Here we are again, facing an impending Federal Government shutdown. Congress has failed to pass the standard appropriations bills required to fund the Government’s operations for FY2024, and if Congress does not act by the end of the fiscal year on September 30, 2023, the Government will be forced to shut down on October 1. In the current political climate of partisan stalemate, we seem poised to endure yet another Federal Government shutdown. Government contractors can take steps to withstand the inevitable upheaval, by looking to prior shutdowns for guidance and a rough roadmap as to what we might expect.
The Anti-Deficiency Act (31 U.S.C. § 1341 et seq.) prohibits Federal agencies from spending government funds without the required Congressional appropriations. Congress’ last appropriations bill funded the Government through FY23, which ends on September 30, 2023. Absent new Congressional appropriations, or temporary funding via a continuing resolution, all non-excepted agency activities must cease operations. Non-excepted Federal employees are furloughed and must stop working; not even checking email is allowed.
Certain agency services are considered essential and are deemed “excepted,” and those will continue, including public safety or national security functions like law enforcement, emergency response, and certain military activities. Federal employees who are “excepted” will continue working. But, generally, Government spending is substantially constrained and Government payments are delayed. The most recent shutdown in 2018-19 lasted 35 days and cost the country $11 billion in GDP, according to a Congressional Budget Office estimate, and that was only a partial shutdown. This time, it would be a complete shutdown, and the consequences are certain to be widespread and substantial.
Government contractors bear the brunt of a Federal Government shutdown in many ways. Agencies are prohibited from awarding any new contracts, including task orders, or from exercising options or issuing contract modifications, renewals or extensions. Payment from the Government for work already performed is likely to be delayed.
For existing contracts awarded before the shutdown, it is important that government contractors continue performance—whether in support of excepted activities or not—unless the Contracting Officer issues a specific order to stop working. For those contractors who are able to continue contract performance, delays and disruptions are likely. Federal facilities may be closed, preventing access to contractor worksites. Government directions or required approvals may be difficult to obtain, and contractors may be prevented from timely delivery of products or services to their agency customers.
1. Assess the contract. A contractor’s specific obligations in the event of a Government shutdown depend upon what is in its contract. For example, does the contract include a FAR clause allowing the government to issue a stop-work or suspension-of-work order? If you receive a stop-work order, all work on the contract must stop, including work by subcontractors. Does the contract contain a provision permitting the contractor to submit a request for equitable adjustment, which could be used to recoup unanticipated costs arising from a hiatus in work due to the shutdown? Understanding the specific terms of your contract is critical to mitigating the impacts of a shutdown and to your potential cost recovery.
2. Review the agency shutdown plan. Many agencies issue guidance regarding their plans for a Government shutdown. These plans, available here, which include the date they were last updated, may offer insight into the steps that a specific agency plans to take in the event of a shutdown. It is important for contractors not to assume that all agencies will be shut down, as some agencies may continue to function in some capacity during a shutdown.
3. Communicate with the Contracting Officer (CO). Reach out to the CO in advance of a shutdown, if possible, to clarify your obligations in the event of a shutdown and create clear expectations. In most circumstances, contractors should continue performance unless the CO provides an express directive to stop or suspend work. Recall that the CO is the only official who can give that order. Contractors may also ask about an action plan for when the shutdown ends, as knowing what steps to take may facilitate a more efficient ramp up following the shutdown. Keep in mind that your CO may be furloughed, in which case communication during a shutdown may be difficult or impossible.
4. Prepare contingency plans for employees. Contractors who are forced to suspend work for any reason should consider whether reassigning certain employees to non-impacted or commercial projects is possible. Make plans for putting employees on furlough or paid leave if that becomes necessary. Communicate with employees regularly to keep them informed of the situation as it evolves. Keep in mind that you must consider the employees’ contracts, along with Federal and state employment laws.
5. Track and document all associated costs and delays. Delays and changes in a contractor’s required scope of work due to a shutdown could result in increased costs, additional unanticipated work, staffing changes or losses for contractors. Tracking all of the changes, including formal orders from the CO as well as impacts from constructive changes, and maintaining detailed documentation of the associated costs, will maximize your potential recovery. Consider creating separate charge codes for costs associated with delays or with winding down operations if you are required to stop working, and for costs associated with starting up again when the shutdown ends, as well as for any idle labor. Contractors that implement such “Change Order Accounting” maximize their chances of cost recovery. Ensure that you properly document evidence of mitigating costs as well. In addition, track any overdue payments because, under the Prompt Payment Act, a contractor who is not paid timely is entitled to interest on overdue payments.
If you have questions about how the potential shutdown may affect your business, please contact one of the RJO attorneys with whom you regularly work or the authors of this article.