Congress has not passed crucial funding bills for the start of the fiscal year 2024. If Congress does not act by September 30, the government may be forced to shut down for lack of funding. While Congress may yet act, agencies across the government are preparing for a shutdown, and contractors should do so as well.
The issues that contractors would face under a government shutdown may vary with the circumstances of individual contracts, but there are a number of common considerations.
Based on our experience under prior Federal government shutdowns, these include:
- What is the Contracting Agency's Plan?Agencies across the government are issuing operating plans in the event of a lapse in appropriations. For example, theDepartment of Defense,Department of State,Department of Energy, andDepartment of Housing and Urban Developmenthave all issued new guidance in recent weeks. The plans restate general rules that contractors should continue performing under contracts awarded and funded prior to the shutdown, but that agencies may not award new contracts or options, with some exceptions for "excepted" activities. The plans also reflect the probability of furloughs of large numbers of government personnel. Contractors should review their contracting agency's guidance to understand any agency-specific plans.
- What Happens if Performance is Delayed or Disrupted?Due to the unavailability of appropriated funds, contractors may be unable to access closed government facilities or obtain timely approvals, directions or support from the government. For example, a contractor that performs services in a federal facility may find that the facility is closed, so the contractor's employees do not have access to their workplace. In that situation, contractors will need to decide whether to (1) continue to pay employees for idle time caused by the shutdown, (2) reassign employees to unaffected contracts, (3) force employees to take vacation or other paid leave for the duration of the shutdown, or (4) furlough or lay off employees. In connection with those decisions, contractors need to consider not only their contractual requirements, but also the applicability and requirements of federal, state, and local labor and employment laws (such as WARN Acts), the terms of their employment contracts and collective bargaining agreements, the impact that their decisions may have on employee relations, and other factors. In a situation in which the duration of the shutdown is unclear, those decisions can be even more difficult, involving a variety of competing and largely unattractive options. Contractors should track and document the cost and schedule impact of both the disrupted work and the contractor's employee relations actions to ensure that any increases in the contract work associated with the shutdown are appropriately reflected in a contract modification.
- Can My Contract Workload Increase?Some contractors may actually be approached by their government customer seeking to off-load, at least temporarily, work that cannot be performed by the government during the shutdown period. If the contract funding is available, the government may want to increase the scope of the contract in order to ensure that certain work is not disrupted or delayed. Contractors should track and document any changes in workload to ensure that any increases in scope and associated cost or price adjustments are appropriately reflected in a contract modification.
- Can I Stop Performance?In extreme circumstances, contractors may face questions of whether to continue performance in the face of potentially material government failures to pay. A unilateral cessation of work involves considerable risk for a contractor, particularly considering the duty to proceed imposed by the FAR "Disputes" clause. FAR 52.233-1 requires that "[t]he Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract." The "Alt. I" version of the Disputes clause extends that duty further to issues "relating to" the contract, which is generally understood to include government breach. Failure to comply with the duty to proceed can be an independent basis for the government to terminate a contractor for default. Contractors considering unilateral cessation of performance should first seek legal guidance based upon a detailed analysis of the relevant facts and law.
- Where is the Money?For incrementally funded contracts, contractors will need to consider the implications of the various standard clauses (Limitation of Costs, Limitation of Funds, Limitation of Government Obligations) that may affect the government's obligation to pay costs in excess of the amounts already obligated to their contracts. Of particular concern will be the standard provisions in those clauses that may limit the government's liability for termination costs in the event that the contracts are eventually terminated without new funding. But for contracts that are fully funded or that have incremental funding sufficient to cover all anticipated costs, including termination costs, a shutdown would not normally create new funding risks.
- When Will I Be Paid?There may be delays in payment. As noted above, the government's ultimate legal liability for payments due on contracts that are already funded at the time of the shutdown are unlikely to be at issue, but if the government employees who process contractor invoices and make contractor payments are not at work, there will obviously be no payments made. For large contractors with substantial bills that may involve payments of millions of dollars on a daily basis, the consequences of even a short delay in payment could be economically significant, although probably not an existential threat to the company. For contractors without readily available cash or credit lines, the consequences of more than a brief delay in payment could be more consequential.
- What Remedies Are Available?Contract type and the availability of a remedy from the government for the consequences of a shutdown will also be important in the decision-making process. For contractors with cost-reimbursement contracts, the reasonable costs of coping with a shutdown should be recoverable, although there may be issues about the allocability and allowability of specific items of cost. On fixed-price contracts, any recovery from the government will likely depend on whether the contractor is entitled to an equitable adjustment. And, on T&M contracts, there are likely to be contract-specific issues about whether the contractor is entitled to be paid under the contract for idle time or would need to make a claim for an equitable adjustment. Again, every situation should be assessed separately, based on specific facts. In general, however, contractors should take steps to ensure that any increased costs associated with the shutdown are collected in a way that will support a claim or a request for equitable adjustment if the contractor ultimately decides to pursue one.
A shutdown may not occur and, if it does, may not last long. But prudent contractors will assess the likely impacts of a shutdown on their operations and make contingent plans for dealing with the consequences. Our team is closely monitoring events and standing by to help you work through any issues that may arise.
Key takeaway #1
- A government shutdown may not occur, and if it does, it may not last long. But contractors should be prepared for a range of potential impacts. Contractors should work with their contracting officer to establish a plan for contract performance, ensure their contracts have adequate funding and, if there is a shutdown, separately track and document any cost and schedule impacts.
Key takeaway #2
- Contractors should expect payment delays and other disruptions to performance but should not assume that payment delays will automatically allow them to cease performance.
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.