Government Contracts Monitor

Sequestration Part III – Contracts Are Not Only Harder to Win and Keep, but Harder to Perform

December 10, 2012

By: Eric Whytsell

In addition to causing the impacts on winning awards and maintaining contract scope discussed in our previous article, sequestration promises to make contract performance substantially more difficult for government contractors.  This doesn’t mean that sequestration will add to the requirements with which contractors have to comply.  It just means that sequestration will give contractors more reason than ever to comply with all contract requirements.

Regulation and oversight of government contractors continues to trend upward and shows no sign of falling off any time soon.  So contractors will continue to face substantial compliance challenges.  After sequestration, however, lack of compliance will potentially have much greater impact.

First, government contractors should expect to see agencies use heightened enforcement of contract requirements as a tool to reduce net payments.  For example, the Department of Defense’s contractor business system rule provides for the withholding of 5% of payments in the event significant deficiencies are found in a required business system.  See DFARS 252.242-7005(d).  Similarly, FAR 52.219-16 imposes liquidated damages in the event a contractor fails to make a good faith effort to comply with its subcontracting plan.

Deficiency findings can also lead to a variety of government claims, ranging from attempts to recover past contract payments to assertions of civil or criminal fraud.  Such findings can also serve as the basis for a default termination.  Faced with fewer dollars overall to achieve their mission objectives, some agencies may come to view compliance as a potential means of recovering funds already paid and/or avoiding termination for convenience settlement costs as their procurement strategy changes.

Even if it does not result in withholding or payment of damages, such a sustained focus on enforcement will certainly require contractors to spend more to ensure compliance and respond effectively to government inquiries.

Overall, this means that even successful contractors that manage to keep the work they already have and/or win new awards will be performing riskier contracts with lower margins.  Succeeding in this “new world order” will require hard work and creativity on the part of contractors.

Next:  Preparing for the worst.

 

Eric Whytsell is the attorney responsible for the content of this article.