New guidance discourages agencies from entering into new contracts and encourages cutting back on existing contractsWASHINGTON, Feb. 28, 2013 /PRNewswire-USNewswire/ -- In response to repeated requests from the American Federation of Government Employees, the Office of Management and Budget has supplemented its sequestration guidance to make it less one-sided and more consistent with prohibitions against illegal privatization. Federal agencies spend $300 billion annually on service contracts. Nevertheless, in guidance produced by OMB and the Pentagon, federal employees are singled out disproportionately for cuts. OMB's initial sequestration guidance, released Jan. 14, includes several recommendations for cutting spending on federal employees, including freezing hiring, firing temporary and term federal employees, incentivizing retirement, and planning for extensive furloughs. However, with respect to service contracts, OMB's guidance directed agencies to simply review contracts "to determine where cost savings may be achieved in a manner that is consistent with the applicable terms and conditions, remaining mindful of the manner in which individual contracts ... advance the core mission of the agency." OMB's new guidance, issued Feb. 27, discourages agencies from entering into new contracts or options unless they can be justified. The new guidance also encourages agencies to reduce the costs of current service contracts, using the methods recommended by University of Baltimore Professor Charles Tiefer in his recent and much-discussed paper, "Reducing Spending on Service Contracts in Order to Comply with Sequestration." Implicitly, this new guidance acknowledges that agencies retain significant discretion to retrieve service contract dollars, including those that have already been obligated, contrary to suggestions by service contractors and some senior acquisition executives. This new guidance requires agencies to establish appropriate controls "to prevent the increased use of contractors" to perform work performed by federal employees. It is an important first step toward enforcing longstanding prohibitions against direct conversions.