• Pay attention to subcontractors and team members.With potential partial terminations and deductive changes, prime contractors are apt to face disputes among subcontractors and team members over remaining work share. Contractors who anticipate these scenarios and address them in teaming agreements and subcontracts will be in a better position to resolve such matters favorably. in addition, contractors should be aware that agencies are paying attention to the activities of their subcontractors, vendors, and suppliers, and exercise effective third-party due diligence to ensure that these team members meet expectations.

• Be ready for increased government oversight.Suspensions and debarments of contractors by government agencies reached an all-time high in 2011, with no signs of abating in 2012. It is likely that decreasing budgets and the increasing importance of contract integrity and performance will drive even more aggressive enforcement of Federal Acquisition Regulations in 2013. For its part, the defense Contract Audit Agency (DCAA) has more tools than ever to collect monies from contractors, including the ability to withhold payments if the agency finds a significant deficiency in the contractor’s business systems. Contractors will need to guard against unsupportable payment withholds by DCAA. Finally, the political discourse in 2012 indicated that declining taxpayer tolerance for waste, fraud, and abuse of public funds will continue to drive prosecutorial priorities in 2013 and beyond.
• Assess the opportunities and risks of international markets. With declining U.S. government budgets, many contractors are setting their sights overseas. While foreign governments and international markets present opportunities, contractors should be aware of potential pitfalls associated with international business, including the complexities of complying with export Control Laws and the Foreign Corrupt practices Act, which both the DOJ and SEC are vigorously enforcing.
• Expect a smaller, less-experienced government workforce. Several years of declining growth in the federal workforce, combined with pay freezes and proposals to change federal retirement and benefits, have taken a toll on many agencies’ senior staffs. Among those affected is the federal acquisition workforce, which has been predicting for years that inexperience will wreak havoc with the contracting system. Government contractors have already experienced fallout from a less skilled and experienced public contracting workforce. For example, many have received inappropriately disclosed acquisition-sensitive information from inexperienced agency officials, who increasingly rely on contractors to catch these mistakes and serve as their “internal control.”
• Tend to corporate ethics and compliance programs: you may need them. An already log-jammed legal system is likely to support the trend toward use of settlements and deferred/non-prosecution agreements to resolve both criminal and civil cases involving contractor misconduct. Many agreements will continue to contain ethics and compliance-related provisions, including requirements for remediation in areas of values-based ethics, internal controls, and ethical culture.

To learn more, download the full whitepaper. 

There are several proactive steps government contractors can take to mitigate the risks of budget cuts, improve their competitive posture, and survive the unpredictable environment that has become the “new normal” of government contracting:

• Develop strategies for an increasingly competitive market. It is important for government contractors to consider new ways to make themselves attractive and differentiate themselves from their competitors. Strong ethics and compliance programs, for example, have become a competitive differentiator on government contracts, as agencies can ill afford to deal with ethics and integrity problems in either the bidding or execution phases of mission-critical projects. Regular independent assessments of a contractor’s ethical culture and ethics & compliance programs can help make the case that a company deserves the public trust. in addition, proposals that incorporate ethics assessments, training, and education at the project level provide evidence of commitment to controls and accountability important to government agencies in this new environment.
• Be mindful of “scope creep.” As agencies try to stretch contracting dollars, contractors should verify that their program managers understand the company’s obligations under the contract and remind them to notify upper management of any potential expansion of the contract scope immediately. if it appears that the government has changed the contract, a company must provide prompt notice of the change and take steps to ensure that it captures the costs associated with the new work.
• Submit claims early. When a contractor has legitimate claims against the government, it makes sense to try to resolve them as early in the process as possible. This is especially true when the federal budget is tight; a contract with unresolved or unexplained cost overruns makes an easy target for budget watchdogs. if a contractor can establish—through a request for equitable adjustment or contract claim, for example—that the government bears responsibility for some or all of the cost growth, the agency may reconsider its plan to terminate a program. At minimum, a valid claim can reduce the likelihood that the government will terminate the contract for default rather than for convenience.
• Pay attention to quality and performance. It bears repeating that in a tightening budget environment, the quality of contractor performance will be scrutinized and there will be other companies claiming that they can do a better job. Contractors can help themselves by helping agencies document the results achieved, outcomes realized, and reasons why their activities are mission-essential. Contractors should review performance assessments and seek to promptly correct reports that unduly attribute blame to them for matters beyond their control. Adverse assessments not only affect future business, they can weaken arguments for maintaining current budget levels on existing programs. Contractors should understand the circumstances under which they may challenge performance assessments under the Contract disputes Act.
• Identify opportunities created as government emphasis shifts. There are some areas in which government spending is likely to increase.  For example, the proposed DoD FY 2013 budget increases spending on cyber-defense, intelligence, surveillance, reconnaissance, and space.  With the potential cancellation of multiple major programs, DoD focus may shift to more proven, rapidly deployable, commercial technology.  It is also widely believed that the second term Obama Administration will increase federal spending on infrastructures that were previously delayed or ignored by the states; thus, contractor opportunities may arise in highway and bridge construction, high-speed rail projects, airport redevelopment, and other job-creating projects. 

To learn more, download the full whitepaper. 

If sequestration occurs, the Congressional Budget office estimates defense programs will be cut by 10 percent and non-defense programs will be cut by 8.5 percent in FY 2013. Consequently, contractors should prepare to navigate in an environment of increased competition.

The FY 2012 budget included close to $1 trillion in cuts over 10 years, with $21 billion taking effect last year. The Budget Control Act (BCA) of 2011 requires the federal government to reduce spending by more than an additional $1 trillion by 2021. This amounts to cutting about $109 billion from the budget each year. To accomplish this, the BCA created the Joint select Committee on deficit Reduction (the “super Committee”).

 “Sequestration” was the name given to the mandatory, across-the-board spending cuts (totaling about $1.2 trillion) that would occur automatically should the committee fail to compromise. As we know, there was no grand compromise. Through sequestration, budget cuts would be split equally between defense discretionary spending and non-defense mandatory (entitlement) and discretionary (non-entitlement) spending, without an increase in tax revenue. This represents about $55 billion in cuts from both the defense and non-defense budgets every year.