Federal contractors face a year of uncertainty while they wait to learn whether President Obama and Congress will go through with a scheduled trillion-dollar spending cut beginning next year.

“Fasten your seat belts,” said John Cooney, former general counsel of the Office of Management and Budget.

Speaking at a Jan. 17 forum sponsored by the Professional Services Council, Cooney said contractors “are hostages in a showdown between the president and Congress over fundamental decisions on taxing and spending.”

The so-called automatic spending cuts, equally divided between military and domestic programs, were adopted as part of last summer’s deal to raise the federal debt ceiling. Congress’s “supercommittee” could not agree on how to implement the cuts, so they would be applied across the board on eligible discretionary spending programs—although the president has some discretion to move money between line items in the budget.

The cuts are set to begin on Jan. 2, 2013, and continue for nine years. The Congressional Budget Office estimates it would mean a reduction of up to 10% in annual defense spending and 7.8% in non-security discretionary spending.

The reductions will take effect unless Congress and the president agree to cancel or modify them. The issue will be fought out during the presidential and congressional campaigns this fall, and a lame-duck session of Congress after the November elections appears likely to determine whether the cuts go through.

OMB will begin planning soon to implement the cuts, through a process called sequestration, but contracting officers and contractors may not hear the details until the last minute. Cooney said agencies might be instructed to curtail spending as soon as the 2013 fiscal year begins on Oct. 1, in anticipation of sequestration.

Cooney said contractors can expect several impacts:

•Instead of terminating contracts for convenience, which incurs costs, agencies will manage their contracts to reduce the amount of money that is obligated.

•On cost reimbursement contracts, agencies can set a hard cap on spending and tell the contractor to make its “best efforts” to do the work without exceeding that cap.

•On IDIQ contracts, agencies can inform the contractor that only a fixed amount will be obligated for the fiscal year.

•Agencies may be reluctant to exercise options.

•New contracts will be delayed and procurements that can be put off will be put off.

Alan Chvotkin, senior vice president and counsel of the Professional Services Council, recommended this action agenda for contractors.

•Know your existing contracts’ contract type—period of performance, revenue options/ceiling amounts and option periods remaining.

•Ensure that your past performance is the best it can be and that your PPIRS and FAPIIS database references are accurate and most favorable.

•Engage your customers.

•Evaluate agency spending on its priority contracts, even if you aren’t on the contracts.

•Engage the contracting officer, but recognize that he may lack programmatic knowledge.

•Engage the end user, but recognize that he may lack authority to execute.