Coping with the New Reality By Tom Petruska Contracts Unlimited Inc. Government contractors face a very uncertain future over the forthcoming two to three fiscal years, with sharp reductions in spending on many programs. Programs Will Be Canceled. Some programs that had been previously approved will be canceled, or funding for these programs will be substantially reduced. In the event that such reduction in spending does occur, agencies will have less discretionary spending for products, services and systems, and contractors will be confronted with the problem of deductive changes to their contracts or terminations of their contracts for the convenience of the government. Either condition will present difficulties for government contractors. Reductions or Terminations. If agencies reduce the statement of work or specifications on a contract, or terminate a contract, contractors need to react quickly and efficiently to preserve their rights under the contract. Contractors will need to prepare and submit a Request for Equitable Adjustment (REA) to the contracting officer in response to change orders, or prepare and submit a Termination for Convenience Settlement Proposal to the contracting officer in the event their contract is terminated. Regardless of the type of adjustment requested, the contractor must act quickly and decisively. The FAR imposes time limits on each type of action, and delays by contractors may result in loss of revenue. Controlling Costs. In addition to the foregoing issues, the Department of Defense has issued a new rule regarding contractor business systems as part of their effort to force contractors to reduce costs. If the contractor’s business systems are found to be deficient by the DCAA, as much as 10% of the payments due the contractor may be withheld. The government, in general, is attempting to drive contract costs downward. So contractors should expect increasing pressure applied to them to reduce the costs of their contracts in order to reduce the costs to the government. If your contract is completely or partially terminated for the convenience of the government, not only do you have a limited time to prepare and submit the settlement proposal, your indirect rates will have to be adjusted for the new business over which the indirect costs are allocated, and there may be other issues under the contract that may arise and must be resolved. A contractor’s costs may also be affected by reductions in part of the performance work statement, but they may also be adversely affected by the action of government officials who are representatives of the contracting officer, such as inspectors or engineers, who cause delays, disruptions, acceleration of work, or other similar problems. In any of these conditions, a contractor will need to prepare and submit a REA to the government. The government may “de-scope” the statement of work in the contract; that will cause a reduction in revenue. Subcontractors Have Less Reaction Time. Subcontractors should be aware that the performance of work under their subcontract may also be reduced by a change order from the prime contractor, or their subcontract may be terminated in whole or in part by the prime contractor for its convenience. The prime contractor is passing along the change order or termination it receives from the government. The subcontractor has generally less time to file its REA, claim or termination settlement proposal to the prime contractor so the subcontractor must react very quickly. Therefore, the reality is that contractors should (1) be prepared for a possible loss of contract work and funding, and (2) ensure that adequate evidence and documentation necessary and required to support a claim to the government are in your files and readily available. If not, a claim against the government may fail to your detriment. Be prepared! Tom Petruska is president of Contracts Unlimited. He can be reached at tpetruska@contractsunlimitedinc.com.