We have to ask ourselves what some of the underlying causes of the government shutdown are. Certainly there is the debate about the health care plan, but that is too obvious. The counter argument is all about the budget and about the spiraling federal deficit. Even the argument about the health care is deeply rooted in the budget talks (can the government afford this program?). So, when you combine the effects of Sequestration from earlier this year (which continues into 2014 by the way) with the current squabble over the budget and deficit, will this find its way to the business sector outside of government? My immediate concern today is with the pool of government contractors and whether or not they would be faced not only a crippling reduction of cash flow but possible contract termination. I don't know how many contractors know the process for termination for convenience of a government contract. I will try to summarize that here.
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It is becoming more and more obvious that Sequestration will probably go into effect on March 1st. Both the Republicans and Democrats seem more interested in blaming each other rather than negotiating a solution to help the country. Everything I have read in the last couple of days indicates that everyone in Washington is bracing for Sequestration to go into effect on March 1st. The government did not take this threat seriously until just before Christmas. As we saw in a blog last month, the Defense Department started taking Sequestration seriously at that time and beginning in January they began to announce plans to curtail any new spending, trying to figure out where this was going. As this becomes reality, the Defense Department will have to cancel some existing programs. This means contract terminations. We wrote about the Termination for Convenience clause in a blog last week. I think that will become a term that many contractors will become familiar with in the coming weeks. It is not too early to brace yourself and prepare for this possibility. I would recommend that all contractors evaluate the contracts you have currently with the government, but especially the ones from the Department of Defense. You should objectively look at the contract, where it fits into the government's plan and evaluate as best you can the risks of it being canceled. You may want to contact your Contracting Officer or other contact within the government to try and get a read on what they think of the program you are contracting on. You can't talk to too many people at this point. Call your customer.
There seems to be a lull in spending from the Federal Government. We have noticed some companies that were previously notified of an award are still waiting for the documentation and official start of work. Why is that? Quite simply, the Federal Government is bracing for this "perfect storm" that is brewing. The perfect storm that everyone is talking about is the continuing resolution postponing spending, the pending Sequestration and other factors like the Army's overseas contingency budget shortfall. Combine this with the inability of the two sides of congress to work with each other and there is a lot of uncertainty within the government right now. Not to mention that we will be withdrawing from Afghanistan over the next year so military spending will be reduced from that standpoint as well. Agencies are holding tight and curtailing all but absolutely necessary spending right now.
Topics: Termination for Convenience