A government shutdown at the end of the month could significantly impact contractors. This alert provides practical guidance to help minimize the impact.
- Communicate with your contracting officers early and often to appropriately plan for a shutdown.
- Analyze your current contracts to assess funding levels and become familiar with suspension of work, stop-work and government delay of work clauses in those contracts.
- Create an internal action plan to minimize financial damage and maintain continuity of operations and employee engagement.
The federal government’s new fiscal year begins on October 1, 2023. Given the current political climate, Congress may not agree on a new budget by the September 30 deadline. This creates a significant risk that the government will soon shut down for days or even weeks. If this happens, all executive branch operations will cease except for those deemed “essential,” a result which will significantly impact government contractors.
The government has shut down several times before. Operations shut down on five occasions during the Carter administration, and eight times during the Reagan administration. The 16-day shutdown in 2013 (during the Obama administration) caused more than $24 billion in economic losses. The most recent government shutdown, between December 22, 2018, and January 25, 2019 (during the Trump administration), cost the American economy at least $11 billion. Government contractors absorbed substantial losses during both instances.
To comply with the Antideficiency Act, agencies cannot obligate funds during a government shutdown absent exigencies. Accordingly, agencies cannot award contracts, modify them or exercise options. Furthermore, “non-essential” government personnel are furloughed. This significantly impacts contractors, who rely on government personnel to make timely decisions, approve deliverables and generally keep the wheels moving on government contracts. When federal employees are not allowed to work, decisions are not made and actions are not taken—leading to delays, uncertainties and additional costs for contractors.
Performance delays during a period of government shutdown can be explicit or implicit. The government can issue a formal suspension of work or stop-work order (FAR 52.242-14/15), which can last up to 90 days. Contractors may be eligible for an equitable adjustment for the cost and schedule impact of the stop-work order, but only if they properly document these cost or schedule impacts. While failure to document delays and costs can jeopardize cost recovery, failure to stop work can also result in financial loss. Auditors and contracting officers routinely disallow costs incurred during a stop-work period, even if the government ultimately receives the benefit of the work.
Even without an explicit order, the government’s failure to act—such as failure to provide required information/approvals or property/equipment—can cause compensable constructive delays in performance. The Government Delay of Work clause (FAR 52.242-17) and the Changes clause (FAR 52.243-1/5) may provide relief for additional costs and/or performance time required due to government inaction. Again, proper documentation and cost tracking of contract delays are paramount to the successful recovery of an equitable adjustment.
Therefore, contractors will need to appropriately plan for an indeterminate government shutdown. Below are actions that can help minimize the impact of a potential government shutdown:
Before the shutdown:
- Communicate regularly with your contracting officer(s) to obtain approvals and create action plans for a prolonged shutdown.
- Analyze your current contracts to become familiar with relevant suspension of work, stop-work and government delay-of-work clauses. Train personnel on what to expect and what to do in the event of a suspension of work or a stop-work order. Develop systems to ensure immediate notification to employees and the supply chain of a stop-work order.
- Prepare contingency plans to re-assign personnel and resources from impacted government projects to commercial and non-impacted government contracts. Prepare employees for the possibility of furlough or the possible use of paid leave. Communicate and negotiate similar contingency plans with supply chain and business partners.
During the shutdown:
- If directed to stop work, implement contingency plans and accurately and discreetly track delays and costs associated with the delay. If a more prolonged shutdown forces a large-scale reduction in force, comply with the WARN Act and state-equivalent legislation. Avoid performing any work at risk.
- If no formal stop-work order is issued, but the contract is delayed by government inaction, accurately and discreetly track the reason for the delays and costs associated with the shutdown period. Document all relevant facts and time impacts and set up new account codes to track costs and to maximize potential recovery. Do not stop work on funded contracts unless so directed in writing by the contracting officer.
Co-author Whitney Alston served as an Air Force contracting officer during two government shutdowns.