Shutdown Alert: Impacts And Contractor Preparedness

On Sept. 30, 2025, the federal government officially shut down after Congress failed to reach an agreement on either a short-term continuing resolution or a broader budget bill to fund government operations.

Most of the federal government has ceased to operate. The regulations governing federal government shutdowns divide federal activities and employees into "excepted" and "non-excepted" personnel. Only those activities and personnel that are "excepted" have continued to operate, unless an agency has a separate funding source. Some "excepted" federal functions that have continued include those related to national security, such as the military (though servicemembers' pay may be delayed), functions related to the protection of life and property (air traffic control, prisons, federal law enforcement, etc.), Social Security payments, the United States Postal Service, and the Federal Reserve.

At the start of the shutdown, federal agencies furloughed approximately 550,000 employees—a number that is expected to rise as the shutdown continues and remaining funding runs out. Agencies followed established procedures, which required employees to check in on the first morning of the shutdown to complete "orderly shutdown" tasks. These tasks included setting up out-of-office notifications and signing paperwork to formally acknowledge their furlough status.

Contractors are not strangers to the uncertainty of this situation, having dealt with disputes over the debt ceiling and sequestration in the past, but a government shutdown presents a unique set of problems that impact the ability of contractors to perform their contracts.

Recommended Actions for Government Contractors

First, contractors should assess their contracts and evaluate which contracts will be affected by the shutdown, or will be as the shutdown continues. If you haven't already, it is critical that you have frank and open discussions with your contracting officers for information about the status of your contracts. Document all communications with your contract's procurement officials in preparation for claiming recoverable costs related to the shutdown at a later date.

There are several Federal Acquisition Regulation (FAR) clauses that play a role in the remedies available to contractors when there is a government shutdown. At a minimum, contractors should be entitled to schedule relief for excusable delays in performance. But to protect your rights and be able to recover costs incurred as a result of any delays in performance during a shutdown, contractors need to keep detailed records. Documenting the specific government actions/inactions that cause the delays, as well as the costs associated with those delays (such as labor costs, costs for demobilization/remobilization, equipment, extended storage, etc.), is important. And you should email updates to your contracting officer to provide notice of your delays and increased costs, even if he/she is furloughed, so you do not forfeit your rights to recover them later.

Contractors must mitigate the cost of a shutdown to the extent possible. By doing so, you not only limit the impact on your employees and on contract performance, but you will also increase the success of your claim when funding is restored.

Employee Implications and Considerations

• Furlough: The Government Employee Fair Treatment Act, signed into law in 2019, guarantees that furloughed government employees receive backpay once a shutdown ends. However, federal contractors impacted are not guaranteed backpay, so plan accordingly.
• Benefits Issues: Employees who have been furloughed or work on reduced hours could lose eligibility for coverage under their employer-sponsored health plans. In such cases, affected employees become eligible for COBRA continuation coverage, which triggers an employer's obligation to send COBRA election notices to employees who lose coverage due to reduced hours. It is important for employers to ensure compliance with these notification requirements to avoid potential legal liability.
• Unemployment Benefits: Eligibility and the scope of benefits vary by state, so contractors are advised to consult their state's unemployment laws and regulations to understand how furloughs impact employees' ability to claim unemployment compensation.

Financial and Operational Considerations for Contractors During and After the Shutdown

The government shutdown creates significant operational disruptions and financial challenges for contractors who are reliant on federal funding and engagement. To mitigate these challenges, it is critical for contractors to maintain comprehensive and detailed documentation of all costs incurred as a direct result of the shutdown. Such thorough record-keeping is essential to substantiate any equitable adjustment claims or contract modifications once government operations resume.

In addition to immediate financial impacts, contractors should proactively address the longer-term operational implications of the shutdown. Employee retention may pose a significant challenge, particularly as furloughs and uncertainty affect workforce stability. Contractors should anticipate the attendant costs related to recruitment, onboarding, and training of new personnel, and incorporate these considerations into their post-shutdown planning and budgeting.

By taking these proactive measures, contractors can better position themselves to navigate the complex legal and financial ramifications of the shutdown, minimize disruptions, and facilitate a smoother transition back to full operational capacity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.