Monday, August 27, 2012


The Center for Strategic and Budgetary Assessments (CSBA), a nonpartisan think tank, has just released its "Analysis of the FY 2013 Defense Budget and Sequestration" report authored by Todd Harrison.  In the report, CSBA points out that the Budget Control Act (BCA) caps apply to budget authority, not to cash outlays.  Budget authority is the amount appropriated, not the amount actually spent.  CSBA demonstrates on page 12 of its report that in FY2013, there will only be a 3.5% reduction in actual outlays of cash for procurement.

"The delay between budget authority and outlays means that while sequestration will result in an immediate cut of 10.3 percent in budget authority, the reduction in outlays will be more gradual."  Cash outlays for RDT&E would be reduced by 5.9% and 6.9% for O&M.  Sequestration would cause overall defense outlays to drop by roughly 4.6% in addition to a 2.5% reduction already expected due to the decline in war-related funding.

"The fact that sequestration acts on budget authority rather than outlays provides some insulation for defense companies because it allows more time for adjustment." Sequestration does not affect funding already obligated.  Finding out how a contract is funded requires some investigation, of course.  However, the Government Accountability Office (GAO) has a detailed instructional treatise on the law relating to all aspects of funding.  Find it at  It's called the "Red Book".

In Todd Harrison's opinion, few layoffs should occur as a result of sequestration going into effect on January 2nd because "virtually all contractors will be working on projects and activities where funding has already been obligated and thus is not subject to sequestration."  He also opines that sequestration will not directly terminate programs.  He refers to the need to renegotiate contracts to buy in smaller quantities.  Here, he falters.

There is no renegotiation clause in government contracts.  Contracts can be bilaterally modified by mutual agreement if the parties can agree.  But this then raises the question of whether the change may be protested and may possibly require reprocurement.  Moreover, a unilateral change can be challenged as a partial termination which permits the contractor to submit a termination claim and to reprice the remaining work.

We applaud CSBA for its report.  However, even viewed in the cash outlay light, sequestration means cuts and cuts mean "renegotiation" which in turn means changes, at least partial terminations, and the likelihood of claims.

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  1. Bill,

    Does this mean that the cuts and layoffs will be coming, but later next year - more aligned with the Sep 30th fiscal year, not Jan 2nd implementation?


    1. Jamie,

      Not necessarily. Nearly everyone is uncertain about what cuts will be made and when. And, CEO's are making their own strategic decisions based on a variety of factors. So, although it would appear the layoffs could be delayed, I have no indication that will be the case.


    2. Well, one thing I've learned from John Stewart at Vantage Economics is that uncertainty is rarely good for the economy:-) Could make for an interesting 2013 for business owners, especially in the government sector!