Are you ready for another government shutdown?

If a government shutdown occurs this week or any time in the future, there will be ramifications for government contractors, which means that contractors, like the agencies they contract with, should have their own shutdown contingency plan

Here we go again.

I’m not going to address the wisdom of Congress, the latest oxymoron. I’m not going to opine as to why these seemingly semi-annual government shutdowns hurt government contractors and their employees in particular, not to mention the impact on their counterpart federal employees and the public at large.

But if this latest government shutdown occurs this week (or any time for that matter) there will be ramifications on the government contracting community which means that contractors, like the agencies they contract with, should have their own shutdown contingency plan.

Why us?

Rest assured, these shutdowns are not targeted specifically to government contracts or any other government function. The government shuts down because Congress didn’t enact the legislation to keep the government funded.

Once upon a time Congress enacted the Anti-Deficiency Act that prohibits a contracting officer from authorizing an expenditure not approved by Congress or entering into a contract in the absence of an appropriation. In short, if Congress fails to appropriate the funds to allow payment on the contract, which will occur if government funding expires this Thursday, the government will no longer be able to contract for those goods and services, and the law further prohibits an agency from accepting free services from anyone for unfunded acquisitions.

In any event, if the shutdown leads to a government-ordered work stoppage, even if the contractor continues the work it will be doing so “at risk.”

The shutdown will not apply to all government functions to include its contracts. Narrow exceptions exist for certain “essential” activities, which generally include most military and other national security functions, law enforcement, emergency and disaster assistance, medical care and other work related to public health and safety, border protection, and some other similar functions.

The good news is that contracts already funded or subject to multi-year appropriations should also not be impacted, but invoices might be paid late because of the shutdown. In that event a contractor would generally be required to continue working and to bill the government according to the contract’s terms.

But alas, if the contractor employee is denied access to the facility, cannot work from home, or cannot contact the furloughed government employee, then performance cannot occur. And, if the government employee who reviews your invoice is furloughed because of the shutdown, you will be waiting some time to be paid.

A shutdown of the federal government means exactly as it sounds: by and large the U.S. government ceases to operate. The impact on the government contracting community differs from federal employees in one key respect: once Congress makes the appropriations to re-start the government and end the shutdown, federal employees return to work with full back pay. Not so for contractor employees.

What will happen if the shutdown occurs?

Here’s what happens:

  • During a shutdown, agencies must cease operations unless authorized to continue under one of the exceptions.
  • Contractors are generally not entitled to reimbursement for performance of unfunded work.
  • Contractors offering products will likely face changes in when and where they would make their deliveries simply because the receiving facility is not open to accept those products.
  • The impact on service contractors will depend on the funding source for the services, the terms of the contracts and the direction from the contracting officer regarding whether the work is deemed “essential” or already funded.
  • The net effect is that most contractors affected by the shutdown may end up needing to furlough employees, some of whom may not return. The same is true of their federal employee counterparts (see above). Of course, contractors may still continue to keep and pay employees without charging the government so long as their cash flow can sustain it. Translation: most small businesses and those that are financially challenged will likely be forced to furlough or eventually terminate affected employees. And there are other financial consequences as well such as unabsorbed overhead, attrition costs and other costs related to or caused by the shutdown.
  • Contractors should also not expect to receive new awards (including options) or extensions on expiring awards.
  • Unless excepted, contractors may not obtain access to most federal facilities where they had been operating, to the extent they were working onsite anyway given COVID, or the federal employee overseeing your program is furloughed so unable to provide direction or assignments.
  • Contractor employees overseas may be delayed in being repatriated.
  • Companies performing under cost-plus and time-and-materials contracts that include the Limitations of Funds clause will be most adversely affected if ordered to stop work.

What do we do now?

Here is a basic framework for a contractor’s shutdown contingency plan:

  • Don’t assume that all government contracting activities will cease with a shutdown. Again, some of those activities may fall within an exception or have advanced funding. The procuring agency will make that determination on a contract-by-contract basis as dictated by OMB guidance and the agency’s own shutdown contingency plan. Contact the contracting officer now to see if that determination was made on your contract.
  • If the shutdown affects your contract, the contracting officer should provide formal notice to include a Stop Work order under the FAR. A Stop Work order will not be valid unless issued by the contract’s cognizant contracting officer, which is the only person with authority to bind the U.S. government. If you don’t receive the order then determine with your contracting officer whether the contract may be exempt or already funded.
  • Whatever happens on your prime contracts due to the shutdown, a parallel notice should be sent to your subcontractors and other vendors to avoid being liable for payment.
  • Document, Document, Document every key action on your part, especially if shutdown-related costs are incurred, or if the contract is excepted or advance funded your employees are prevented from accessing government facilities or contacting government personnel, or you receive conflicting messages from the agency. Under that famous FAR Changes clause you may be eligible to claim an adjustment in price or recovery of costs (depending on contract type) and be mindful of that clause’s notice requirements.
  • Communicate effectively with your employees and team members on the impact of the shutdown on the contract. This could go a long way in avoiding employee and subcontract disputes.

Stay safe.

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