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SEQUESTRATION BACKGROUND

Budget Cuts and Federal Govt Contractors:  What Is Coming and What Isn‘t, And The Most Significant Federal Government Contracts Cases of 2012. SEQUESTRATION BACKGROUND. Budget Control Act of 2011

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SEQUESTRATION BACKGROUND

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  1. Budget Cuts and Federal Govt Contractors:  What Is Coming and What Isn‘t, AndThe Most Significant Federal Government Contracts Cases of 2012

  2. SEQUESTRATION BACKGROUND Budget Control Act of 2011 – Key Provision – To Decrease Spending Requires Budget Reduction of $1.2 T Between 2013 and 2021: • Requires roughly $984 B of spending cuts in discretionary spending. • Pro-rated evenly over 10 years. • Split that roughly evenly between (defense) and (nondefense + some entitlements). • So each category takes about a $50 B hit in each of the next nine years.

  3. SEQUESTRATION BACKGROUND • OMB 2014 Budget Guidance Calls for 5% reduction in net discretionary budget from 2013 levels • 2012 NDAA § 808 (and June 3, 2012 DoD Guidance) – Limits Services Contracts to 2010 Budget Levels – Negotiation Objectives for DL and OH at 2010 Levels for Contracts > $10M • American Taxpayer Relief Act – Postponed Sequestration until March 1, 2013 – Continued many Bush-Era tax cuts for other than most wealthy – Reduces Overall Potential FY 2013 Sequestration from $109B to $85B(paid for by lowering spending caps in 2013 and 2014 and rule changes for IRAs) – Reduces Potential Defense Sequestration from $55B to $43B (BUT addition $12B will be required because CR level exceeds cap)

  4. SEQUESTRATION BACKGROUND Recent Developments: • Jan 10 DepSecDef Memo direct planning for: – Cutting Supply purchases and IT – Reviewing and Modifying Contracts for Potential Savings – Cancelling/postponing depot-level maintenance • Jan 14 OMB Memo directs: – Preparation for furlough, early retirement/separation, and hiring freezes for government employees • Jan 16 SecArmy Memo directs: – Immediate hiring freeze; termination of temporary employees – Reduction of Base Operations Support spending levels by 30% – Submission of all R&D and Production contract awards and modifications >$500M to DoD for approval

  5. OUTLOOK Possible Impact of Sequestration • Service contracts at risk • Possible inefficiency in award and administration of contracts because of furloughs • Possible terminations and scope reductions • Small businesses and subcontractors may be at particular risk • Possible delay and cancellation of procurements • Delayed Contract Awards and More Aggressive Government Negotiations • Extreme variations from agency to agency

  6. OUTLOOK Other Possible Effects • Increased Threat of Cure/Show Cause Notices and Default Terminations • Increased use of Firm-Fixed Price and FFP/Level of Effort Rather than Time and Materials and other “Flexibly Priced” Contracts • Increased use of LPTA for Services and Items Historically Procured on Best Value Basis • More Frequent funding of Incrementally-Funded Contracts at Reduced Levels • Government Use of “Option to Extend Services” Rather than “Option to Extend Term of Contract” clause

  7. Notable Cases of 2012 from the Courts, Boards and GAO

  8. 2012 GAO: Protest Issues Documentation of Source Selection Decision NikSoft Sys. Corp., B-406179, Feb. 29, 2012, 2012 CPD ¶ 104 (protest sustained where agency failed meaningfully to explain its evaluation of past performance). Clark/Foulger-Pratt JV, B-406627, July 23, 2012, 2012 CPD ¶ 213 (protest sustained where documentation was inadequate to explain increase in awardee’s ratings). Improper Best-Value Tradeoff NikSoft Sys. Corp., B-406179, Feb. 29, 2012, 2012 CPD ¶ 104 (protest sustained where agency failed meaningfully to consider protester’s low price and merely awarded to higher-rated quote). J.R. Conkey & Assoc., Inc., B-406024.4, Aug. 22, 2012, 2012 CPD (protest sustained where tradeoff only conducted using highest-rated proposals. Proper tradeoff decision requires rational explanation of why higher ratings justify price premium).

  9. 2012 COFC: In-Sourcing Dellew Corp. v. United States, 108 Fed. Cl. 357 (2012) • Latest in a succession of cases before COFC challenging agencies’ decisions to hire govt employees to perform functions hitherto performed by contractors. • Judges in previous cases had found, variously, a lack of standing or jurisdiction and that plaintiffs’ claims were moot because their contracts already had expired. • Dellew court found that plaintiff had standing and that the case was not moot, but that the Air Force conducted a rational cost comparison required by 10 U.S.C. § 2463. • Unclear what will happen with in-sourcing cases in the immediate future. Many agencies have instituted hiring freezes as a result of Sequestration.

  10. 2012 GAO: Price Realism Lifecycle Constr. Servs., LLC, B-406907, Sept. 27, 2012, 2012 CPD ¶ 269 (protest sustained where agency unreasonably rejected protester’s proposal as unrealistically low-priced when median price included proposed prices the agency already had determined to be unreasonably high). • GAO held: “Based on our review of the record here, we conclude that the Corps unreasonably rejected Lifecycle's proposal. We reach this conclusion, first, because the median was materially higher than the government estimate due to the inclusion of proposed prices that the agency, itself, determined were unacceptable, ineligible for award, and/or unreasonably high. That is, while the contracting officer and the source selection official assert that the median represented the “fair market pricing,” they also acknowledge that three of the price coefficients used to establish that benchmark were, themselves, unreasonably high...”

  11. 2012 COFC: Scope of Contract Modifications Ceradyne, Inc. v. United States, 103 Fed. Cl. 1 (2012). • Procurement for side body armor plates • Plaintiff argued that modification to intervenor’s contract was improper sole-source award because it was outside the scope of the original award. • Court of Federal Claims relied on the Federal Circuit’s decision in AT&T Comm’ns v. Wiltel, Inc., 1 F.3d 1201 (Fed Cir. 1993) in dismissing complaint. • Contract modification not outside the scope of the original award because it did not substantially change the type of product or service being delivered, the quantity of that product, the performance period and the costs.

  12. 2012 CBCA: Refusal to Exercise Option Sword & Shield Enter. Sec., Inc., CBCA No. 2118, Aug. 22, 2011, 12-1 BCA ¶ 34922. • Appeal of a decision of the CO to not exercise an option to extend appellant's schedule contract. • Recognizing the discretion afforded a CO on an option decision, the Board states: “The Government's decision not to exercise an option can thus provide a vehicle for relief only if the contractor proves that the decision was made in bad faith or was so arbitrary or capricious as to constitute an abuse of discretion.” • Because bad faith was not alleged, the Board concludes: “In sum, the contracting officer had a responsibility to exercise her discretion in this situation and did so appropriately.”

  13. 2012 COFC: Fraud Counterclaim Railway Logistics, Int’l v. United States, 103 Fed. Cl. 252 (2012). • Plaintiff awarded two contracts, valued at $2.5M, to provide materials for the rehabilitation of the Iraqi Republic Railway. Contracts terminated for convenience of the govt after plaintiff had only partially delivered incomplete orders late. Plaintiff submitted certified claim for $6.4M for adjustments and termination expenses. Govt filed fraud counterclaims against contractor based on the testimony of its owner, and others who testified on contractor's behalf. • The court found that Pl “could not support its claim because of fraud and misrepresentation of fact. Every item on the spreadsheet that served as plaintiff's support for its claim was overstated or imaginary. Contents of the spreadsheet alone provide clear and convincing evidence that RLI practiced fraud 'against the US in the proof, statement, establishment, or allowance' of its claim.”

  14. 2012 ASBCA: Executive Compensation J.F. Taylor, Inc., ASBCA Nos. 56105, 56322, Jan. 18, 2012, 12-1 BCA ¶ 34,920. • Appellant challenged finding of unreasonable executive compensation and demanded payment of $589,600. • ASBCA sustained appeal, finding that appellant met its burden of FAR 31-201-3 except for some $42,437. • After discussion of compensation surveys and the analysis done by DCAA, the opinion concludes: “The government made no effort at the hearing or in its brief, to respond to the statistical arguments made by appellant and thus we are left with unrebutted evidence that the methodology used by DCAA was fatally flawed statistically and therefore unreasonable. Moreover, the government effort to support its own methodology was supplanted by an expert witness of questionable judgment.”

  15. Ronald S. Perlman, Esq. Holland & Knight LLP Partner, Government Contracts Practice Group800 17th Street, NW Suite 1100 | Washington DC 20006 Phone 202.419.2420 | Fax 202.955.5564 | Cell 202.302.5445 ronald.perlman@hklaw.com | www.hklaw.com

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