Winds of Change: IT Contractors Should Prepare for Uncertainty

 The Trump administration promises to be a boon to IT contractors:  the President has vowed to strengthen the country’s cybersecurity defenses, which almost certainly will require significant software and hardware investments, and he has championed an ambitious infrastructure plan that will rely on new technologies to update our national transportation systems.  As stated in the video below, President Trump will increase IT spending allowing it to operate more like a commercial enterprise.

All this bodes well, but there are reasons for contractors to be cautious. Since his election, President Trump has also emerged as negotiator-in-chief.  For government contractors, the consequences could be grave—for it appears a single tweet can put contractors on their heels and sink their stock prices.

To date, the President’s Twitter targets in the contracting community have focused on defense firms with high-profile programs, but it is possible the President could similarly insert himself in all manner of contracting, including IT spending.  For better or worse, the specter of presidential involvement adds some amount of uncertainty to the contracting process.

In this new era, contractors must keep in mind the limits of executive power in the federal contracting process. Government contracts are, first and foremost, governed by a complex and voluminous set of statutes and regulations – including the Federal Acquisition Regulations (FAR), which cannot readily be undone by Executive Order.  They are a complex and interrelated array of requirements that affect social and fiscal policy in a manner unlike anything comparable in commercial contracting.  In turn, numerous agencies have their own procurement regulations supplementing the FAR, and those too are unlikely to be modified significantly if at all by the President.  The large contracts that are a product of our regulatory regime are evaluated and negotiated over many months and involve multiple steps and many agency constituents.  Furthermore, the practical and sole legal power of negotiating for the government rests with a contracting officer, who will be either unlikely or unable, because of the law, to be swayed by the comments of the President.  In short, it is the contracting officer who holds a contracting “warrant,” not the President.

That said, presidents can—and have—shaped federal contracting through executive order.  For example, President Obama required that contractors adhere to certain practices in hiring.  President Trump, however, is unlike his predecessors in that he is taking an interest in specific contracts and their constituent business terms.

Warrant or not, President Trump could theoretically direct that a contract be terminated through its termination for convenience clause, although this would have to be done via the contracting officer, who is supposed to make such decisions independently, but whose discretion in practice is so broad as to give the contracting officer virtually unreviewable authority.  As seasoned contractors know, in every government contract there is a termination for convenience clause that allows the government to escape contracts for just about any reason save for bad faith, which is well-nigh impossible to prove. It’s a unique feature that is rarely found in private contracts.

Of course, using this power comes at a cost.  If the government terminates a contract for convenience it still is responsible for the costs the contractor has incurred in performance of a contract, as well as the contractor’s costs of winding up the work.  Those costs are often substantial.

Ultimately, canceling contracts may not even be the President’s aim.  It could be President Trump simply wants to use his bully pulpit to ensure that taxpayer dollars are not wasted, and that the government is getting the best deal possible.  Occasionally striking fear into companies with tweets may just be his preferred method of ensuring that this happens.  The President recently claimed he helped shave $600 million from the F-35 fighter program.  Perhaps consequently, Lockheed’s stock price traded down on the day of the announcement.

The Lockheed episode may encourage the President to deepen his involvement in contracts and programs.  It should also send a warning to publicly traded government contractors that the President’s practical powers may greatly outweigh his legal authority.

Now, more than ever, contractors should follow the rules laid out in the FAR and the agency supplements.  Contract negotiations and modifications should be scrupulously documented.  Government contracts can, and often do, run for far longer than a presidential term, and litigation surrounding these contracts often occurs years after a contract is terminated.  This being the case, creating a clear record of following the rules will benefit any contractor in the long run.