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Sequestration and its Effect on Federal Construction Spending

The Federal Government’s budget sequestration, which consists of automatic spending cuts enacted to address the on-going budget crisis, went into effect on March 1, 2013.  The spending cuts will be made over the remaining months of fiscal year 2013.  Although the exact effect on various industries and government programs is difficult to accurately forecast, in its report on sequestration the Associated General Contractors of America has estimated that cuts to federal construction spending will exceed $4 billion.  As a result, direct government contractors should expect fewer federal project solicitations and more competitive bidding and pricing over the remainder of this fiscal year, and even into the next fiscal year.  For the most part, sequestration should not significantly impact new project solicitations for transportation infrastructure because the Highway Trust Fund and Airport Improvement Program were excluded from the budget cuts.  With respect to existing federal projects, contractors should be wary of federal agencies possibly seeking to reduce spending through terminating certain contracts for convenience or seeking to modify contracts to limit the scope and costs of a project.  Until Congress and President Obama strike a deal that ends sequestration, government contractors should take time to prepare contingency plans and become familiar with their contractual rights to protect themselves, both financially and legally, in this precarious environment of restricted government spending.