(A version of this blog post was originally published in September and then published again in January. Funding for several federal agencies will run out Friday night, with funding for the remaining agencies expiring March 8, if Congress does not act.)

Shutdowns are inevitably disruptive for federal contractors, but the impact will vary depending on whether the contract is already funded, whether the work is considered “essential,” and whether the contractor requires access to federal facilities or approvals from non-essential federal employees, among other considerations.

Contractors can minimize the effect of the shutdown by reviewing their contract portfolio and assessing risk, planning how to manage employees and teammates and communicating with the contracting officer (CO) about performance expectations during the shutdown. Once the shutdown begins, contractors should continue to communicate with the CO and advise the CO about any unforeseen costs or delays arising from the shutdown, document those costs, and take reasonable measures to mitigate costs.

What to Expect

A government shutdown occurs when there is a lapse in appropriated funding. If a shutdown occurs, agencies will not be allowed to award new contracts or orders or exercise options on incrementally funded contracts unless that work is deemed to be “essential.” Even if a contract is already funded, the ability of a contractor to perform will be hampered if:

• Government personnel are not available to administer contracts, inspect deliveries, perform tests or provide any other required approvals
• Government facilities are closed
• The government or other contractors cannot deliver property or other materials required for performance

Preparing for the Shutdown

Contractors can minimize the effect of a shutdown by planning and proactively reaching out to their contracting agencies for guidance. Contractors should consider taking these steps:

1. Review your contract portfolio and assess risk

• Identify whether your contracts are fully funded and assess funding levels of incrementally funded contracts. A contract is fully funded if “funds are obligated to cover the price or target price of a fixed-price contract or the estimated cost and any fee of a cost-reimbursement contract.” FAR 32.703–1. A lapse in funding will not necessarily require a stop in performance. Incrementally funded contracts may have enough funding to continue performance for a period once the shutdown begins, subject to certain notice requirements.
• Assess whether your contracts require government resources to perform. Even if a contract is fully funded, performance may not be possible if it requires access to government facilities, personnel or resources that are not available due to the shutdown. Such information can be useful not just for planning but for communicating with employees and teammates.

• Verify which contracts include the stop-work order clause. Most federal contracts include FAR 52.242-15, Stop-Work Order, which permits the agency to issue a “stop-work order” (SWO). If the Agency is unable to fund a contract, the CO should issue a SWO shortly prior or at the beginning of the shutdown. A SWO should include (1) A description of the work to be suspended; (2) Instructions concerning the contractor's issuance of further orders for materials or services; (3) Guidance to the contractor on action to be taken on any subcontracts; and (4) Other suggestions to the contractor for minimizing costs. See FAR 42.1303(c). Once the shutdown ends and the SWO is lifted, FAR 52.242-15(b)(1) affords the contractor the right to assert “an equitable adjustment in the delivery schedule or contract price, or both” within 30 days after the end of work stoppage. FAR 52.245(b)(2). As an alternative to issuing a SWO, the CO may enter into a supplemental suspension agreement.

2. Communicate with your contracting officer regarding performance expectations during a shutdown and document any verbal communications.

• Ask your CO for guidance regarding which activities, if any, should continue during a shutdown. Once a shutdown begins, access to government resources and personnel will depend on whether those are deemed to be “essential” by the Agency, based on OMB guidelines. In the case of an incrementally funded contract, ask whether any of the contract requirements are considered “essential” such that the contract will receive funding during the shutdown.
• If possible, resolve existing issues before the shutdown. For instance, if you need a contract amendment, try to obtain it before Sept. 30, the end of the federal fiscal year. Once the shutdown begins, the contracting officer will lose the support of contract specialists and other personnel and will likely be too busy triaging emergencies to attend to ordinary requests. Indeed, the contracting officer may be unavailable and on furlough.

3. Communicate with employees, teammates, and plan ahead.

• Keep employees informed and try to allay anxieties. If one contract is likely to be halted, explore opportunities to reassign employees to other projects.
• Contact subcontractors and vendors in advance to alert them about the possible shutdown and inform them about the prospects for continuing performance. Discuss the possibility of deferring orders or delaying deliveries. Review contracts and supply agreements for suspension of work and termination for convenience clauses. Remind subcontractors and teaming partners to document and mitigate costs.

During the Shutdown

It is generally possible to recover overhead costs, delay costs and standby costs caused by the shutdown if you can show (with reasonable documentation) that they were actually caused by the shutdown, and that you took reasonable measures to minimize costs.

• If work is suspended or partially suspended, respond to performance directions only from the CO. Any work performed during a stoppage is performed at risk unless it is performed at the direction of the CO.
• If you are performing on an incrementally funded contract, be extra careful to comply with the notice requirements specified in the availability of funds clause, such as FAR 52.232–20 Limitation of Cost and FAR 52.232–22 Limitation of Funds.
• Exercise the suspension of work clauses for subcontracts to the extent that performance of the prime contract is suspended by the government.
• Promptly provide the CO with written notice of any delay or cost incurred due to the shutdown.
• Document all costs and expenses. These can include delay costs, such as moving employees off-site, winding up work and then ramping back up once the shutdown ends, and unabsorbed overhead costs. These can also include standby costs, such as paying highly key personnel to keep them on retainer, even if they are unable to do any work. Establish billing codes to track shutdown, restart and standby costs during the shutdown.
• Mitigate costs and document efforts to mitigate costs. For instance, if you need to pay key personnel to remain with the company during the shutdown, perform market research so that you can demonstrate how difficult it is to hire replacement personnel.
• Assume that any deadline (e.g., filing a bid protest or contract claim) remains unchanged.
• As the shutdown continues, begin preparing a request for equitable adjustment (REA) so that you can submit the request within 30 days after the suspension of work is lifted.

Conclusion

The impending shutdown will hopefully be short-lived if it occurs. Although it is impossible to eliminate the disruption caused by the shutdown, you can minimize the impact by acting proactively. 

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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