Agencies could be liable for certain costs under sequestration

Friday - 9/28/2012, 6:41pm EDT

Agencies will be liable for many of the costs coming from the termination of contracts, including legal fees and employee compensation costs, if sequestration happens Jan. 2 and if vendors do not issue layoff notices this fall.

The Office of Management and Budget issued guidance today detailing what types of costs vendors could charge back to agency customers under the Worker Adjustment and Retraining Notification (WARN) Act.

At the same time, the Defense Department responded to a letter from the National Defense Industrial Association about sequestration, saying it doesn't foresee having to "terminate or significantly modify contracts" if sequestration takes effect.

The OMB guidance and DoD letter are, in part, attempts to alleviate industry fears about having to issue layoff notices to workers 60 days before the cuts are scheduled to go into effect. The WARN Act requires employees to be notified should major layoffs occur.

The Labor Department issued a memo July 30 telling vendors layoff notices were not required under the law.

But some vendors expressed concern over Labor's ruling and discussed the need to issue notices. So far, there has been no reports of a vendor issuing WARN Act letters to employees.

The guidance from OMB Controller Danny Werfel and Office of Federal Procurement Policy Administrator Joe Jordan stated certain costs are allowed to be charged to the government if:

  • Sequestration occurs and an agency terminates or modifies a contract that necessitates that the contractor order a plant closing or mass layoff of a type subject to WARN Act requirements

  • The contractor has followed a course of action consistent with the Labor guidance, then any resulting employee compensation costs for WARN Act liability as determined by the court, as well as attorney's fees and other litigation costs, would qualify as allowable costs and would be covered by the contracting agency, if otherwise reasonable and allowable.
The Obama administration and many lawmakers have repeatedly and vociferously sounded alarm bells about the impact of sequestration and the need for balanced deficit reduction to avoid sequestration.

In its letter to the industry association, obtained by Federal News Radio, Richard Ginman, the director of Defense Procurement and Acquisition Policy, stated DoD will take "a fair and reasonable approach to these situations, and consistent with the Federal Acquisition Regulations, will recognize costs to the extent they are allowable, allocable and reasonable under the circumstances."

Ginman also said DoD will abide by the OMB guidance issued today.

Additionally, Ginman said most DoD contracts are fully funded for the first six months of 2013 because of the continuing resolution President Barack Obama signed into law today. Many current contracts would not be affected by sequestration.

"For contracts in place that are incrementally funded, any action to adjust funding levels would likely occur, if it occurred at all, several months after sequestration," Ginman said. "Further contracting officers will have some latitude to determine reduced funding requirements, and the department will have the ability to reprogram dollars if warranted."

Guidance sparks positive reaction from industry

Industry reacted positively to the memo and DoD letter.

"The memo is consistent with the position the administration has taken for some time," said Alan Chvotkin, executive vice president and counsel for the Professional Services Council, an industry association. "There are no allowable costs prior to a specific contract action. It's fairly narrow in addressing the scope of allowable costs contractors may occur in potential distruptions from sequestration."

Trey Hodgkins, senior vice president for TechAmerica's Global Public Sector, said: "It is a shame that we can't come to resolution about avoiding sequestration and would potentially force the taxpayers to foot the bill for implementation of these cuts in federal contracting. Not only would they have to cover all allowable costs associated with administering the shut down or modification of a contract, but taxpayers would have to foot the legal fees and judgment costs associated with any lawsuits that arose as a result of adherence to the Department of Labor memo on WARN Act compliance."

Chvotkin said none of PSC's members have issued or are preparing notices, but many are researching the impact of sequestration because of state laws and collective bargaining requirements.

An industry source said the OMB memo seems to acknowledge that adherence with the Labor memo is in conflict with WARN Act compliance.

"Why else would they issue guidance specifically stating that if a company followed this administration's guidance about WARN Act compliance, it would have any labor related legal fees and judgments made allowable costs, also?" the source said. "Many companies are worried about that legal obligation and that is motivating them to pursue compliance despite the Labor memo."

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