Navigating Government Shutdowns: Considerations for Government Contractors

Last week’s threat of a potential government shutdown has – for now – been averted, bringing relief to businesses across the nation. The temporary funding bill signed by President Biden on September 30^th will keep government agencies funded until November 17^th. While Congress works to pass long-term spending bills, federal contractors now have some breathing room to consider how best to handle a possible shutdown in the future which can affect everything, from daily operations to employees, cash flow, and compliance with contractual obligations.

The best way to minimize such disruptions and costs is having a well-thought-out government shutdown contingency plan. In this blog, we will take a look at some critical steps and issues that government contractors may wish to consider to prepare themselves for the prospect of a shutdown.

What is a Government Shutdown?
Government contracts funded by appropriated funds contain appropriations and Limitation of Funds language. When Congress fails to enact appropriations, a government shutdown occurs. Federal agencies reliant upon appropriations are then unable to spend or obligate any money without Congressional approval. Congress often waits until the end of the fiscal year to pass appropriations bills, creating a fraught situation for government contractors. If Congress doesn’t pass an appropriation bill, agencies without appropriations are forced to shut down, resulting in a partial shutdown.

Is Your Government Contract Affected?
The way in which a government shutdown impacts a government contract varies. It depends on your contract’s funding status and whether your contract is “excepted” from the shutdown. Understanding the source and status of your contract’s funding is crucial. Contracts that are fully funded and not dependent on government appropriations may continue. Contractors are expected to continue work (non-essential contracts) during a shutdown until the funding runs out, unless otherwise directed by the Contracting Officer. Check your contract to determine whether it has appropriated funds and understand the ceiling amount. Different contract types may have different funding sources, so if in doubt, reach out to your legal counsel or Contracting Officer to verify the funding status and language in your contracts. It is also crucial to know whether your agency is funded.

Are There Exceptions to Government Shutdowns?
During a shutdown, “Excepted Activities” including “Essential Activities” may continue. If the activities under your contract are essential for the protection of life, health, national security and government property, for example, your contract work will likely not be shut down. Understanding these exceptions can be vital to your business continuity planning. Unfortunately, you may not receive payment for your invoices during while still expected to perform work. You will have to bear the costs associated with performance, including paying employees.

How Long Does a Government Shutdown Last?
The last shutdown in 2019 was the longest – 35 days. A “Stop Work Order” may stay in place for up to 90 days. After that, the Government has rights to end the contract or try to negotiate with the contractor. Bear in mind, though, that the Government may not have staff available during the shutdown which can hinder negotiations.

What Should I Expect, What Is a Stop Work Order?
Contract Officers notify contractors with a written Stop Work Order, which can affect all or part of a contract. These orders are typically issued on the business day when the shutdown takes effect, although agencies may notify contractors with guidance when a shutdown is impending.  It is crucial to follow the instructions in the Stop Work Order diligently. Contact the Contracting Officer in writing for any clarifications. Continuing to work after a Stop Work Order has been issued could result in your company not receiving payment for the work.

How Does this Impact my Employees?
Government shutdowns can impact employees significantly. Contractor employees do not receive back pay when the government shuts down, unlike federal workers. Contract employees need prompt communication and guidance from their employers. Managing employees during this period requires careful planning, sensitivity and adherence to labor laws and regulations. Federal and state laws require that employees receive prior notice of an impending large furlough. Employees who are working less than full time may fall into another classification affecting overtime.

Tracking Your Costs, Settlement with the Government
Properly tracking costs during a shutdown is essential. Some costs, like wind-down, start-up, and settlement costs with subcontractors, can often be recouped, but it is imperative that you maintain detailed records. For example, outside legal counsel fees related to advise generally can be recouped. It is imperative that you consult with legal counsel and accountants to determine recoverable costs and how best to track them.

Contractors can receive an equitable adjustment when the contract resumes work. You have 30 days from the date that the Government lifts a Stop Work Order in which to submit a claim. The claim can include changes to the schedule, the SOW and some costs. Having detailed records and segregated tracked costs can make the difference when trying to recoup costs.

Invoices and Payment
Continue to submit invoices for work performed, but anticipate delays in payment due to shutdown backlogs. Check with your Contracting Officer before the shutdown regarding payment operations during the shutdown. You can also check the agency websites for guidance.

Companies, especially small companies, may have their cash flow affected by delayed invoice payments. Access the possible impact on your company. You may need to talk with third parties such as suppliers and vendors. However, before doing so, it is important to get legal advice.

What About Subcontractors – I am the Prime?
If you are the prime contractor, you may need to  promptly notify your subcontractors when you receive a Stop Work Order  and  provide the same instructions – as applicable – that you received in your Stop Work Order from the Government. Your subcontracts likely include provisions from the prime contract such as stop work language and flow down clauses.

Talk to Your Contracting Officer
Maintain open communication with your Contracting Officer, even if responses are delayed. Document your concerns and questions carefully, and remember that only the Contracting Officer has the legal authority to issue instructions. While the Contracting Officer’s Representative (COR), Technical Representative (COTR), and the program manager may communicate with you, only the Contracting Officer has the authority to give directions.

What About Proposals?
If you are working on proposals, if you choose to continue to meet proposal deadlines, you may want to  meticulously document submission efforts to avoid potential issues.

Where Can I Get More Information?
Government agencies have contingency plans for shutdowns, which can provide valuable insights into specific scenarios. Additionally, consult with your government contracts attorney to ensure you have the most up-to-date guidance. It’s good to stay vigilant about protests and regulatory deadlines throughout the shutdown period.

Weathering a government shutdown as a government contractor requires careful planning, open communication, and a thorough understanding of your contracts and funding sources. By taking proactive steps and seeking guidance, you will be better able to minimize disruptions and protect your interests during these challenging times. If you would like help in this regard, please contact Donnella Rice at [email protected].

Donnellda Rice is a Partner on our Washington D.C.-area team and brings over 30 years of experience advising companies of all sizes in the government contracting and commercial spaces. She regularly works with companies developing emerging technologies and biopharmaceutical products, as well as IT companies and engineering management firms developing public infrastructure, handling such legal matters as regulatory compliance; complex transactions; joint ventures, sub, and prime agreements; and FAR/DFAR training.