The U.S. Government shutdown is now the longest in U.S. history and is starting to have serious implications for Government contractors.  One of many key concerns arises when contractors approach their contract funding ceiling — can they continue to work, and what happens if there is a cost overrun?[1]

The answers are often complicated for both contractors and agency officials, and depend on the terms of the contract and the statutory basis for the program.  Contractors facing this situation should keep seven points in mind.

(1) Agencies usually are not required to pay contractors for work in excess of the cost ceiling, even if the agency later allots additional funding

Most cost-type contracts limit the Government’s obligation to pay contractors in excess of the total funding allotted to a contract.  E.g., FAR 52.232-20(d)(1); FAR 52.232-22(f)(1).  Contractors may wonder whether they can continue working during the shutdown, assuming that the Government will add funding once the shutdown ends.  Although there may be circumstances where that strategy is sensible, contractors subject to these limitations who take that approach will be at risk of not receiving payment for costs incurred in excess of the obligated amount, even if the agency later allots funding to the contract.

Depending on the language of a particular contract, contracting officers may have discretion to fund an overrun retroactively.  E.g., FAR 52.232-20(f); FAR 52.232-22(i).  A variety of factors may be relevant to determining whether a contracting officer could or would do so, and contractors should carefully evaluate the circumstances before deciding whether to proceed.

Contractors with multi-year or umbrella indefinite-delivery/indefinite-quantity (“IDIQ”) contracts should also consider whether their funding is limited on a yearly or task-order basis.  See Interlmage, Inc. v. United States, 133 Fed. Cl. 355, 369 (2017) (funding ceiling set by order); Boeing Co., ASBCA No. 57409, 14-1 BCA ¶ 35474 (funding ceiling set by base IDIQ contract); FAR 52.232-19 (limiting funding to a tailored time frame in the contract).  Depending on a contract’s terms, funding limitations may be tied to specific time frames or task orders, or constrained on some other basis.  Filling orders outside of those constraints may jeopardize the ability to be reimbursed.

(2) Notify the agency before you reach the ceiling

Before reaching the contract ceiling on obligated funds, contractors are required to notify the agency.  Outreach to the contracting officer may not only help to avoid surprises, but may allow the agency to develop a funding solution.

However, providing such notice in an informal manner may not be sufficient.  Many federal contracts require the contractor to notify the agency “in writing whenever it has reason to believe that the costs it expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent” of the total amount allotted to the contract.  FAR 52.232-22(c); see also FAR 52.232-20(b).  Contractors may also be required to notify the agency of “the estimated amount of additional funds, if any, required to continue timely performance[.]”  FAR 52.232-22(d).  Because contracting officers may be furloughed during the shutdown, contractors may find it particularly difficult to provide this notice, however, that does not excuse compliance.

In turn, contracting officers are required to address a potential cost overrun “upon learning” that the contractor is approaching the limitation on funding.  FAR 32.704(a)(1); FAR 52.232-20(d); FAR 52.232-22(f)(2).  Contracting officers should state “in writing” whether the agency will increase funds, terminate the contract, or take some other action to address the issue.  FAR 32.704(a)(1)(i)-(iv); see also HTC Indus., Inc. v. Aspin, 22 F.3d 1103 (Table), 1994 WL 66091, at *2-4 (Fed. Cir. 1994) (holding contractor not entitled to costs in excess of ceiling, despite agency’s failure to respond under FAR 32.704(a)(1)).

(3) Contractors normally have the right to stop work once funding ceases

Just as agencies may not be required to pay for work in excess of allotted funds, contractors are normally not required to do such work.

Standard FAR clauses provide that contractors are “not obligated to continue performance” of work until the contracting officer (i) increases the allotted funding and (ii) notifies the contractor of the increase in writing.  FAR 52.232-20(d)(2); FAR 52.232-22(f)(2).

In other words, contractors generally have a unilateral right to stop work once funding is exhausted.  Although that may be little comfort to a contractor that seeks to continue working, these rules can protect contractors from Government demands for additional work or claims for breach of contract.  See Titan Corp. v. West, 129 F.3d 1479, 1480 (Fed. Cir. 1997) (explaining the policy justifications for these provisions).

It is essential that contractors receive a notice from the contracting officer — and not anyone else — adding funds before continuing work; that is because “[n]o notice, communication, or representation in any form other than that specified” from “any person other than the Contracting Officer” can bind the Government to additional funding.  FAR 52.232-20(e); FAR 52.232-22(h).

(4) Agencies should not encourage unfunded work

Not only are agencies restricted from paying for work in excess of a ceiling, they are also restricted from accepting voluntary work under the Antideficiency Act (“ADA”) — a 19th century statute that prohibits federal employees from incurring unfunded obligations.  31 U.S.C. § 1341; 31 U.S.C. § 1342.

Agencies should not encourage or accept contractor work in excess of obligated funding: “Government personnel encouraging a contractor to continue work in the absence of funds will incur a violation of” the ADA.  FAR 32.704(c) (emphasis added).  Indeed, a federal Government official who violates the ADA is subject to criminal sanction.  31 U.S.C. § 1350 (“An officer or employee of the United States Government or of the District of Columbia government knowingly and willfully violating section 1341(a) or 1342 of this title shall be fined not more than $5,000, imprisoned for not more than 2 years, or both.”).

(5) If an agency is considering termination for convenience, take care to ensure that termination expenses are funded

In some cases, agencies may be forced to terminate a contract for convenience based on a lack funding, or elect a termination for convenience rather than obligating additional funding.  While a convenience termination normally allows a contractor to be made whole for its incurred costs, terminations under such circumstances can put the contractor at risk; termination expenses — like all other expenses — require sufficient appropriations.  E.g., Principles of Federal Appropriations Law, 3d., Vol. 2, Ch. 6, General Accountability Office (Mar. 2015) (citing Aerolease Long Beach v. United States, 31 Fed. Cl. 342, 363 (1994) (agency properly considered termination costs as current obligations)).  Contractors should be mindful of this rule when tracking costs and should be aware of potential termination costs for purposes of providing the Government with the notices described above.

(6) If you do experience a cost overrun, there may be options for obtaining payment

Despite these standard rules, and in the event that an unexpected overrun does occur, the Courts and Boards of Contract Appeals have recognized several circumstances in which a contractor might be compensated for work beyond a cost ceiling.

In one line of cases, Courts have found that if an agency knew of a cost overrun but took specific actions intending to induce a contractor’s performance, then the agency may be equitably estopped from denying payment.  E.g., American Elec. Labs., Inc. v. United States, 774 F.2d 1110, 1113 (Fed. Cir. 1985) (finding contractor entitled to payment when it was “reassured repeatedly” by agency officials that funding was available).

In a related line of cases, contractors may be excused from requirements to provide notice in advance of a cost overrun, if the agency was not prejudiced by a lack of notice.  E.g., Johnson Controls World Servs., Inc. v. United States, 48 Fed. Cl. 479, 487 (2001).

Unfortunately, these exceptions are based on unexpected events, and thus it may be difficult for a contractor to evaluate their applicability until a problem has arisen.

(7) Contractors should identify and document added costs incurred due to the shutdown

If properly documented, contractors may be able to recover reasonable and allowable costs incurred because of the shutdown.  One approach for recovery applies when the contracting officer issues a written “stop-work order” under the Stop-Work Order clause found at FAR 52.242-15.  If a contractor receives a notice to cease performance, the contractor may be able to argue successfully that it should be treated in the same manner as a formal stop-work notice issued under the FAR clause, even if it was not titled in that manner.

Absent recovery under the Stop-Work Order clause, contractors may be able to proceed under the Government Delay of Work clause (FAR 52.242-17), which allows for adjustments in contract price or delivery schedule if the actions of the contracting officer in the administration of the contract are “not expressly or impliedly authorized” by the contract.  One point to remember is that contractors will not be permitted to recover lost profit under this clause.  The cost reimbursement Changes clause (FAR 52.243-2) also may provide a basis for recovery for a stop in work depending on the costs and facts of the stoppage.

In each instance, if the work stoppage was communicated orally, the contractor’s ability to recover is enhanced if the contractor documents that direction in writing and confirms it with the Government.  Contractors should also be mindful of any applicable timing requirements.  Although all of these approaches face challenges, the tracking of costs is the important first step.

Finally, even if a contractor takes all the precautionary steps outlines above, proceeding without funding will pose one additional risk.  In any dispute for costs stemming from the shutdown, the Government may assert that its acts are covered by the sovereign acts doctrine, which shields the Government from liability for certain conduct made in the exercise of its sovereign power.  The Government asserted such a defense in Raytheon STX Corp. v. Dep’t of Commerce, GSBCA No. 14296-COM, 00-1 BCA ¶ 30632.  While under the particular circumstances of that case the board held that the sovereign acts doctrine did not bar recovery against the Government for costs arising from a partial shutdown, it is not certain that the result would be the same for all contractors in this current situation.

[1]           This article focuses on only one of the numerous challenges contractors potentially face related to the Government shutdown.  For example, the shutdown may cause complications related to progress payments, agency reviews or required agency consents, among other issues, leading to program delays and cash flow difficulties affecting employee retention and payment of subcontractors.

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Photo of Susan B. Cassidy Susan B. Cassidy

Ms. Cassidy represents clients in the defense, intelligence, and information technologies sectors.  She works with clients to navigate the complex rules and regulations that govern federal procurement and her practice includes both counseling and litigation components.  Ms. Cassidy conducts internal investigations for government…

Ms. Cassidy represents clients in the defense, intelligence, and information technologies sectors.  She works with clients to navigate the complex rules and regulations that govern federal procurement and her practice includes both counseling and litigation components.  Ms. Cassidy conducts internal investigations for government contractors and represents her clients before the Defense Contract Audit Agency (DCAA), Inspectors General (IG), and the Department of Justice with regard to those investigations.  From 2008 to 2012, Ms. Cassidy served as in-house counsel at Northrop Grumman Corporation, one of the world’s largest defense contractors, supporting both defense and intelligence programs. Previously, Ms. Cassidy held an in-house position with Motorola Inc., leading a team of lawyers supporting sales of commercial communications products and services to US government defense and civilian agencies. Prior to going in-house, Ms. Cassidy was a litigation and government contracts partner in an international law firm headquartered in Washington, DC.

Photo of Frederic Levy Frederic Levy

Frederic Levy is one of the nation’s leading suspension and debarment lawyers, focusing his practice on the resolution of complex compliance and ethics issues. He has successfully represented numerous high-profile corporations and individuals under investigation by the government in civil and criminal matters…

Frederic Levy is one of the nation’s leading suspension and debarment lawyers, focusing his practice on the resolution of complex compliance and ethics issues. He has successfully represented numerous high-profile corporations and individuals under investigation by the government in civil and criminal matters, including False Claims Act cases, and in suspension and debarment proceedings to ensure their continued eligibility to participate in federal programs. He has also conducted numerous internal investigations on behalf of corporate clients, particularly in the areas of program fraud and export controls, and often involving sensitive personnel or fiduciary matters. He has also advised corporations in voluntary or mandatory disclosures to a variety of federal agencies. Mr. Levy regularly counsels clients on government contract performance issues, claims and terminations, and he litigates such matters before the boards of contract appeals and in the Federal Circuit.

Photo of Evan R. Sherwood Evan R. Sherwood

Evan Sherwood advises government contractors on a wide range of matters, including claims and disputes, government investigations, suspension and debarment, bid protests, and regulatory counseling. In addition, Evan counsels clients on risk mitigation strategies, including the process of obtaining SAFETY Act protection.