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Federal 2012 Spending Cuts Put Pressure on Contractors

Posted At : January 31, 2012 10:41 AM
| Posted By : Nancy Coffman
Related Categories: Government Contracting

According to General Martin Dempsey, chairman of the Joint Chiefs of Staff, for a trimmed-back Pentagon, resources have become an independent variable. He meant that, as part of the solution to the nation's fiscal crisis, the Department of Defense must choose its spending priorities carefully and control its costs more precisely.

At the same time, the civilian portion of the government is not exactly doing well either, and it is likely to be even more constrained for 2013. Sellers in the federal market should not be surprised that their customers are thinking about costs first. Federal spending on IT, R&D and construction are all flat or down in 2012 relative to 2011.

IT budgets for 2012 are roughly $80 billion. Although they were not reduced substantially from 2011, the government's emphases are changing. Agencies want to rebalance spending, with less going to operations and maintenance and more going to solutions for improved mission delivery.

Budgets are down for construction. The General Services Agency will not start new projects this year. Although military construction is strong, the actual amount to be spent, $117 billion, is down from the request for $182 billion. At Housing and Urban Development, grant and contract spending will be cut in half. Construction-related spending for IT, audiovisual and furniture will be down as well.

Policy initiatives from both the Government Accountability Office and the Office of Management and Budget will affect how agencies spend. Efforts will be made to shift risk to the supply chain. For example, the 2012 Defense Authorization Bill requires contractors to track, and take fiscal responsibility for, counterfeit parts that might turn up in equipment. It leaves in place caps on contractor executive salaries that can be charged back to agencies and extends them to everyone working on a project.

Agencies are also cracking down on poor quality. For example, the Missile Defense Agency recently put out a solicitation for development of ground-based missile development and sustainment that includes a Contractor Accountability for Quality clause that lets the agency cut or totally withhold performance fees for bad parts or failure by a contractor to use best practices.

The Federal Acquisition Regulation Council has written into regulation greater use of firm-fixed-price contracts, which put more risk on the contractor than cost reimbursable and time and materials contracts. It is also supporting a provision in the Duncan Hunter National Defense Authorization Bill of 2009 that requires written determination and justification that use of a chosen interagency contract is the best procurement approach. It also validated an earlier Office of Management and Budget directive against specifying brand names in solicitations to maintain vendor neutrality.

Click here to view the complete Washington Business Journal article.

MCB has been serving government contractors for over 60 years with their business, tax, accounting and compliance needs. Contact an MCB Tax Adviser for your tax and accounting needs at 703.218.3600 or at info@mcb-cpa.com.