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Congress is responsible for authorizing and appropriating monies to be used for the operation of the federal government. Appropriation and authorization bills must be passed each year to cover the yearly budgets for most executive branch programs, projects and activities within agencies. The executive branch then must apportion these funds to agencies' programs, projects and activities. When funds are authorized, appropriated and apportioned, agencies can exercise their authority to expend these funds through contracts and other agreements. The government operates on a fiscal year cycle that runs from October 1 through September 30. When Congress is unable to pass a final budget before the start of a fiscal year, it must pass a continuing resolution to provide continued funding to the agencies.

Right now, the government is operating under a continuing resolution that will carry the government through November 18, 2011. Section 110 of this continuing resolution provides that "This Act shall be implemented so that only the most limited funding action of that permitted in the Act shall be taken in order to provide for continuation of projects and activities." Continuing Appropriations Act, 2012, H.R. 2608, signed by President Obama on October 5, 2011.

In addition, the government borrows funds for various programs until funds are received through taxes or other sources. This summer's debt ceiling issue arose because the Government needed to increase the debt ceiling to continue to borrow needed funds. The Budget Control Act of 2011 established a bipartisan super committee of twelve members of Congress to work together to propose appropriate budget reductions for congressional approval by December 23, 2011. (See Joint Select Committee on Deficit Reduction.) If the debt ceiling issues are not resolved and agreements on budgets for FY 2012 and FY 2013 are not reached, automatic cuts may be made to agencies' budgets, projects and activities.

The lack of an approved budget or continuing resolution to fund an agency's operation could significantly impact your performance of a government contract or subcontract. For example, you may receive notice of contract modification, non-exercise of an option, a stop work order or even a termination for convenience of all or part of your contract. If any of these events occur, you may have options, including an ability to recover some or all of the costs you incur as a result of these actions. In addition, if the government reprocures the exact same thing that it terminated from your contract, there may be a basis for protest.

You can expect that the coming months will be chaotic for federal government contractors and subcontractors. It is imperative that you understand your rights under your contracts so that you can reduce the risk that you will incur significant losses on account of the federal government's budget reductions. Buchanan Ingersoll & Rooney has experience protecting and preserving our clients' rights in times of budgetary uncertainties. If you have any concerns with the impact of the federal budget uncertainties or specific actions being taken on your government contracts, you should contact us. We can work with you to develop strategies to protect your important business interests.