The effect of a shutdown on government contractors

March 10, 2011

Government Contracts Alert

Author(s): Tiana M. Butcher, Brian J. Whittaker

This alert discusses how a shutdown of the U.S. federal government will impact contractors and what contractors can do to prepare.

While the U.S. Congress continues to debate the 2011 Budget, contractors are left to prepare for a possible shutdown of the federal government. The last federal government shutdown occurred between December 16, 1995 and January 6, 1996. At that time, the government was less dependent on contractors. It is not entirely clear how contractors will be affected should a shutdown occur this year. Although Congress recently passed a stopgap measure to prevent a shutdown, which was signed by President Obama on March 2, there is still the potential that a government shutdown may occur on March 18. 

What does a shutdown mean for contractors?

As a general rule, the Executive Branch is unable to spend money unless Congress appropriates the funds. When Congress is unable to pass a new budget before the existing appropriations run out, the government must shut down to prevent it from spending funds it does not have.   

A shutdown does not mean that all government programs are stopped. When a shutdown is announced, the Office of Management and Budget will notify the agencies, and each agency must then decide which functions are essential and which functions must be shut down. Contracting Officers should then notify contractors, who are responsible for notifying subcontractors, whether the contract will be funded during the shutdown or whether the contractor should stop or reduce work. 

A Contracting Officer may issue a stop work order or, more likely, issue broad guidance for contractors to follow. This type of broad guidance raises a number of complex compliance issues.  Without a stop work order, contractors may still be subject to contractual obligations; however, a contractor may not perform work for the government on a voluntary basis. As a result of these issues, it is essential that contractors remain in frequent communication with Contracting Officers, subcontractors, or prime contractors and counsel in order to understand their rights, duties, and obligations. 

Who may be affected?

Essential contracts – those that are required to maintain the safety, health, and welfare of the American people – likely will not be affected by a shutdown. However, it is unclear at this time how narrow the government will interpret the term “essential.” In addition, contracts that are funded prior to the shutdown likely will not be affected. Examples of these contracts include fixed price contracts that are funded at the time the contract is formed and certain multi-year contracts that do not depend on 2011 appropriations.  

Contracting Officers will not have any authority to enter into new contracts, renew expiring contracts, or exercise options during a shutdown. Existing contracts may be affected if they require the government to obligate new funds during the shutdown. Even if the following contracts are in place at the time of the shutdown, work under the contract may be impeded under certain circumstances: 

  • cost-type contracts if future incurred costs exceed the contract amount;
  • time and materials or labor hour contracts if the cost incurred exceeds any pre-funded amount;
  • indefinite delivery/indefinite quantity (IDIQ) contracts that require new task orders; and
  • severable services contracts. 

The shutdown will not affect the 10-day period for submitting bid protests. 

How will contractors be affected?

A contractor should mitigate costs of a shutdown wherever possible and maintain thorough records documenting all costs incurred during the shutdown. To mitigate costs, a contractor may reassign personnel from a contract affected by the shutdown to other projects or contracts. At the conclusion of a shutdown, contractors should promptly request reimbursement for allowable expenses incurred. Potentially recoverable costs include:

  • the cost of stopping activities and starting back up;
  • the cost of additional material and vendor costs required; and
  • certain employee costs that the contractor was required to incur during the shutdown.

As indicated above, these costs are recoverable, meaning that the government may reimburse the contractor for these costs after the government has resumed business, which presumably it will, at some point. The contractor must also ensure it has sufficient cash flow during the shutdown to meet its contractual requirements.

To prepare for a potential shutdown, contractors are encouraged to communicate with their Contracting Officers, who are in the best position to know whether a particular contract will be affected, and to document all communication with their Contracting Officer. Agencies are required by Office of Management and Budget Circular No. A-11 to maintain shutdown plans. Therefore, Contracting Officers should have a general idea what programs have priority in the event of a shutdown. Subcontractors, who are not in direct contract with the government, are encouraged to seek guidance from the prime contractor. All parties, including Contracting Officers, will face unique challenges during a shutdown. By proactively communicating with the Contracting Officer, a contractor will be more likely to learn how a government shutdown may impact its contracts and in a position to inform the Contracting Officers about challenges the contractors are facing.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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