The Looming Government Shutdown – How Will it Affect Government Contractors?
If Congress cannot pass a new funding plan by October 1, 2023 (the start of the federal fiscal year), the Government will “shut down” financially at 12:01 A.M. and that shut-down will last until Congress signs a new funding bill into law.
The question is—what do you do as a government contractor when faced with the issues surrounding a government shutdown? Better yet, how do you prepare for these issues so you are ready if the Government does shut down?
Federal workers across the nation will be affected by a government shutdown, and so are federal contractors. A shutdown can cause, among other things, a lack of funding or delayed payment for current contracts; difficulty in entering new contracts, modifications, or option years; closure of government facilities; furloughing or laying off employees; and/or increases in costs. This is because “[t]he Antideficiency Act prohibits agencies from incurring obligations that are in advance of, or that exceed, an appropriation, with certain limited exceptions.” In other words, while the Government seems to just print money whenever it wants to, government agencies cannot spend money it technically does not have yet.
The “certain limited exceptions” carved out by the Office of Management and Budget (“OMB”) include (1) a statute or other legal requirement that “expressly authorizes an agency to obligate funds in advance of appropriations” (this is rare, according to OMB); (2) emergency services where suspension of performance would “immediately threaten the safety of human life or the protection of property”; or (3) functions “necessary to the discharge of the President’s constitutional duties and powers.”
As we prepare for the possibility of a government shutdown, think about the following.
I. Are you entitled to continue performance by way of an exception? If not, are you permitted to continue performance because of the “authorized continuation of other activities”?
Your Government Contracts Hold Great Significance –
First, review your contracts with the government to see if any of the three exceptions to the Antideficiency Act listed above apply to the contract. Then, continue to brush up on your current contracts to see if they provide any insight as to how the government will operate (if at all) during a shutdown. For instance, it is helpful to know if the contract is incrementally or fully funded. If the contract is incrementally funded, you may have issues with delayed payments while the government is shut down. It will also be helpful to know, for a couple of reasons, when the contract expires. If the contract expires soon (within the time the government may still be shut down) you could be facing issues with the ability to exercise option contracts or extensions. However, it may be beneficial if the contract does not expire at the end of the fiscal year (e.g., a multiple-year contract or a contract with indefinite appropriations funding) because a government shutdown may not affect its funding or performance.
Your Contracting Officers May Have Useful Information –
It will also be helpful to contact your contracting officer(s) (“CO”) and seek written guidance on how to proceed during a government shutdown. The CO may provide insight as to whether government facilities will remain open, whether performance of any contract is expected to continue through a shutdown, what employees should (or are expected to) remain working, how to disburse benefit payments, etc. If the contract requires continued performance through the shutdown, it may be beneficial to seek a written stop-work order if continued performance will be difficult because of facility closures or furloughed or laid-off employees. Some of these answers may be found by re-reading the contract as suggested above; however, it is always beneficial to get the answer in writing from the CO. This ensures all parties are on the same page.
You also want to know what the government expects of you as a contractor during the shutdown for billing purposes. The CO may be able to inform you of what you can or cannot bill for during the shutdown period, which will greatly assist in preventing False Claims Act issues. If the government does shut down, be sure to inform the CO of any expected delays in performance or added expenses.
II. What About Employees?
Determining how to handle employees during a government shutdown should not be taken lightly. Speak with your HR personnel and make a plan on how to proceed. You can, among other things, reassign employees to “essential” tasks that will still be performed during a shutdown, encourage employees to use their vacation time, furlough employees, or lay off employees. Having a plan will allow you to stay in connection with employees, inform employees of what the government shutdown means for them and what work (if any) they are required to do, and will ensure they can return back to work the moment the shutdown is over.
If you are unable to keep employees working throughout the shutdown, you likely have to decide whether to furlough or lay off employees. A furlough is a temporary solution where any employee still has access to things such as health insurance, whereas a layoff is discharging the employee entirely. Having a plan will also help in determining who to furlough and who to lay off. Be sure to avoid situations that may appear discriminatory or unreasonable.
III. What About Subcontractors?
If you are a prime contractor, it is necessary for you to stay in contact with your subcontractor(s) as well. Be sure to inform the subcontractor(s) of whatever information you learn from the government that would flow down to the subcontractor(s). Re-read your subcontract agreement(s). Understand what may be required of you in order to issue a stop-work order, issue payments, etc. Then, speak with your subcontractor(s) to ensure they have a clear understanding as to whether they proceed with performance or not during the shutdown, and provide them written guidance memorializing that understanding. You want to avoid a situation where the subcontractor continues performance during a shutdown and is expecting a payment that you cannot provide.
IV. What Else Should I Be Doing?
Document EVERYTHING –
Make a record of everything that occurs throughout the shutdown. You want to remain as prepared as possible to make or defend claims regarding invoice issues, performance issues, delays, etc. This documentation will help greatly in drafting a request for equitable adjustment (“REA”) if necessary post-shutdown. Think: “who, what, when, where, why, how.” To be successful with any REA, you will need to show the government specifics as to why you are entitled to costs when the government was “shut down.” Play offensively here, and be prepared to prove to the Government that these costs were incurred during the shutdown for hypothetical reasons X, Y, and Z.
For example, document things such as, but not limited to:
- Material costs;
- Vendor costs;
- Increases or decreases in supply and demand;
- Costs associated with new subcontracts;
- Costs associated with terminating contracts;
- Costs associated with furloughing or laying off employees;
- Unabsorbed overhead;
- Communications with the government;
- Communications with employees;
- Communications with subcontractors.
Do Not Miss Deadlines –
Unless the government tells you that non-compliance with a specific deadline is permitted, assume all government-related deadlines remain in place. Deadlines for submitting bids on solicitations, claims, appeals, etc. will likely not be extended because of the shutdown in and of itself.
Prepare for a Lack of Funding and/or Delayed Payment for Current Contracts –
A government shutdown essentially stops all funding. You should prepare for a lack of funding for things such as, among other things, contract modifications, extensions of option years, and new task orders. Without funding, the government will be unable to issue any new work.
The shutdown will also delay the government’s payment of any outstanding invoices until after the shutdown is over. To mitigate this delay as much as possible, try to collect any outstanding invoices before the shutdown occurs. Have conversations with your CO(s) and subcontractor(s) about potential delays to make sure everyone is on the same page.
If you have any questions about potential Government shutdown-related issues, please contact Ward & Berry.
 OMB Information and Guidance, Agency Contingency Plans – FAQ During a Lapse in Appropriations, https://www.whitehouse.gov/wp-content/uploads/2023/09/Agency-Lapse-FAQs-9.2023.pdf.