Frequently Asked Questions For Federal Contractors During A Government Shutdown

Because Congress did not enact a full appropriations bill or continuing resolution, as of October 1, 2025, the federal government is experiencing a funding lapse, triggering a partial government shutdown. 

The Antideficiency Act requires many agencies to suspend nonessential operations until Congress provides appropriations, although functions that are considered excepted will continue. Federal contractors face unique challenges in this environment, including disruptions to performance, delays in payment, and uncertainty regarding ongoing or upcoming work.

Below is a set of frequently asked questions designed to help contractors understand the potential impacts of the shutdown, outline key considerations for managing risk, and identify practical steps for documenting costs and protecting contractual rights.

1. What is a government shutdown, and why does it happen?

A government shutdown occurs when Congress does not pass an appropriations bill or a continuing resolution to fund government operations. Under the Antideficiency Act, agencies generally cannot spend money without appropriations and must suspend “non-excepted” functions. This typically means that the agencies close offices, furlough employees, and temporarily cease operations. 

Here, Congress was not able to pass a continuing resolution or an appropriations bill, which triggered a funding lapse at the end of the fiscal year (September 30, 2025). Additionally, the administration, through the Office of Management and Budget, has indicated that in addition to furloughing employees, agencies can consider terminating employees via Reduction in Force notices. 

2. What happens to contractors when a shutdown begins?

Impacts vary, but common effects of a shutdown include: no new awards or options exercised, suspension of performance, stop-work orders, delays in invoice processing, and potential termination of nonessential work. In some cases, even fully funded contracts are disrupted if government oversight or access is unavailable.

To determine the full impact of the shutdown on their contracts, contractors should rely on their contracting officer (CO) for authoritative guidance. The CO is responsible for determining whether a contract is affected and will normally issue a formal stop-work order if performance must be suspended. Clear communication with the CO is essential to ensure compliance with federal law and to avoid violations of the Antideficiency Act. COs are generally directed by their agencies to analyze contracts in accordance with the guidance issued by their agency and issue stop-work orders for all contracts affected by the lapse in appropriations. Additionally, in cases where oversight by federal employees is essential and those employees are furloughed, contract performance may be paused. However, if you are not directed by your CO to stop work that is already ongoing, your contract may continue.

Contractors should also closely monitor agency websites, as several agencies—like the  U.S. General Services Administration, the  U.S. Department of State, the U.S. Department of Justice, and the  U.S. Department of Health and Human Services—have shut down plans explaining how the agency will proceed during the shutdown. 

3. Are contractors entitled to payment during a shutdown?

It depends. Payment rights hinge on funding status and whether a CO has directed work to stop. During a lapse in appropriations, federal contract actions may continue only under specific conditions. Contracts that were fully funded prior to the shutdown, such as those supported by no-year, multiyear, or other exempt funds, remain in effect and may proceed without interruption. New contracts, task orders, or contract modifications may only be executed if they directly support legally defined “excepted activities,” such as those necessary to protect life or property, or if they are funded by exempt sources like nonappropriated funds. Agencies may also continue contract administration and payments for obligations made before the lapse, but no new obligations may be incurred unless explicitly authorized by law or deemed necessary under emergency exceptions. 

4. How do multiyear or performance-based contracts fare in a shutdown?

Fully funded, multiyear contracts may continue despite a shutdown. However, incrementally funded vehicles and indefinite delivery/indefinite quantity (IDIQ) task orders may halt until new funds are obligated. Performance-based contracts may stall if deliverable acceptance or oversight requires government staff.

5. What kinds of shutdown-related costs may be recoverable?

Under the Federal Acquisition Regulation (FAR) Stop-Work Order clause (FAR 52.242-15), Suspension of Work clause (FAR 52.242-14), or the Changes clauses in the FAR 52.243, recoverable categories can include standby labor, restart costs, subcontractor pass-through costs, and schedule disruption expenses. However, recovery is not automatic, and contractors must meet FAR cost principles for allowability and allocability and support their arguments with a proper legal basis. For commercial item contracts governed by FAR Part 12, recovery under these clauses may be subject to streamlined procedures, and contractors may rely on their standard accounting systems rather than formal cost principles. FAR Part 12 also limits the government's audit rights and encourages efficient resolution of claims.

6. How should contractors document shutdown-related costs?

Contractors should: 

• Create separate cost codes for shutdown expenses.
• Record dates and events of disruption.
• Notify subcontractors of any stop-work or suspension of work orders issued by a CO.
• Track idle labor and subcontractor impacts.
• Track ramp-down and ramp-up expenses.
• Preserve communications with COs.
• Document mitigation efforts.

These steps help support equitable adjustments or Contract Disputes Act (CDA) claims.

7. Should contractors stop performing on their own?

Generally, no. Contractors should continue performance unless directed otherwise by a CO. Unilateral cessation risks default termination. If work is impossible due to government inaction (e.g., closed facilities), contractors should notify the CO in writing and preserve claims under the Disputes clause (FAR 52.233-1). Additionally, contractors should try to engage COs as early as possible to confirm assumptions about performance obligations and payment.

8. What mechanisms exist to recover shutdown-related costs?

Options include equitable adjustments under the Stop-Work or Suspension of Work clauses, formal CDA claims, constructive change or delay claims, and termination settlement proposals if contracts are terminated. 

9. What risks or challenges exist when seeking recovery?

Key hurdles include proving causation of incurred costs (e.g., that additional costs are related to the government shutdown), demonstrating allowability of costs, and meeting notice requirements. Larger claims may draw audit review. 

10. How are subcontractors affected by a government shutdown?

Subcontractors are affected when prime contracts are disrupted. Generally, prime contractors remain responsible for paying subcontractors, even if government payments are delayed, unless the subcontract specifically says otherwise (e.g., the stop-work order clause is flowed down, and notice of the stop-work order is provided).

Prime contractors should also notify subcontractors of any stop-work or suspension orders they receive from the government. This ensures the subcontractor will follow the government's direction, preserves the subcontractor's right to claim equitable adjustments for costs caused by the shutdown, and mitigates the prime contractor's risk of incurring unallowable subcontractor costs.

Subcontractors should document all costs associated with delays, suspensions, or idle labor and communicate promptly with the prime to ensure those costs are included in any claim the prime submits to the government. Similar to prime contractors maintaining communication with their CO, subcontractors should communicate with their prime contractors to ensure alignment. Open communication and proper flow-down of government directives help protect both prime and subcontractor rights.

11. What happens if the government cancels or terminates my contract?

Most shutdown-related terminations are for convenience, entitling contractors to reimbursement of costs incurred as of the termination date that may include direct costs (labor and materials), indirect costs (overhead), settlement expenses, and profit on work performed (see our  Article addressing in more detail cost recovery after a termination for convenience). Under FAR Part 12, which governs commercial item acquisitions, termination for convenience allows contractors to recover a portion of the contract price for completed work and reasonable termination-related expenses. These procedures are streamlined compared to noncommercial contracts and do not require compliance with cost accounting standards or FAR Part 31.

Default terminations should not occur absent contractor fault, though improper defaults may be contested. Partial terminations and deobligations are also possible because agencies may reassess funding availability, scope requirements, or priorities during a shutdown, leading to scaled-back obligations or reduced contract performance. A partial termination may also be referred to as a scope change, particularly when it alters the quantity or nature of the work to be performed without ending the entire contract. These should be handled in accordance with the terms of the contract, including the termination for convenience clause of the contract when appropriate.

12. What proactive steps can contractors take before or during a shutdown?

Contractors should: 

• Review funding status of each contract.
• Engage COs early about contingency plans.
• Establish internal cost-tracking protocols.
• Maintain all records and communications.
• Train staff on shutdown response.

Proactive planning strengthens both operational resilience and legal claims. 

13. How does the shutdown affect federal grantees, since grants are not governed by the FAR?

Federal grants and cooperative agreements are generally subject to the same funding lapse restrictions that affect contracts, even though they are governed by the Uniform Guidance (2 C.F.R. Part 200 and agency supplemental regulations) rather than the FAR. The FAQs and responses above are generally applicable to grantees and cooperative agreement recipients, except when it comes to recovery of shutdown-related costs and dealing with terminations. Grantees and cooperative agreement recipients should rely on the Uniform Guidance and the specific agency regulations incorporated in their agreements. 

Key Takeaways

• Document everything: dates, directives, costs, and mitigation.
• Do not unilaterally stop performance without direction.
• Communicate early with COs and subcontractors.

These FAQs are intended as general guidance; contractors should evaluate contract-specific terms and consult counsel for tailored advice.

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.