WASHINGTONPOST
FEBRUARY 13, 2013
Continued uncertainties surround sequestration
By Vincent J. Napoleon and Tiana M. Butcher
In his recent State of the Union address, President Obama urged Congress to adopt an alternative to
the sequestration cuts scheduled to take effect on March 1, 2013. Although Republicans and
Democrats in Congress have previously offered proposals to avert the cuts, the parties remain
deadlocked over whether the sequestration cuts should be replaced by a plan that involves strictly
cost-cutting measures or a plan that involves new tax revenue as well as cost-cutting measures. Due
to the deadlock, many members of Congress suggest that sequestration is inevitable and some
members even perceive the cuts as the only real way to reduce the deficit. In addition to
sequestration, agencies are further limited by the threat of future budget cuts. Agencies have
developed plans to dramatically cut costs and the Department of Defense has even begun to
implement cost reduction measures. Regardless of what happens on March 1, one thing is certain—
federal reductions in spending are imminent.
What is sequestration?
Sequestration is the automatic cancellation of spending across the federal government to enforce
budget policy goals. It was first authorized by the Gramm-Rudman-Hollings Balanced Budget and
Emergency Deficit Control Act of 1985 (“Gramm-Rudman-Hollings Act”) and was included in the
Budget Control Act of 2011 (the “Budget Control Act”). Much like the Gramm-Rudman-Hollings
Act, the Budget Control Act includes a provision that calls for a series of automatic spending
reductions, which were originally scheduled to be triggered on January 2, 2013, but have been delayed
by the American Taxpayer Relief Act of 2012, and will take effect on March 1, 2013.
Sequestration cuts under the Budget Control Act, which are set to occur on March 1, 2013, will be
divided equally between the Department of Defense and other federal spending. Originally $109
billion was subject to automatic cuts in fiscal year 2013. The American Taxpayer Relief Act reduced
the amount subject to automatic cuts by $24 billion. However, the extension also reduced the
amount of time agencies will have to implement the cuts. The potential cuts, coupled with the likely
decrease in budget allocations from the 2013 levels, have agency officials, contractors, and the
economy poised for a dramatic reduction in government spending. The automatic trigger of
sequestration may be far from ideal but, given the inability of Congress to reach an agreement on
spending reductions, it is increasingly likely that sequestration will occur.
Many agencies are preparing for sequestration and other reductions in spending and are expected to
announce their sequestration plans in the coming days. For example, the Department of Defense is
at risk of being forced to impose $49 billion in cuts from its anticipated 2013 spending. Defense
Secretary Leon Panetta recently warned that cuts to the Defense Department triggered by
sequestration would pose the “most serious readiness crisis” to the country in over a decade. The
Department of Defense expects that cuts in spending would result in furloughs for the military’s
800,000 civilian workers, hiring freezes, and significant reductions in training. A February 6, 2013,
USA Today article highlights plans proposed by the military services in preparation for sequestration.
Among other things, the Army anticipates that the sequestration cuts will require a decrease in
funding for intelligence aircraft, surveillance aircraft, and new soldier equipment. The Air Force plans
would include cuts in support to more than 30 weapons systems and spending on aircraft
maintenance by one-third. The Navy would decrease the number of flying hours for its warplanes on
aircraft carriers in the Middle East by over fifty percent. The deployment of a naval aircraft carrier
scheduled to leave for the Persian Gulf this week has already been cancelled. In addition, the
department likely would defer or reduce maintenance and repairs to military facilities, aircraft, and
other equipment and renegotiate many existing contracts in addition to significantly reducing funds
for new contracts.
The White House recently issued a fact sheet highlighting examples of how the sequester would
impact middle-class families, jobs, and economic security. The fact sheet noted that, among other
things, sequestration would result in a cut of up to $902 million in Small Business Administration
loan guarantees; a reduction of nearly 1,000 research grants and awards by the National Science
Foundation; and the possible loss of 10,000 teaching jobs, funding for 70,000 children on Head Start,
and 7,200 special education teachers and staff. Experts suggest that the sequestration cuts impact
every industry and would have broad implications on the overall economy.
Certain programs are exempt from sequestration cuts. These include programs administered by the
Department of Veterans Affairs, Social Security, Medicaid, refundable tax credits to individuals, and
certain low-income programs (such as the Children’s Health Insurance Program, Supplemental
Nutrition Assistance Program, Temporary Assistance for Needy Families, and Supplemental Security
Income). However, administrative expenses related to these programs are subject to sequestration.
Non-exempt programs will face reductions across every program, project, and activity. This acrossthe-board application limits OMB’s discretion to redirect cuts away from sensitive programs.
What does sequestration mean for contractors?
Sequestration reduces the legal authority of agencies to obligate new federal funds to projects. This
means that there will be fewer new contracts and significantly greater competition. A decrease in
spending means that any future solicitations will be limited and focused on fundamental agency
missions. Contracting officers are likely to favor contractors with strong performance ratings and an
ability to do “more with less.” Contracting officers are also likely to favor fixed price or IDIQ
contracts, shifting the burden of the inherent risks of such contracts to the contractor.
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As a general matter, contracts for which funds have already been obligated would be safe. However,
many may now be at risk if the government exercises its right to terminate a contract for convenience
or make changes to the contract to meet its cost-cutting burden under sequestration. In addition, the
government may reduce the allocation of funds for ongoing multi-year contracts or not exercise
options to renew existing contracts.
Contractors responding to cost-cutting measures should be mindful of how these events may trigger
other compliance obligations. For example, as the market for contractor goods and services shrinks
in the United States, contractors may consider opportunities in other markets. However, contractors
interested in expanding into international markets must be aware of export control rules and Foreign
Corrupt Practices Act requirements. In addition, a contractor facing a significant decline in business
may be forced to consider reducing its workforce. A company must be familiar with federal and state
WARN Act requirements in the event that such reductions in force becomes necessary.
In the wind of sequestration, there is a difficult business environment on the horizon for government
contractors. Keeping the lines of communication open so that contracting officers can share
concerns and contractors can offer realistic but cost-effective solutions will benefit both parties as
they navigate this new territory of budget uncertainty.
If you have any questions, please contact your Nixon Peabody attorney or:

Vincent J. Napoleon at (202) 585-8379 or [email protected]

Tiana M. Butcher at (202) 585-8359 or [email protected]

Louis E. Dolan, Jr. at (202) 585-8818 or [email protected]

D. Grayson Yeargin at (202) 585-8273 or [email protected]
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