Pending and highly potential spending cuts in the defense budget are looming. Sequestration is the term of the times. Sequestration – the automatic, indiscriminate reduction of budgeted funds to levels required by the Budget Control Act of 2011 – will occur on January 2, 2013. Shortly after the President issued an Executive Order on July 31, 2012 that exempts military troops from the effect of sequestration, Congress passed the Sequestration Transparency Act of 2012 which requires the Office of Management and Budget (OMB) to prepare a plan for the reduction of spending of both discretionary appropriations and direct spending.
Sequestration will impact the loss of jobs in the Federal Government and Government contractors. It’s not just the large companies that will experience the results of $54.7 billion in the next fiscal year. These cuts will have a cascading affect on all companies including subcontractors. No doubt this will affect all Government contractors as the impact of the budget cuts will flow throughout all Government – not just military. You can’t just wring your hands over this. You must be prepared. Many agencies have already begun planning for sequestration and Federal Contractors would be wise to do the same. Being proactive means preparing sensibly.
Aside from the potential for layoffs, you do have the practical side of getting your organization ready when the budget cuts impact your contracts. How will those budget cuts come to you? One way is in the form of modifications to your contracts through the exercise of the termination for convenience clause that is in your contract. The other is also a contract modification that will apply the stop work order clause that is also in your contract.
What you can do to get prepared for Government budget cuts is to ensure you have the following three big considerations in place or ready to be put in place.
1.Be sure you have adequate contract and cost accounting policies and procedures.
Your company contracts and cost accounting policies and procedures should address how you handle such terminations for convenience and stop work orders. This is listed as the first action item because if you don’t have both of these policies and procedures, you have no plan or process for handling them. The contracts policies and procedures ought to deal with the contractual side which involves notices to subcontractors and actions related to responding to the exercise of either clause. The cost accounting policies and procedures must address what you do to set up proper accounts and prepare the claims.
2.Know your contracts and what clauses they contain.
Read your contracts. It sounds simple but it is so true that we don’t read the contract details until we are pushed to do so. Become familiar with what 52.242-15 Stop Work Order clause says and means as well as the Termination for Convenience clauses you have in your contracts which can range from 52.249-1 through 52.249-4. If you have a short form termination for convenience clause in your contract, you are limited from termination settlement charges to just services rendered to the Government. If you don’t have a short form termination for convenience clause, then you do have latitude in claiming reasonable costs for settlement of the work. Know which clauses you have, read what is contained in these clauses and get assistance with interpreting them.
3.Immediately create direct and indirect cost accounts for the action and document your activities.
This may be one the most important steps you can take when you get notice of a stop work order or termination for convenience. Create those cost accounts for direct and indirect type expenses immediately. Give notice to those employees, subcontractors, and outside consultants who are touching anything related to stop work or terminated contract/task, that new accounts are set up specifically for their effort. You must identify and collect all direct costs for the stop work or termination effort separately from your normal contract direct costs. This seems apparent to some, but there are more accounts that apply in these situations then you ordinarily would find. What generally flys beneath the radar for most contractors are the indirect type costs which, in the case of a stop work order or termination for convenience, many of them become a direct cost! So those costs which are typically indirect costs for most other circumstances may become direct costs for your contract stop work orders and terminations for convenience. Those costs may include such typical indirect cost items as professional and consultant, employee separation, and bid preparation.
Make sure you keep track of all of your contract related activities with full documentation of time, personnel, outside support, travel and conversations/email/written materials. This documentation will be important in substantiating your claim for the recovery of expended costs, both direct and indirect. Gather your documentation from the onset of the stop work or termination notice and you stand a better chance of full recovery of all of your costs.
It’s clear that the uncertainty of the future means you need to be prepared. While none of us looks forward to a stop work order or termination for convenience. If you are prepared with these three steps already, you will be way ahead of the curve in making your claim proposals quicker. That spells cost recovery sooner. We all need that.
About the Author
Marsha Lindquist, President of Granite Leadership Strategies, Inc., has over 30 years experience as a business expert in Government contracting She has enhanced her clients’ cost competitiveness, improved their contractual positioning, and solidified overall strategies with companies including BP Amoco, DynCorp, and Northrop Grumman. Marsha adds value by telling you what you need to hear. For more information on her, please visit: www.GraniteLeadershipStrategies.com or email her: Marsha@GraniteLeadershipStrategies.com
For more on sequestration, be on the lookout for our multi-part sequestration series beginning next week!
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