Funding Shortfalls (Sequestration & Shutdown)

An agency must use-it or lose-it under a fixed-priced contract.  When an agency makes it impossible to receive a contractor’s service under a fixed-priced contract, it must still pay the full contract price. So long as the contractor is willing to live up to its end of the bargain, the contractor is entitled to payment

The National Defense Authorization Act for Fiscal Year 2016 [pdf], signed into law just before Thanksgiving, authorizes $607 billion for Department of Defense activities in FY 2016. It also implements a number of acquisition reforms intended to enhance the Government’s cybersecurity efforts and streamline the various acquisition regulations.  Here we break down some of the key acquisition provisions:

  • Rapid acquisition authority for cyber attacks. Section 803 of the 2016 NDAA expands the DoD’s ability to employ rapid acquisition procedures established under the 2003 NDAA to enhance its ability to respond to combat emergencies and urgent operational needs. Under Section 803, rapid acquisition procedures may now be used to acquire “needed offensive or defensive cyber capabilities, supplies, and associated support services” to respond to a cyber attack that “has resulted in critical mission failure, the loss of life, property destruction, or economic effects.” The term “cyber attack” is broadly defined as including any “deliberate action to alter, disrupt, deceive, degrade, or destroy computer systems or networks or the information or programs” in those systems. Acquisitions made pursuant to this authority are subject to an aggregate limit of $200 million in each fiscal year.
  • U.S. Cyber Command acquisition authority and liability protection for cybersecurity contractors. In addition to expanding DoD’s rapid acquisition authority to deal with cyber attacks, Section 807 of the NDAA provides new limited acquisition authority for the Commander of the United States Cyber Command (CYBERCOM). The Commander is authorized to procure “cyber operations-peculiar equipment and capabilities,” subject to an annual limit of $75 million for each fiscal year from 2016 through 2021. Section 1647 of the NDAA also requires the evaluation of cyber vulnerabilities of all major DoD weapons systems by the end of 2019. Section 1641 of the NDAA provides enhanced liability protection for reporting cyber incidents for both “cleared” and “operationally critical” contractors, so long as there is no willful misconduct.


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The contractor’s duty to proceed with performance pending the resolution of disputes is a basic concept in the law of government contracts. It is laid out explicitly in FAR 52.233-1(i), the mandatory disputes clause that appears in nearly all federal contracts: “The Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.”

But the duty to proceed has important limits. A contractor is excused from its duty to proceed and may stop work if the government materially breaches its own obligations under the contract.

Breaches occur in many contexts. A cardinal change in the scope of work is a breach that excuses a contractor’s performance. Terminating a contract just to get a lower price is a breach. Refusing to pay for a contractor’s work without an adequate excuse is also a breach.

According to the decision in Kiewit-Turner v. Dep’t of Veteran Affairs, CBCA No. 3450 (Dec. 9, 2014) [pdf], the government breaches the contract by ordering a contractor to continue performance when it is clear that there will be no funds available to pay for the work. The Civilian Board of Contract Appeals recognized Kiewit-Turner‘s right to stop work when the Department of Veteran Affairs failed to provide a design that would have allowed construction to be completed within the budget established by the available appropriations. Despite the general duty to proceed, Kiewit-Turner was not required to continue performance because it was clear that the construction costs would exceed the available funds and the VA refused to seek additional funding or incorporate value engineering changes to reduce the overall construction cost.
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OIG report - Jan 25 2015 - cover snippetEver since the Postal Service “defaulted” on its annual $5.5 billion payment to the U.S. Treasury for retiree pre-funding obligations, it has been assumed that USPS is a pauper agency. But a new white paper issued by the USPS Office of Inspector General concludes that the value of the Postal Service’s real estate holdings, and

Submitted by Russell Orban

The Consolidated Appropriations Act, 2014, Public Law No. 113-76 (Jan. 17, 2014) funds the federal government until September 30, 2014. This legislation followed the groundbreaking Bipartisan Budget Act of 2013, Public Law No. 113-67 (Dec. 26, 2013). Together, these laws reflect a significant departure from the recent past. Normally, the budget agreement sets the boundaries for federal government spending in the upcoming fiscal year and the details are then supplied by the Appropriations Committees. The Bipartisan Budget Act set levels for both FY2014 and FY2015—the period from October 1, 2013 to September 30, 2015. This gives Congress a head start on its spending process for FY2015 and will postpone budget-deficit skirmishes until after the next election. Many important things remain undecided, but it is encouraging that Congress has found some common ground.

During the budget process, the House and Senate decide how much the federal government will spend in an upcoming year. Targets are based on Presidential requests and Congressional committees’ advice about agency needs. Allocations are made to each appropriation subcommittee, and Congress has four or five months to agree on how to spend the allotted money. The President’s role in the process comes from his power to veto appropriations bills.

Without a budget, no appropriations guidelines were set and gridlock ensued. Disagreements over spending cuts, raising revenues and allocating money resulted in stalemate, automatic sequestration cuts, and a government shutdown.

Since that time, both sides have worked out a compromise that spends less than the President requested but more than what originally passed. Here are some thoughts on what the two laws do and what they don’t do:

What the Budget Act and the Consolidated Appropriations Act do—

  • Prevent another government shutdown. By passing a bill that prescribes spending amounts for the rest of the fiscal year, Congress avoided another shutdown in January.
  • Meet budget targets. The Bipartisan Budget Act set a discretionary spending ceiling of $1. 012 trillion for 2014, and the Consolidated Appropriations Act met that goal. This is $191 billion less that the President requested, but it marks the fourth straight year of reduced government spending. That has not happened for over 60 years.
  • Set spending levels for two years. The Budget Agreement makes it possible for the Appropriations Committees to get an early start on 2015 spending priorities and (hopefully) work out differences ahead of time. Setting budget targets moves the endless budget deficit debate off center stage.
  • Reduce the impact of “sequestration.” Republicans and Democrats agree that sequestration is arbitrary and wasteful. The Budget Agreement reduces sequestration in 2014 and 2015 by $63 billion, postpones portions of those cuts, and finds ways to “pay for” any increased spending. The legislation reflects agencies’ latest priorities with flexibility to make intelligent reductions instead of blind, across-the-board cuts.


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It should come as no surprise that the contracting policy changes in the National Defense Authorization Act for 2014 [pdf] reflect a continued focus on reducing spending. But they also encourage collaboration between the government and the private sector and emphasize the need for innovative contracting strategies and greater flexibility in the procurement process, which may benefit contractors in the long run. Here is a breakdown of a few of the highlights:

  • Extension of restrictions on contractor services spending. Section 802 of the 2014 NDAA amends Section 808 of the 2012 NDAA to extend the temporary limit on the amounts obligated for DOD spending on contract services in FY 2014 to the amount requested for contract services in the President’s budget for FY 2010. It also requires that the heads of each Defense Agency continue the 10-percent-per-fiscal-year reductions in spending for staff augmentation contracts and contracts for inherently governmental function for FY 2014, and requires that any unimplemented amounts of the 10 percent reductions for FY 2012 and FY 2013 be implemented in FY 2014.
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Let’s put the politics of the 2013 government shutdown aside and look at the practical questions. Like the government employees that are affected, contractors want to know if they should come to work. And if they do come to work, will they get paid? Will the options be exercised? Will their contract be terminated for

Flight delays resulting from the furloughs of air traffic controllers are certainly not the only impact of sequestration. All federal contractors and grant recipients will have to adapt to reduced federal spending. According to the OMB report to Congress on sequestration reductions for FY 2014, $109 billion will be cut from the federal budget next year with equal reductions of approximately $54.7 billion in the defense and non-defense categories. Discretionary defense spending will see a $53.9 billion reduction, while direct defense spending will be reduced by $749 million. Non-defense discretionary spending will decrease by $37.2 billion, and non-defense direct spending will shrink by $17.5 billion, $11.2 billion of which will come from reductions in Medicare spending.

As agencies struggle with these mandatory budget cuts imposed by sequestration, incrementally funded contracts are particularly vulnerable. Despite the apparent need for their goods or services and the high caliber of their work, contractors holding incrementally funded contracts may find that funds are simply not available. Here are three strategies contractors can take to limit the risk of performing without compensation:


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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.

Line in the Sand

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.


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