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OMB Mandates that Federal Agencies Reduce Spending by 7 Percent and Cut Use of Cost-Plus Contracts by 10 Percent

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On July 29, 2009 the Office of Management and Budget (OMB) issued direction to Federal agencies entitled "Improving Federal Acquisition."  Despite the innocuous title, the memo directs all Agencies to reduce spending by 3.5 percent in Government Fiscal Year (GFY) 2010 and again in GFY 2011.  The memo further directs Agencies to cut use of "high-risk contracting authorities," such as contracts that are awarded on (i) a noncompetitive basis, or (ii) are either cost-reimbursement, Time & Materials, or Labor-Hour contract types.  Agencies are given discretion as to how to achieve the 7 percent spending cuts (which the OMB estimates will save taxpayers roughly $40 billion); the savings can be generated through ending programs (i.e., terminating contracts for convenience), negotiating more favorable pricing with contractors on existing programs, reengineering internal processes, or by other means.  Less discretion is given to Agencies regarding achievement of the ten percent reduction in use of "high-risk authorities" -- those acquisition methods that pose "special risks of overspending" -- GFY 2010 Agency obligations made via these contracts must be at least ten percent less than GFY 2008 obligations.

What this means for contractors is more pressure to help the Agencies find the cost savings, increased risks of contract termination, and a shifting (once again) of cost containment risk to their side of the negotiating table.  It would seem prudent for contractors to partner with their Agency customers to help find savings, before such savings are imposed on them unilaterally.  Further, contractors would be well-advised to take another hard look at their program execution disciplines, including EVMS, program budget control, and change management.  Finally, companies lower in the program supply chains should expect to feel renewed pressure to do more for less.

The OMB memo is found here.
 

Defense News Reports that DOD is Forecasting a $60 Billion Funding Shortfall, Portending More Program Terminations

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Defense News  reports that DOD's Quadrennial Defense Review (QDR) has identified a $60 billion funding shortfall over the next five years (2011 - 2015).  The forecasted shortfall impacts "essential" military missions and DOD must "free up" the funds by the end of this year in order to avoid impacts. The only way to free up the funds will be to terminate existing "non-essential" programs to pay for the essential ones, and Secretary of Defense Gates has tasked each military service with identifying (by August 2009) their candidates for termination.  

(Note that the forecast assumes flat DOD budgets, which may be optimistic.  If the Obama administration cuts Defense spending, the impacts to existing programs will be larger.)

See the entire story here.
 

Delay in Recovery Act Reporting Tool Gives DOD Contractors a Break

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On July 10, 2009 DOD contractors were given a break via issuance of a "class deviation" from the requirements to report expenditures related to receipt of funds under the American Recovery and Reinvestment Act (ARRA).  The class deviation, issued by Shay Assad (Director, Defense Procurement and Acquisition Policy), informed DOD contractors that they were exempt from the reporting requirements of contract clause FAR 52.204-11 (American Recovery and Reinvestment Act -- Reporting Requirements) for a period of 90 days.  Instead of making their first report regarding how they used the ARRA funds received on July 10th, DOD contractors will now have to make their first report on October 10th.  Mr. Assad attributed the delay to the on-line reporting tool (www.federalreporting.gov
) not being ready as planned.  Mr. Assad reminded DOD contractors, however, that even though ARRA reporting requirements were being delayed, contractors should still maintain the required data.  See Mr. Assad's memo here.
 

DOD Revises DFARS to Limit T&M and Labor Hour Contracts for Commercial Services

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Recently, the DAR Council issued an interim rule, implementing Section 805 of the Fiscal Year 2008 National Defense Authorization Act, revising the Defense Federal Acquisition Regulation Supplement (DFARS) to limit use of T&M and Labor Hour contracts for acquisition of commercial services to the following limited circumstances:

1.  Services in support of a commercial item
2.  Emergency repair services

Any other use of T&M or Labor Hour contracts for acquisition of commercial services by DOD or NASA requires that the agency head approve the action.

Here is the interim rule.
 

DOD Commercial Item Handbook 2.0

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Yesterday DOD released version 2.0 of its Commercial Item Handbook in draft form, seeking comments and input from the public.  The Handbook, initially issued in 2001, provides guidance to DOD Contracting Officers regarding how to acquire commercial items and services. The draft can be viewed here.
 
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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.