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Friday, May 31, 2013

Government Procurement in Times of Fiscal Uncertainty

Kate M. Manuel
Legislative Attorney

Erika K. Lunder
Legislative Attorney

When confronted with actual or potential funding gaps, funding shortfalls, or budget cuts, the federal government has a number of options as to prospective and existing procurement contracts. Many of these options arise from contract law and, in particular, certain standard clauses included in federal procurement contracts. Among other things, these clauses may allow the government to (1) unilaterally change certain terms of the contract, such as the specifications or the method and manner of performing the work; (2) delay, suspend, or “stop work” on the contract; and (3) terminate the contract for the government’s convenience. However, courts have also found that the government has certain rights because it is the government, regardless of whether the contract provides for these rights. Such rights are commonly described as “inherent rights,” and include the right to terminate the contract for convenience and, according to one tribunal, the right to suspend work.

The government’s rights are broadest where prospective contracts are concerned. Prospective contractors generally do not have a right to a government contract, and the government, like private persons, is generally free to determine whether to enter a contract to procure goods or services. This is true even if the agency has issued a solicitation for a proposed procurement, and prospective contractors have expended time and money in responding to that solicitation. Agencies have broad discretion in canceling solicitations prior to contract award, and contractors must generally show that cancellation was in bad faith or otherwise unreasonable in order to recover the costs of preparing bids or proposals for canceled solicitations. The exercise of an option is, similarly, a unilateral right of the government.

The extent of the government’s rights where existing contracts are concerned depends upon the type of contract (e.g., indefinite-quantity), the nature of the goods or services being procured (e.g., construction), and the facts and circumstances of the case. For example, the terms of indefinite-quantity contracts would generally permit the government to cease ordering goods or services from the contractor once the guaranteed minimum has been ordered. Various changes clauses would similarly permit the government to make certain unilateral reductions, or increases, in the work to be performed under the contract, including the quantity of goods and services provided. Other clauses provide for suspension or delay of work by the government, or permit the government to order the contractor to stop work. In addition, the government may terminate all or part of a contract for its convenience, as well as cancel multi-year contracts. When the government exercises these rights, the contractor could potentially be entitled to an equitable or other adjustment, other compensation, or an extension of time in which to perform. The nature of such recourse varies significantly, however, and in some cases, the government could potentially avoid liability for actions that delayed or increased the costs of the contractor’s performance because it acted in its sovereign capacity.

Recent events have prompted significant congressional and public interest in how the government may go about reducing spending on procurement contracts. The prospect of a funding gap and government shutdown in April 2011 was followed by the enactment of legislation (P.L. 112-25) that called for mandatory cuts in federal spending, effective January 2, 2013, if legislation cutting the deficit was not enacted by January 15, 2012. Such legislation was not enacted, and although the mandatory cuts were briefly delayed, sequestration took effect on March 1, 2013. It remains in effect as of this writing. There have also been debates in each of the calendar years 2011, 2012, and 2013 over whether to raise the debt limit.

Date of Report: May 9, 2013
Number of Pages: 34
Order Number: R42469
Price: $29.95

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