How Experienced Contractors View Washington’s Budget Skirmishes

Successful contract negotiators appreciate what both sides need to consider their deal a success, and they possess the ability to make bullet-proof agreements that account for future uncertainty.

Nowhere are these skills more important than in the field of federal government contracting, where available dollars and spending priorities change annually, as a result of shifting national and global conditions or a change in which political party holds power.

Contracting with the federal government presents a unique challenge: the government’s objectives and the amount of money available to meet those objectives can, and often do, change from year to year. The risks facing contractors that lack a solid grounding in federal budgeting processes are many, both large and small: frequent contract re-negotiation, loss of profitability, and possible financial ruin.

William Kugel, an adjunct professor of law at the University of Dayton School of Law and a contracting specialist for many years with the U.S. Department of Defense, says that the government wants its contractors to be profitable. Profitable contractors are reliable suppliers. Unfortunately, however, a government project can be waylaid for any number of reasons. 

Technological challenges can drive up research and development costs unexpectedly. The government may exercise its right to reduce the size of its order. And government spending priorities may change during the course of the contract. Long-term contracts are particularly susceptible to shifting political priorities. 

“The history of government contracting is replete with companies that lose hundreds of millions, if not billions of dollars, on badly negotiated and badly defined programs,” Kugel said. “If the government negotiated a contract where most of that risk has been pushed into the industry partner, then that industry partner is going to lose money.”

The Federal Debt Limit

The recent political debate over the federal debt limit is a timely opportunity to examine how the federal budget and spending processes affect contracting on both sides of the negotiating table.

When federal spending outstrips incoming tax revenues, the government must borrow money to make up the difference. The “debt limit” is a congressionally mandated restriction on the amount of money that the government can legally borrow in order to pay for spending that, for the most part, has already occurred. When the government reaches the debt limit, it may not borrow any more money until Congress raises the debt limit again.

Borrowing to help finance government operations is not new; in fact, the federal government has borrowed money to make ends meet since the nation’s founding.

Today, the federal debt is $31.38 trillion. The Office of Management and Budget estimates that interest payments alone on the federal debt will be $395.5 billion, or 6.8% of all federal spending, this year.

Interest payments this large can crowd out spending for worthy current and future government operations.

According to the Pew Research Center, interest payments on the federal debt will exceed by $100 billion the money that the government spends on veterans’ benefits and services. Looking at the debt obligation another way, Pew’s researchers say that interest payments on the federal debt will exceed spending on “elementary and secondary education, disaster relief, agriculture, science and space programs, foreign aid, and natural resources and environmental protection combined.”

It’s easy to see why these numbers command the attention of federal government contractors. Money spent paying down debt could be used to fund current federal programs; in other words, to pay for goods and services from government contractors.

Recently, the federal debt limit debate in Congress – traditionally an anodyne affair that inevitably yields an increase in the debt limit – was politically charged by conservatives who used the threat of government default on its payment obligations as leverage to secure agreements to lower government spending on programs they disfavor.

In fact, spending cuts were obtained during the 2023 debt limit negotiations. Chief among them: $136 billion in cuts to future non-defense discretionary spending and a 1% growth cap on all discretionary spending in 2025 (in reality, a cut in spending when inflation is considered).

Federal spending is inherently subject to political pressure. Debt limit politics aside, there is always debate in Congress over spending priorities. Some types of spending, such as for national defense, is broadly supported and typically well-funded. Other areas of federal interest, such as for health and human services, transportation, or environmental protection, generate more debate and are subject to significant fluctuations in funding from year to year.

Impact on Government Contracting

Cuts in federal spending create financial pressure across all government operations, even on spending for programs already authorized by Congress. That’s because federal agency leaders have the ability to hold back money on contracts that, in their view, are not meeting congressional objectives. When the government is being asked to, in effect, “do more with less,” it disrupts all government spending. Agency leaders often respond to spending pressure by reallocating or clawing back previously authorized spending, directing federal money toward projects they deem most worthy.

This fact of life puts pressure on government contractors to execute on contracts quickly and to demonstrate tangible progress toward the purpose their project was funded.

When money is tight, government contract managers watch closely to see if contractors are delivering. After all, they have other programs that could use the money. From the government’s perspective, it’s better to steer money toward other, more-promising projects than to frivolously spend it on a struggling project.

Government contracting managers often respond to spending pressures by quickly re-negotiating existing contracts with industry partners. If they suddenly find themselves with more money than anticipated (a happy problem), then they will work with industry partners to identify and fund projects that meet congressional and executive objectives. If, on the other hand, a federal agency faces the prospect of less-than-anticipated funding, then all existing contracts will be at risk of re-negotiation and/or de-prioritization.

Clearly, the job of the federal contract specialist is more than negotiating the terms of the contract and managing contract performance. The federal contract specialist also must ensure that authorized funds are being spent in a timely fashion. Because money not spent is always at risk of being diverted to other projects.

Likewise, the job of the government contractor is to understand that the government is reliant on industry to execute contracts in a timely fashion and to be willing to rapidly negotiate (or renegotiate) when spending priorities, or spending levels, change. The longer that a government contract takes to execute, the more it will be subject to pressure from federal spending processes.

Learning Government Contracting at UDSL

The University of Dayton School of Law’s government contracting specialist programs are designed to teach students how to thrive in this dynamic environment. Program instructors, with experience from both the government and the private industry side, give students a solid grounding in federal budgeting and spending processes.

At UDSL, students gain an understanding of four functional areas that they likely did not encounter in their prior educational journey:

• financial management from both the government and industry side;
• contract negotiation with government entities;
• program management for government projects; and
• ethical considerations specific to the government contracting environment.

Students will learn how to negotiate and manage government contracts that generate a profit for the contractor and deliver on federal government policy objectives.

“This program aims to develop contract management specialists and procurement law specialists that can really hammer out an issue,” Kugel said. “We give semester-long dedication to areas such as financial management, program management, and ethics so our students have a holistic understanding of the acquisition environment and what they need to do and know to be better contracting people.”