reform, the government may turn to increased fraud enforcement as one way of paying for government programs and reducing the nation's debt.

We saw a substantial increase in the Department of Defense's issuance of suspensions and debarments between fiscal years 2009 and 2010, but civilian agencies such as the Department of Transportation, the GSA and even the Department of Justice have been criticized for failing to take timely and effective suspension and debarment actions. In response to these criticisms, these agencies have dedicated more resources to suspension and debarment actions, which will result in a continued increase in these mechanisms to ensure government contracts are only awarded to "presently responsible" contractors.

All prudent contractors doing business with the federal government must have a compliance program tailored to their business including, but not limited to, a compliance code or handbook, a training program, a compliance officer, and an anonymous reporting mechanism. An effective compliance program not only reduces violations, it also provides a contractor with more favorable treatment if and when a violation occurs.

Conclusion

The government will always spend money on essential goods and services, but contractors that rely on the government to invest in the development of cutting-edge military technology, build federal facilities, or use contractors for services that could be performed internally by the government, will be the first to feel the budget cuts. At the same time, contractors will see increased competition for government necessities. In this climate of budget cuts and heightened enforcement, savvy contractors that take advantage of these reforms will thrive on the opportunities they present.

Published: Tue, Jan 17, 2012

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