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Budget cuts could lead to costly legal disputes, contractor payouts

Jul. 11, 2012 - 12:08PM   |  
By SARAH CHACKO   |   Comments

The government could be headed for costly legal disputes and contractor payouts as budget cuts force agencies reduce or terminate contracts in the coming year, contract experts said Tuesday.

Contractors are mostly concerned about the impact of automatic budget cuts, called sequestration, that are supposed to take effect Jan. 2. But if Congress wants to avoid those automatic cuts, it still will have to approve an alternate budget reduction plan, said William Roberts, a government contracts lawyer at Wiley Rein who spoke to contractors about the potential impacts of sequestration at a Professional Services Council event.

“The only way we’re going to avoid sequestration is to have the major budget cuts,” Roberts said. “There’s no planning going on to speak of within the government. They’re going to get caught flat-footed and have to deal with what programs to cut, what contracts to partially terminate.”

Without guidance on where agencies should make cuts and by how much, contracting officers will probably have to make quick decisions to change the work required under contracts or terminate them, Roberts said. But government auditors could later find that a contract was not written to allow for those kinds of changes, he said.

Agencies may become stricter in holding contractors to the contract terms, Roberts said.

For example, companies are required to notify contracting officers when 75 percent of a cost-reimbursement contract’s funds are spent so that the agency can decide if there is sufficient funding to complete the work, Roberts said. In the past, contractors might miss the notification deadline but agencies would often find funding if it was needed, he said. But now, “if you give the customer any legal way of saying, ‘You failed to provide proper notice, we’re not going to pay you,’ I think you can reasonably expect much stricter enforcement,” Roberts said.

Budget cuts could also derail administration efforts to use more fixed-price contracts instead of cost-reimbursement contracts, said Alan Chvotkin, PSC’s executive vice president and general counsel.

Under fixed-price contracts, the government pays a set cost for a product or service. Because the contractor bears more risk if there are cost overruns, these contracts often provide sizeable payouts to companies if the contract is ended early.

Cost-reimbursement contracts — where the government pays the contractor for costs incurred — can be more easily adjusted because the scope of work can be changed without rewriting contract terms.

“The irony is the public policy support for greater use of fixed price contracts may end up reducing the agencies’ flexibilities should there be a sequestration,” Chvotkin said.

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