Vendors Face Furlough Alone

Companies looking to recover costs from the government shutdown can expect little sympathy

P> With little support for a legislative solution in Congress, government contractors will have to take matters into their own hands to recover direct labor or overhead expenses incurred during the government shutdown. But those who received a stop-work order or had already funded work stand a good chance of getting reimbursed by the government, said one local attorney who specializes in contract appeals.

"If the government doesn't pay on an already funded contract, they're acting in their capacity as a contractor," rather than as a sovereign, said Eric Drattell, partner in the Washington office of McDermott, Will & Emery, Chicago. If the government could legitimately defend its position as a sovereign, it probably could excuse itself from having to reimburse contractors.

The key distinction between the two is that as a sovereign the government can claim its responsibilities as a contractor are superseded by its obligations as a sovereign nation. Ironically, perhaps, companies working for government agencies that took the hardest line with contractors appear to be in the best position to regain their costs.

Drattell thinks that contractors who work for the Environmental Protection Agency "are in great shape" for recovering shutdown-related expenses because "the EPA really screwed up. They issued stop-work orders, and that almost ensures contractors' ability to recover costs." Most agencies did not issue stop-work orders because they knew such an action would give contractors the highest probability of collecting on shutdown-related costs, he added.

The U.S. Agency for International Development, despite an initial hard stand against contractors, recently reversed its position and said it would pay contracts for the three-week shutdown period.

With no imminent legislative solution, contractors can expect that the government and contract appeals board will decide on an individual basis if -- and how much -- each contractor should be reimbursed.

"You have to look at each situation on its own merits," said Bruce Shirk, legal counsel for the 6,700-member Information Technology Association of America in Arlington, Va. Shirk said agencies -- when they receive budget appropriations -- first will pay those contractors deemed most mission-critical, and the rest will have to wait.

The reasons for congressional inaction are varied. Some argue the terms and conditions of contracts can differ so dramatically that members of Congress do not want to pass a "one size fits all" solution.

Another issue, according to Dave Nadler, partner with Washington, D.C.'s Dickstein, Shapiro & Morin L.L.P., is that contractors who did not have legitimate claims would be more likely to apply for relief if Congress drafted legislation. He added that it will be difficult to determine how much of a contractor's overhead expenses the government should pay if the company has commercial and government business.

However, contractors may not have much support outside the Washington, D.C., area, noted Julie Noufer, vice president of government relations for the Professional Services Council.

Contractors suffer from a black sheep image, said Dratell. "The misperception, spread by the media, is that all they do is lie, cheat and steal."

Lacking the ability to craft legislation to assist contractors, legislators from the Washington, D.C., area are working with lobbying groups and meeting with agencies to encourage them to reimburse contractors.

"Some of the smaller contractors have no choice" but to apply for reimbursement, said Drattell. "There are substantial costs involved for them in" in keeping administrative and labor contract employees during the shutdown. Absorbing such costs "can make them uncompetitive."

Service companies are usually "thinly capitalized," noted Larry A. Davis, director of government contractor services at Aronson, Fetridge and Weigle, an accounting and management consulting company in Bethesda, Md. Usually, such companies do not need much excess capital to operate, but the shutdown has made them call on cash reserves. "Banks are getting called to extend credit lines, and the ripple effects extend to vendors" because contractors will have more difficulty paying their bills.

Despite the hardships, "not too many people appear worried about filing claims," said Barry Friedman, a partner at Friedman & Fuller P.C., Rockville, Md. "I have talked to two lawyers who specialize in this area...let's just say no one has been beating down their doors."

Although Friedman set up a legal fund on Jan. 18 to allow contractors to pool resources, he has had only "a handful of sign-ups." He said, "Not too many people are worried about filing claims. They appear to be very lethargic. It's almost as if [contractors] don't realize that they have the grounds for a claim," or that they don't want to do it.

Spokesmen for Computer Sciences Corp., El Segundo, Calif.; Electronic Data Systems Corp., Plano, Texas; and PRC Inc., McLean, Va., indicated that their firms do not plan any action.

"Our business wasn't affected very much. During the first shutdown [in November], we put people into training. During the second one, our contracts were already funded, or a continuing resolution covered them," explained EDS spokesman Randy Dove. "Most of our federal work is with the Department of Defense," which successfully argued that its operations are critical to national security and should continue as usual, said John Gulick, spokesman for CSC. "We were not affected very much."

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