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:

1.     Do not rely on assurance of future funding

Relying on assurances of future funding from anyone other than the contracting officer can be risky, because they may not bind the government. In Appeal of Dynamics Research Corp., ASBCA No. 57830 (Mar. 26, 2013) [pdf], for example, the contractor continued performing after existing appropriations were exhausted. It did so in part because of assurances from its Technical Point of Contact (TPOC) that future funding was in the approval process and would be made available. The Board held that the contractor could not rely on such assurances because the TPOC did not have authority to assure the contractor that the government would provide future funding. The contract made clear that only the CO could change or modify the contract terms or take action that obligated the government.

2.     Monitor funding and give notice

Contractors should also monitor contract funding levels, be aware of when they will exhaust available funds, and give notice to the CO. This is particularly true where, as in Dynamics Research Corp., the contract contains the Limitation of Government’s Obligation clause (DFARS 252.232-7007) or the Limitation of Funds clause (FAR 52.232-22). The DFARS clause requires the contractor to give 90 days’ advance notice of when the contract work will reach 85 percent of the available funds allotted to the contract. The notice must be in writing, addressed to the CO, and must estimate when 85 percent of the allotted funds will be expended. As the Board in Dynamics Research Corp. explained, simply identifying the amount of available funds remaining is not sufficient. The FAR Limitation of Funds clause has a similar 60-day notice requirement when contract work will exceed 75 percent of funds allotted to the contract.

3.     When the funds stop, the work stops

Several of our previous posts have discussed the Antideficiency Act (ADA) in the context of potential government shutdowns. The ADA generally prohibits contractors from continuing work once available funds have been exhausted. There are, however, some exceptions, which we discuss here and here.  Both the Limitation of Funds clause and the Limitation of Government’s Obligation clause incorporate this prohibition. The FAR clause provides that the contractor is not obligated to continue work once funding is exhausted, while the DFARS clause provides that the contractor is not authorized to continue. These textual differences notwithstanding, the effect of the clauses is the same—once funding levels are exhausted, the contractor should not continue working unless additional funding has been appropriated and allocated to the contract. Like the contractor in Dynamics Research Corp., contractors who continue work after funds are exhausted do so voluntarily and at their own risk.