Sequestration

Sequestration is an automatic budget enforcement mechanism that applies across-the-board percentage cuts to federal discretionary spending accounts when statutory budget caps are breached, reducing available appropriations without targeting any specific program.

What is Sequestration?

Sequestration was established by the Gramm-Rudman-Hollings Deficit Reduction Acts of 1985 and 1987, and its most significant modern application was under the Budget Control Act of 2011 (BCA), which triggered automatic sequestration beginning March 1, 2013 after the "supercommittee" failed to agree on deficit reduction.

How sequestration works:
When congressional appropriations (or spending authority) exceed the spending limits set in statute, the Office of Management and Budget (OMB) calculates the excess and distributes automatic cuts across applicable accounts as a uniform percentage reduction. No program or account is spared (with limited exceptions for mandatory programs, military personnel, and certain other protected accounts).

Impact on federal contracting:

• All discretionary accounts subject to sequestration are reduced by the sequestration percentage.
• Agencies must reduce spending across all programs proportionally, leading to contract cuts, delays, and deferrals.
• No individual program can absorb more or less than its proportional share without violating the automatic nature of sequestration.
• Agencies facing sequestration often defer new contract awards, reduce task order volumes, and seek renegotiation of existing contracts.

The 2013 sequestration resulted in approximately $85 billion in automatic spending cuts split between defense and non-defense discretionary. DoD was cut by approximately 9 percent across accounts, leading to furloughs of civilian employees, training stand-downs, and contract delays.

Why Sequestration matters for government contractors

Sequestration is an indiscriminate budget reduction that affects all programs equally, meaning contractors on high-priority programs suffer the same percentage cuts as those on lower-priority work. Contractors should model sequestration scenarios in their government business planning and understand the termination for convenience and limitation of funds provisions in their contracts that govern government options when budgets are cut.

Example

A government IT services firm holds five task orders under a GWAC totaling $32 million annually. A sequestration order reduces IT discretionary spending by 7.2 percent. The program offices managing each task order must reduce spending proportionally. Three program offices modify their task orders to reduce scope, resulting in a combined $2.3 million reduction in contract value. The contractor must notify its subcontractors of reduced scope and adjust staffing accordingly. Two of the five program offices request six-month delays on planned option exercises while they assess their sequestered budgets.

Frequently Asked Questions

Are military personnel exempt from sequestration?

Certain mandatory spending programs (Social Security, Medicare) and military personnel accounts were exempted from the 2013 sequestration. However, most other defense and non-defense discretionary accounts were subject to cuts. The specific exemptions vary depending on the statutory language of each sequestration order.

Can agencies move funds to avoid sequestration cuts?

Sequestration is applied before reprogramming - agencies cannot avoid sequestration by moving funds between accounts. However, after sequestration is applied, agencies can reprogram within the reduced accounts (subject to thresholds and congressional notification) to direct remaining funds toward their highest priorities.

How is sequestration different from a shutdown?

A government shutdown occurs when no appropriations are enacted and agencies lack legal authority to operate. Sequestration occurs within an enacted appropriation - the money is appropriated, but the automatic reduction cuts the available amount. During a shutdown, the government stops operating; during sequestration, it continues operating at reduced funding levels.

Has sequestration been suspended?

The Budget Control Act's automatic sequestration mechanism has been suspended or overridden multiple times by subsequent legislation (the Bipartisan Budget Acts of 2013, 2015, 2018, etc.) that set new spending caps above sequestration levels. The sequestration mechanism remains in law as a backstop but has been routinely overridden by Congress in budget negotiations.