Sequestration: What Government Contractors Need To Know

With the 2012 presidential election months away, government agencies and contractors continue to speculate about the possible effects of sequestration. Whether sequestration will actually occur is unknown, as Congressional legislation and presidential approval of alternative deficit reductions could dramatically curb, if not eliminate, the effects of sequestration. If sequestration does occur, however, the Congressional Budget Office estimates that eligible defense programs will be cut by 10% and eligible non-defense programs will be cut by 8.5% in fiscal year 2013. Consequently, contractors should commence preparations for the possibility of drastic cuts in federal spending and position themselves to navigate in an environment of tighter budgets and increased competition.

This client alert provides a background on sequestration, outlines the possible impacts on government contractors and the procurement process, and identifies key steps government contractors can take to prepare for sequestration. Below are the highlights.

What Does Sequestration Mean?

Sequestration is a process in which automatic, indiscriminate across-the-board budget cuts are imposed on government programs to force reductions in spending and meet budgetary goals established by statute. If sequestration does occur, $1.2 trillion in budget cuts will begin on January 2, 2013, and continue through the following nine years (FY 2021).

Generally, sequestration spending cuts are divided equally between eligible defense and non-defense programs. There are, however, some domestic entitlement programs – Social Security, federal retirement programs and Medicaid – that are exempt from sequestration budget cuts. In addition, the Government Accountability Office (GAO) issued a decision on May 21, 2012, extending exemption from sequestration to U.S. Department of Veterans Affairs (VA) spending. In issuing its decision, the GAO determined that the Statutory Pay-As-You-Go Act of 2010 exempted VA spending – with the exception of limited administrative expenses – from the impact of sequestration by overruling language within the Balanced Budget and Emergency Deficit Control Act of 1985, which limited cuts on veterans' medical care to 2%. The GAO decision affirmed an April 2012 opinion by the Office of Management and Budget (OMB) which similarly concluded that sequestration budget cuts do not apply to VA spending. While not exempt from sequestration, other programs are limited to a fixed percentage of cuts; Medicare cuts, for example, are limited to 2%.

It is also important to remember that the Budget Control Act of 2011 provides a means to avoid sequestration if Congress successfully acts to achieve deficit reduction savings that match the anticipated $1.2 trillion in funds that will be subject to sequestration...