	Introduction

The federal procurement process (i.e., the process whereby agencies obtain goods and services from the private sector) requires funding. The use of appropriated funds to finance contract performance and/or administration means that federal contracts may be affected by actual or potential funding gaps or shortfalls, such as could arise from a failure to raise the debt limit, budget cuts, or sequestration, all of which have been topics of wide-spread congressional and public interest during recent years. However, as the report concludes, the effects of the exercise of these rights upon contractors and, particularly, upon federal spending on procurement contracts are less clear and generally would depend upon the facts and circumstances of individual cases. Certain standard terms of federal procurement contracts, discussed below, do permit the government to take certain actions that could potentially give rise to liability for breach under the common law of contracts. Prospective Obligations

The government's rights are broadest where prospective contracts, or prospective obligations (i.e., definite commitments to spend appropriated funds) under existing contracts, are concerned. Specifically, these clauses state that 
Except as required by other provisions of this contract, specifically citing and stated to be an exception to this clause—
(1) The Government is not obligated to reimburse the Contractor for costs incurred in excess of (i) the estimated cost specified in the [contract] or, (ii) if this is a cost-sharing contract, the estimated cost to the Government specified in the [contract]; and
(2) The Contractor is not obligated to continue performance under this contract … or otherwise incur costs in excess of the estimated cost specified in the Schedule, until the Contracting Officer (i) notifies the Contractor in writing that the estimated cost has been increased and (ii) provides a revised estimated total cost of performing this contract. This is true even if the contractor and the agency anticipated increasing the amount of funds allotted, or the contractor's incurred costs exceed those originally anticipated. While this general rule would seem to suggest that the government's options to reduce procurement spending are significantly more circumscribed with existing obligations under contracts than with prospective obligations, the government has broad contractual and inherent rights that give it some flexibility in responding to funding gaps, funding shortfalls, and budget cuts (e.g., by reducing the scope of the contract when there are budget cuts, or delaying performance in anticipation of a potential funding gap). In some cases, these rights reflect the type of contract used. In other cases, the contract expressly or impliedly includes terms allowing the government to (1) change the scope of the contract, including the quantity of goods or services purchased under it, (2) delay or accelerate performance of a contract, or (3) terminate a contract, all without incurring liability for breach. In either case, the government may need to compensate the contractor for the changed work, although the basis for and extent of such compensation could vary. Reductions in Scope

Federal procurement contracts generally include changes clauses, which would permit the government to make certain reductions in the scope of the contract (e.g., purchase fewer goods or services than contracted for). However, all variants of the changes clause provide that "[t]he Contracting Officer may, at any time, by written order, … make changes within the general scope of this contract" to certain terms of the contract, such as
the contract specifications, the method or manner of performing the work, any government-furnished property or services to be used in performing the contract, the method of shipping or packing, the place of delivery, the time of performance, for services, and the place of performance, for services. An equitable adjustment is a fair adjustment intended to cover the contractor's costs, as well as profit on the work performed. While one board of contract appeals (i.e., an administrative tribunal established to hear disputes between contractors and the government ) has found that, in the absence of a clause giving government the right to order a suspension of work, the government has the inherent right to do so, the general rule appears to be that in the absence of a contract clause dealing with the suspension of work, the contractor is generally not entitled to compensation for delays unless they are the fault of the government. In addition, the government could potentially avoid liability for certain costs because it acted in its sovereign capacity. Government contracts grant the government the right to terminate its contracts for either default or convenience, but the government has also been found to have an inherent right to terminate contracts for its convenience, regardless of whether the contract provides for this right. When the government does properly exercise its right to cancel a multi-year contract, the contractor is generally paid a "cancellation charge."
When confronted with actual or potential funding gaps, funding shortfalls, or budget cuts, the federal government has a number of options as to prospective and existing procurement contracts. Many of these options arise from contract law and, in particular, certain standard clauses included in federal procurement contracts. Among other things, these clauses may allow the government to (1) unilaterally change certain terms of the contract, such as the specifications or the method and manner of performing the work; (2) delay, suspend, or "stop work" on the contract; and (3) terminate the contract for the government's convenience. However, courts have also found that the government has certain rights because it is the government, regardless of whether the contract provides for these rights. Such rights are commonly described as "inherent rights," and include the right to terminate the contract for convenience and, according to one tribunal, the right to suspend work.
The government's rights are broadest where prospective contracts are concerned. Prospective contractors generally do not have a right to a government contract, and the government, like private persons, is generally free to determine whether to enter a contract to procure goods or services. This is true even if the agency has issued a solicitation for a proposed procurement, and prospective contractors have expended time and money in responding to that solicitation. Agencies have broad discretion in canceling solicitations prior to contract award, and contractors must generally show that cancellation was in bad faith or otherwise unreasonable in order to recover the costs of preparing bids or proposals for canceled solicitations. The exercise of an option is, similarly, a unilateral right of the government.
The extent of the government's rights where existing contracts are concerned depends upon the type of contract (e.g., indefinite-quantity), the nature of the goods or services being procured (e.g., construction), and the facts and circumstances of the case. For example, the terms of indefinite-quantity contracts would generally permit the government to cease ordering goods or services from the contractor once the guaranteed minimum has been ordered. Various changes clauses would similarly permit the government to make certain unilateral reductions, or increases, in the work to be performed under the contract, including the quantity of goods and services provided. Other clauses provide for suspension or delay of work by the government, or permit the government to order the contractor to stop work. In addition, the government may terminate all or part of a contract for its convenience, as well as cancel multi-year contracts. When the government exercises these rights, the contractor could potentially be entitled to an equitable or other adjustment, other compensation, or an extension of time in which to perform. The nature of such recourse varies significantly, however, and in some cases, the government could potentially avoid liability for actions that delayed or increased the costs of the contractor's performance because it acted in its sovereign capacity.
Recent events have prompted significant congressional and public interest in how the government may go about reducing spending on procurement contracts. The prospect of a funding gap and government shutdown in April 2011 was followed by the enactment of legislation (P.L. 112-25) that called for mandatory cuts in federal spending, effective January 2, 2013, if legislation cutting the deficit was not enacted by January 15, 2012. Such legislation was not enacted, and although the mandatory cuts were briefly delayed, sequestration took effect on March 1, 2013. It remains in effect as of this writing. There have also been debates in each of the calendar years 2011, 2012, and 2013 over whether to raise the debt limit.