By George W. Ash
The storm cloud of sequestration hangs over any prediction of federal procurement trends for 2013. While politicians focus on the expiring tax break portion of the fiscal cliff, the Budget Control Act’s (BCA) “doomsday” consequence in failing to reach agreement on balancing federal revenue and expenditures will result in the “sequester” of $1.2 billion of federal spending in 2013, to be equally divided between defense and non-defense agencies. The cuts of this self-inflicted calamity defy logic and are void of any strategy – like cutting off your leg, or maybe more accurately, surgically removing 10 percent of every part of your body, in an effort to lose weight. Even now, the Administration has no plan to implement the cuts, while the President has said he will veto any attempt to delay sequestration that is not part of the required realignment of revenue and spending. We are in for a showdown.
Sequestration will trigger a proportionate cut to every federal “Program, Project or Activity,” with more than 2,500 programs in the Department of Defense (DoD) alone. Since the President has elected to exempt military pay from sequester, DoD spending will be reduced by 9.2 percent, with non-defense agencies cut by 8.4 percent. However, since the federal fiscal year started October 1, the actual cuts, even if implemented immediately on January 2, will require a 12.25 percent reduction in DoD spending for the remainder of the fiscal year, while non-defense agencies will incur an 11.2 percent cut.
The impacts of sequestration are predicted to be horrific – loss of more than 2 million jobs, layoff of 180,000 government employees, and the reduction of U.S. Gross National Product by several percent. If sequestration occurs, the impacts will not be immediate, but as implementation takes place, every government contractor will be affected, and for that matter, every citizen.
Assuming sequestration is avoided or managed, there are several other efforts expected to occur in 2013 that will affect government contractors:
Budget cuts are inevitable, leading to fewer contract opportunities. Because opportunities will decrease, the competition for continuing programs will be fierce. As a result, the number of bid protests filed with the Government Accountability Office will increase, just as they have every year for the past five years.
Price or cost will become a greater determining factor in the award of contracts. It will have greater weight in “best value” procurements and there will be more “low price, technically acceptable” competitions.
Agencies will continue to demand more and more intellectual property (IP) rights in the products they buy, on the assumption that if they own rights in the IP they can create competition and save money in the long run. This strategy ignores the fact some contractors will not deal with the government (as a prime or subcontractor) if they have to lose their IP’s exclusivity; the government cannot afford to buy the IP rights in the first place; and finally, the government does not have an integrated system to track its inventory of IP rights to use the IP in future procurements.
More contractors will face suspension or debarment actions. The volume of these actions, referred to as the “death penalty” for government contractors, have risen steadily – 2,668 in 2009, 4,208 in 2010 and 5,838 in 2011. The number is expected to be even higher in 2012 and there is no reason this trend will not continue as Congress demands greater transparency, mandates more requirements and agencies become less tolerant.
The second Obama Administration will continue its proliferation of regulations, increasing the cost of maintaining an effective compliance program and making it more expensive to sustain a government contract business.
GSA intends to revamp the Federal Supply Schedule it administers, greatly reducing the number of contractors holding a schedule contract, and also making other refinements in an effort to make the schedule more efficient.
There will be greater contractor oversight. This stems from both the Administration as well as Congress implementing more compliance requirements and stiffer “automatic” penalties. Whistleblowers will be encouraged and granted greater protections against retaliatory actions.
In other areas as varied as caps on the reimbursement of contractor executive pay; the elimination of counterfeit parts; prohibiting trafficking in humans; a myriad of small business measures intended to encourage small business contracting while punishing those who falsify their small business status; access to contractors internal audits; and a greater emphasis on “green” energy, contractors will see more demands and oversight, but for the contractor who can successfully adapt to this evolving environment there will be opportunities and rewards.
(George W. Ash, is a partner and chair of the Regulated Industries Department and Government & Public Policy Practice at Foley & Lardner in Detroit.)
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