Another Funding Stalemate: How DHS & Appropriations Uncertainty Impacts Government Contractors

On February 12, 2026, the U.S. Senate blocked legislation that would have funded the Department of Homeland Security (“DHS”) through September 30, 2026. Agencies under DHS include the Transportation Security Administration (“TSA”), the Federal Emergency Management Agency (“FEMA”), Immigration and Customs Enforcement (“ICE”), Customs and Border Protection (“CBP”), Citizenship and Immigration Services (“USCIS”), Cybersecurity and Infrastructure Security Agency (“CISA”), the Secret Service, and the Coast Guard.

With both the House and Senate going into recess shortly after funding lapsed, DHS will continue operating under shutdown procedures until new appropriations are enacted. Although DHS deemed nearly 95% of its employees “essential” during the record 43-day shutdown last fall, requiring them to continue working, the same cannot be said for government contractors. Contractors operate in a risk-intensive environment that becomes significantly more complex when federal appropriations lapse or agency funding is uncertain.

What Happens During a Shutdown?

As noted in our post from October 1, 2025, the Antideficiency Act (“ADA”) prohibits agencies from soliciting new contracts, awarding new work, executing contract modifications, exercising options, or obligating new funds under most existing contracts during a shutdown. For example, work on an incrementally funded contract may stop once funds are exhausted.

However, in relation to DHS specifically, the agency may enter into a new contract if it supports exempted or excepted functions, such as safeguarding human life or protecting property. However, routine contract and grant administration, including payment processing, generally does not fall under exempted activities.

DHS Contracting During a Funding Lapse

DHS maintains a Contracting Contingency Plan to guide contracting activities when appropriations lapse. Heads of Contracting Activities work with Component Heads (i.e., the senior official in charge of a specific DHS component or agency) to proactively identify contracts that support exempt or excepted functions. These pre-shutdown determinations enable DHS to:

• Maintain a list of contracts for which Stop Work Orders or partial terminations for convenience may be issued, giving Contracting Officers (“COs”) sufficient lead time to de-scope work and prepare required justifications and supporting documentation.
• Allocate available COs effectively to ensure an orderly shutdown and continued oversight of contracts supporting exempted functions.

Key Guidance for DHS Contractors

DHS-specific guidance from last fall is still pertinent and clarifies how contracts will be managed during a funding lapse:

• Fully Funded Contracts: Contractors may continue working only if their activities do not require access to government facilities or oversight from furloughed personnel and if continuing performance is a prudent use of taxpayer funds.
  • Routine oversight activities like inspections, accounting, administration, and payment processing generally do not continue during a funding lapse and can affect performance.
  • DHS must also consider whether continued work is common-sense spending. For example, it may be unnecessary to maintain daily trash collection in offices that are closed.
• Excepted Functions: Contracts that support exempted or excepted functions may continue, but payments cannot be made until appropriations are restored. This can cause backlogs and delayed payments once DHS receives funding again, meaning contractors may perform work without immediate reimbursement, which can impact cash flow and planning.

• Contractor Oversight: If federal oversight is critical to performance, DHS may instruct a contractor to suspend work until appropriations resume. Additionally, fully funded fixed-price contracts may continue without affirmative direction if oversight is not essential.

• Coordination with Counsel: Contracting staff must work closely with Component procurement counsel to implement stop-work orders, de-scoping, or suspension decisions in a manner that minimizes costs to the Federal Government.

Additionally, it is important to remember a government shutdown typically qualifies as an excusable delay under federal contracts, giving contractors more time to perform without risking negative performance evaluations or termination for default. While time extensions do not automatically provide additional money, costs incurred due to stop-work orders, suspensions, or constructive changes may be recoverable through contract clauses or equitable adjustments. Contractors should document all delays, provide timely notice, maintain communications, and take reasonable steps to mitigate costs to preserve recovery rights once funding resumes.

Bottom Line: During a DHS funding lapse, contractors face a mix of operational and funding restrictions. Fully funded contracts may continue only if oversight and facility access are not required, while incrementally funded work generally stops. Even contracts supporting excepted functions cannot be paid until appropriations are restored, which can create backlogs and affect cash flow. Contractors should understand their rights under excusable delay and other applicable contract clauses, carefully document all impacts, provide timely notice, and take steps to mitigate costs. Planning ahead and maintaining clear communications with contracting officers is essential to navigating a shutdown with minimal disruption and risk.