Two-Minute Warning: Preparing for a Possible Government Shutdown

Experienced contractors remember the impact of the 1996 and 2013 shutdowns. The 2013 shutdown was credited with more than $24 billion in lost economic impact; on a personal level, contractors were forced to lay off employees, delay projects and postpone investment, resulting in significant and largely unrecoverable losses for a number of companies.

Given the unpredictable political climate, wise contractors will proactively invest their time in preparation for a possible shutdown. Some have assessed the likelihood of a shutdown at well over fifty percent, with the debt ceiling and border wall funding being the main sticking points. Ironically, Hurricane Harvey may be the catalyst that forces Congress to address issues like emergency relief, and convince opposing political forces to delay major battles like the debt ceiling and border wall until later this year or early 2018.

During a shutdown, the Anti-Deficiency Act governs what gets “shut down.” Agencies can’t obligate funds or award contracts (or modifications or exercise option periods) without funding. The impact on contractors is immediate and obvious—absent emergencies and exigencies, pending contracts cannot be awarded (including modifications and option years), notices to proceed cannot be issued, and “non-essential” government personnel are furloughed. The government furloughs significantly impact contractors, who rely on government personnel to make timely decisions, review and approve documents, and generally keep the wheels moving on projects. When federal employees are not allowed to work, decisions do not get made and actions are not taken, leading to delay costs and uncertainty for contactors. Contractors are well aware of how even a three day delay can cause one to miss an ordering or shipping window, resulting in weeks or months of actual extended delay.

Delays during a period of government shutdown can be explicit or implicit. The Government can issue a formal Suspension of Work or Stop Work Order (FAR 52.242-14/15), which can last up to 90 days. Contractors may be eligible for an equitable adjustment, but only if they properly document the cost and schedule impact of the stop work order. The Government Delay of Work clause and the Changes clause also may provide relief for damage caused by government inaction. While failure to document delays and costs can jeopardize cost recovery, failure to stop work can also result in financial loss. Auditors and contracting officers routinely disallow costs incurred during a stop work period, even if the Government ultimately receives the benefit of the work.

Government agencies may also simply fail to act during a shutdown, leading to constructive delays and ensuing contractor claims. Again, proper documentation and cost tracking of your delays and cost impacts is paramount to successfully recovering equitable adjustments. There are a number of actions contractors should take to minimize their risks:

Contractor’s Immediate Action Items

• While work does continue on fully funded contracts, contractors should plan to bridge a gap of a few days or weeks caused by government furloughs. Communicate early and regularly with your Contracting Officer to seek early approvals and create an action plan in the event of a shutdown.
• Prepare contingency plans to re-assign personnel and resources from impacted Government projects to commercial and non-impacted government contracts. Prepare employees for the possibility of furloughs or a requirement that they use paid leave if applicable. In the event a shutdown forces an employer into a large scale reduction in force, ensure you are aware of the requirements of the WARN Act or any State equivalent regulation. Communicate and negotiate similar contingency plans with suppliers, subcontractors and teaming partners.
• Analyze your current contracts and become familiar with relevant Suspension of Work, Stop Work, and Government Delay of Work clauses. Avoid performing any work at risk.
• Don’t stop work unless directed, but prepare for that occurrence. Train personnel on what to expect and what to do in the event of a suspension of work/stop work order. Have systems in place to ensure immediate notifications to employees and to all levels of your supply chain.
• If you do not receive a formal stop-work notice but your contract is delayed by government inaction, have systems to track total delays and costs associated with the shutdown period. Set up new account codes to track costs, and document everything. Some clauses provide greater rights than others for equitable adjustments, but all costs and time impacts should be discretely tracked to maximize recovery.