Legal and Practical Tips for the Latest Sequestration Showdown

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Yogi Berra famously quipped, “It’s déjà vu all over again.”  Federal contractors know the feeling.  After the exhausting run-up to the previous sequestration deadline last December 31st, the issues were largely punted to March 1st.  So here we find ourselves again, on the precipice of sequestration.  As with the last go-around, there is much uncertainty about what will happen and what it will mean.  There is little question, however, that budgets will continue to be constrained and cuts will be made, whether sequestration goes into effect, a “grand bargain” is reached, or the can is kicked further down the road.  Accepting and planning for the legal and practical implications of this new contracting reality is the key to successfully navigating what may be a rocky road ahead.

Our law firm has already seen the ramifications of sequestration in each of our key practice areas.  For government contracting, we have repeatedly told clients that the best defense against sequestration is a good offense:

  • Communicate with government customers and prime contractors, make sure the relationships are strong and that you are on their radar.
  • Review your prime and subcontracts to understand termination and stop-work rights and resolve any open issues on your contracts as quickly as you can.
  • Include no solicitation clauses in your agreements with other contractors so they cannot raid your employees in the event that a program is delayed or shut down.  Also, be sure to understand the data rights provisions in your contracts and take all appropriate steps to protect your proprietary information.
  • Be careful in committing resources too soon to projects that may be vulnerable to delay or cancellation, and adapt your procurement strategies to the increasing use of lowest price, technically acceptable competitions.
  • Make sure your house is in order so you do not give a contracting partner an excuse to terminate you or pay you less.
  • Do not be shy about claims and requests for equitable adjustment when you are being asked to do more or accept less than you bargained for, and if your project is delayed.

For small businesses, it is important to keep in mind that sequestration does not alter the federal government’s statutory requirement to set aside a certain amount of procurement spending for small and disadvantaged firms.  Small business programs may be viewed as easier to cut, but agencies must still find ways to maximize the use of small businesses and comply with the “Rule of Two.”  You may have a viable protest if an agency ignores the small business requirements when issuing or consolidating a procurement.  The Small Business Jobs Act also provides protections for subcontractors that could be utilized if sequestration causes large prime contractors to diminish or terminate subcontracts with small businesses.

Our corporate practice has seen the impact of the budget uncertainty on mergers and acquisitions involving contractors.  Buyers and sellers need to gauge the extent to which their contractual assets are in growth and/or mission critical areas, as this will impact valuation as well as a bank’s willingness to provide financing.  Sellers may need to put more “skin in the game” to get a deal done in this environment.

On the employment side, planning for compliance with layoff notice requirements remains a vexing issue.  Contractors must evaluate their workforce dynamics and ensure employees are aware of their fiduciary obligations to act in the best interest of your company.  Contractors can also utilize non-compete agreements for key personnel, such as persons with security clearances, to mitigate the effects of a delayed or cancelled program.  You also need to try to assess which are your more vulnerable projects and factor that in before making new hiring decisions.

For more information, contact Jon Williams at PilieroMazza PLLC.

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