More Light at Furlough's End?

Contract language could help contractors recoup revenues lost during the federal government shutdown

P> Government contractors may be able to recoup part of the overhead costs they incurred as a result of the federal government shutdown. But not all contracting specialists agree with this conclusion -- and others wonder whether recouping those costs is even worth the effort.

"Contractors are not expected to shut down during this unusual period. They need to be prepared to put their direct labor people back to work, and they have administrative staff and executives who must keep the company running during a shutdown, such as this one," commented Larry A. Davis, director of government contractor services at Aronson, Fetridge and Weigle, an accounting and management consulting company in Bethesda, Md. "Contractors shouldn't be adversely affected by the government's arbitrary actions."

According to Davis, government contractors can recover the increased overhead costs from the work stoppages. Many contractors furloughed employees working on government contracts during the shutdown -- reducing the company's overhead -- but still had to pay other fixed costs, such as rent, fringe benefits and administrative staff salaries. Davis said the Federal Acquisition Regulations provide for recovery of the increased overhead costs that the income from contracts normally would cover, but under the stop-work order clause, the contractor must assert its right to an adjustment within 30 days after the end of the period of work stoppage.

But not everyone agreed with Davis' assessment of the rule. The Information Technology Association of America in Arlington, Va., has told its 6,700 members that legislative action will be needed for the government to pay for contractors' overhead incurred during the shutdown, according to Olga Grkavac, vice president.

The ITAA's legal counsel, Bruce Shirk of Seyfarth, Shaw, Fairweather and Geraldson in Washington, D.C., said that in many cases, the government will contend that it acted during the shutdown in its sovereign -- rather than contracting -- capacity. According to Shirk, the government's two roles are mutually exclusive. And because it had to resolve an important public policy issue during the budget impasse, the government was acting as a king, rather than as a contractor. "Each situation will turn according to the contract's circumstances," he said. "Generally speaking, however, government will claim the expenses aren't their responsibility."

Nevertheless, ITAA's Grkavac said she has spoken with contractors who have not yet decided whether to file lawsuits.

But Ed Bersoff, president and CEO of BTG Inc., the $205 million integrator in Vienna, Va., commented, "I don't think suing the government is a very good idea."

The issue goes beyond short-term gains. Paul Lombardi, chief operating officer of DynCorp, the $1 billion integrator in Reston, Va., said, "you've got to consider customer satisfaction. Is [recouping] the additional costs worth the aggravation associated with recovering them?" He said that if a contractor's customers do not agree that the company should be compensated, the contractor likely will never recover that money.

In addition to taking vacation days and a temporary 20 percent pay reduction for top executives, DynCorp will try to recover some of its shutdown-related overhead by charging it to contracts that weren't stopped. During the initial, three-and-a-half day shutdown, DynCorp furloughed approximately 2,000 employees.

Both Davis and Lombardi reported that the Environmental Protection Agency has shut down many contracts.

Davis described the EPA as "the most draconian" of the government agencies because it issued stop-work orders on most of its contracts. Some EPA contractors hit hard by the agencies actions include BTG; DynCorp; ManTech International Corp., Fairfax, Va.; and E.H. Pechan and Associates, Springfield, Va.

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