Although Congress averted a Government shutdown on October 1 by passing a temporary spending bill, we may be headed toward a shutdown next month. As many Federal Government contractors have experienced during prior Government shutdowns, some portions of the Government — primarily those not funded through annual appropriations bills or that provide “essential services” — may continue to operate (often without pay or access to certain resources), while others shut down immediately, leaving contractors with a customer that often is unable to provide funding, authorize contract actions or respond to inquiries until the Government reopens its doors. Faced with these challenges, contractors would be well advised to ensure their shutdown plans position them to navigate the potential challenges. Each agency and contract can offer unique challenges, but we offer a few key considerations below to guide contractors in assessing their approaches to potential shutdowns:
- Assess Impacted Contracts – As a first step, contractors should take inventory of their government contracts to assess how a shutdown could impact performance.
- Contractors should consider whether any contracts contain the Availability of Funds (FAR 52.232-18) clause, as a lapse in appropriations during a shutdown could mean that the availability of funds for such contracts is further impacted.
- “Fully-funded” contracts are also impacted by a shutdown. Although theoretically, many contracts are “fully funded” — meaning that they contain funds that have already been obligated to cover the price of a fixed-price or the estimated price of a cost-reimbursable contract — issues may arise if, for the completion of the contract, a contractor requires access to government facilities or systems or otherwise needs ongoing input from government personnel. In such situations, performance may be delayed or adversely impacted, particularly if such access or input is from personnel deemed “non-essential.” Additionally, if a contract is nearing an option exercise or the need for a modification is on the horizon, performance may be impacted if so-called “non-essential” personnel are required to exercise option periods or authorize modifications.
- Performance under certain contracts (including cost-type contracts or contracts subject to funds not yet appropriated) may be halted, and the Government may issue a stop work order for certain contracts.
In connection with this assessment, a contractor should seek guidance from the Government regarding contract performance (assuming contract terms allow for ongoing performance) and/or instructions for performance during the shutdown. Contractors should also review an agency’s shutdown plans for guidance and information, many of which are available online.[1] Agencies are expected to execute shutdown plans in an orderly manner, which may allow an opportunity for a contractor to receive specific instructions regarding contract performance.
- Remain Aware of the Legal Consequences of Employee Furloughs – Agencies are expected to instruct contractors on agency contingency plans and to provide guidance on how to implement reductions in contract hours. A misstep in implementing this direction, however, could potentially result in an exempt employee being reclassified as non-exempt under the Fair Labor Standards Act (“FLSA”), which would then require payment of overtime wages to the employee. Professional services contractors are particularly at risk, as many of their employees may be working on cost-reimbursable government contracts but may be compensated on a salaried basis. We previously considered this topic here.
- Understand the Exceptions to the Anti-Deficiency Act – The Anti-Deficiency Act prohibits agency officials from paying employees when the official does not have the funding that covers the payment that will be owed to the employee in the future. However, the Act recognizes a few narrow exceptions — such as when Government services are “for emergencies involving the safety of human life or the protection of property” — that permit the Government and its contractors to operate on a limited basis. These narrow exceptions can be crucial for contractors because falling within them could mean being able to recover for the costs of paying employees.
When determining whether the exception applies, contractors should consider whether their operations involve the “safety of human life” or “the protection of property,” recognizing that administrators have only found exceptions in unique and narrow circumstances. For example, GAO found that recalling Farm Service Agriculture employees to open mail to identify bankruptcy notices and third-party actions affecting security interests was an exception to the Act because of the time-sensitive nature of the action. Matter of: U.S. Dep’t of Agric.-Operations of the Farm Serv. Agency During the Fiscal Year 2019 Lapse in Appropriations, B-331092 (June 29, 2020). Contractors must also be sure to clearly link the action to an emergency posing imminent harm. See Matter of: Smithsonian Inst.-Application of the Antideficiency Act to Emp. Travel During A Lapse in Appropriations, B-333281 (Oct. 19, 2021) (finding that Smithsonian had not identified a clear emergency or demonstrated how its action would avert imminent harm to human life or property).
- Record Costs Incurred as the Result of the Shutdown – Contractors should document the costs they reasonably incur as a result of a shutdown, as they may be recoverable from the Government. For instance, contractors may be able to proceed under the Government Delay of Work clause (FAR 52.242-17), which allows for adjustments in contract price (excluding profit) 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. 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, though contractors should take care to precisely document and track costs, which form the basis to the successful recovery of an equitable adjustment.
- Assess and Track Potential Cost Overruns – During a shutdown, contractors often ask whether they can continue to work once they have reached a contract ceiling and, if so, whether they will be reimbursed. Although the contracting officer typically has the discretion to fund a cost overrun retroactively, a number of factors inform this decision (including the terms of the funding that may be available to the contracting officer to use for this purpose). If a contractor decides to proceed, the standard FAR clause requires contractors to provide notice of an overrun before it occurs. We addressed this topic in detail, here, during a prior Government shutdown.
- Consider Impact on Procurement Activities and Protests – With non-essential government workers furloughed and appropriations stalled, procurement activity will inevitably slow. Contractors should watch carefully to determine whether procurement deadlines are extended, and continue to plan to submit (if possible) by the deadline if such extensions are not publicly posted. Additionally, GAO will typically pause its consideration of pending protests, and extend filing deadlines consistent with the length of the shutdown.
These considerations reflect only a few of the numerous challenges contractors potentially face related to a Government shutdown. Indeed, for many contractors a shutdown causes ripple effects, leading to program delays and cash flow difficulties affecting employee retention and payment of subcontractors. Although planning for a shutdown and its potential length is difficult, communication with the Government (when possible) and documentation of performance efforts and costs incurred throughout the shutdown may help to mitigate its impacts.
[1] A few examples of agency contingency plans include guidance from the Department of State, Department of Defense, and the Office of Management and Budget.