Have you heard that the government might shut down again on October 1st? It’s causing quite a stir, especially among government contracting businesses who rely on contracts for their income. If the government shuts down, contractors will be in a tough position. They won’t be able to continue working on their projects, and the worst of all, they won’t get paid.
To make matters worse, nobody knows how long the shutdown will last, adding more uncertainty to the contractors. In fact, defense contractors alone lose about $1 billion every single day the government stays closed.
So, if you’re a contractor, this guide will help you prepare for the possibility of a shutdown.
What Is a Government Shutdown and How Can It Be Avoided?
A government shutdown happens when the federal government doesn’t pass and sign funding into law. It’s a rare occurrence, with only four shutdowns lasting one or more business days in history. The most recent one took place in December 2018 for 35 days.
During a shutdown, Congress has a couple of options. One way is to pass all 12 annual appropriations bills, which allocate funds to different government agencies and programs. These bills must be approved by the Senate and the House of Representatives and signed by the President.
If Congress can’t agree on all the bills, they may opt for a continuing resolution. This short-term funding measure allows the government to keep running while they work on resolving their disagreements over the annual appropriations.
In some cases, Congress might decide to pass only some of the appropriations bills, resulting in a partial shutdown.
What Happens During a Government Shutdown?
Here are five things to expect during a government shutdown:
Observance of the Antideficiency Act
During a government shutdown, federal agencies must comply with the Antideficiency Act, where they cannot obligate funds. Agencies cannot award contracts, modify them, or exercise options. Furthermore, “non-essential” government personnel are furloughed.
This significantly impacts contractors who rely on government personnel to make timely decisions, approvals, and support from these personnel to deliver their work on time. For example, contractor employees may encounter difficulties accessing U.S. government facilities due to the closure of security offices, installation access points, and buildings. This can disrupt the workflow and hinder contractors from fulfilling their obligations on time.
Employee Benefits Are Affected
During a government shutdown, government contractors must consider how it can affect employee benefits. Employees’ benefits may be impacted if they are furloughed for a long time. From 2018 to 2019, the longest shutdown lasted 34 days, but it was a partial shutdown. When employees’ hours are reduced due to a shutdown, they might lose their COBRA health plan coverage.
Government contractors must send qualifying event notices to affected employees in such cases. Employees should be allowed to continue their coverage under the plan, but they would have to pay for it themselves. This option would be available for the entire duration of the furlough, following the maximum COBRA continuation period.
Work on Existing Contracts Continues
When the federal government shuts down, it doesn’t automatically mean that existing government contracts halt. Contracts that still have time left for performance and funding already allocated are expected to be carried out during a shutdown unless the contracting officer terminates the contract or puts it on stop-work status. The contract remains in effect until the obligated funding runs out.
When funding for a specific contract is depleted, it becomes the contractor’s decision whether or not to pause the work or take the risk of continuing, hoping to be reimbursed once the shutdown is over. This choice is left to the contractor’s discretion.
If contractors experience any negative effects caused by a shutdown, they may have the opportunity to seek reimbursement for associated costs based on their contract terms. Relevant clauses to consider include:
- FAR 52.242-14 (Suspension of Work)
- FAR 52.242-15 (Stop-Work Order)
- FAR 52.242-17 (Government Delay of Work)
- FAR 52.243-1 (Changes – Fixed-Price)
Considerations for Subcontractors
Subcontractors should not be overlooked during a government shutdown. Subcontractors have a direct relationship with the prime contractor, not the government. So, avoid situations where the subcontractor is owed more money than the government will pay the prime contractor.
Prime contractors must carefully review their agreements to ensure they have not inadvertently agreed to fully compensate subcontractors after the shutdown, as the government doesn’t guarantee such reimbursement. Regular communication between prime and subcontractors is key. If the contracting officer orders a work stoppage, the subcontractor should refrain from performing on the contract.
Closure of The Office of Federal Contract Compliance Programs
The Office of Federal Contract Compliance Programs (OFCCP) oversees various aspects of employment practices, whether you hold federal contracts or seeking your first one. The government shutdown will have significant effects on the OFCCP’s operations. Federal contractors and subcontractors should be aware that there’s no communication from OFCCP staff during this period. Additionally, the OFCCP’s workforce will be completely reduced from its current staffing level, including all recently hired field personnel.
What Government Shutdowns Mean for Ongoing Contracts
The two most common forms of government contracts are fixed-price and cost-reimbursement. Here’s how government shutdowns affect the financing for ongoing contracts:
In a fixed-price contract, the contractor agrees to provide a product or service at an agreed-upon maximum price. The contractor takes the risk and takes over the financing until completion. Payment terms can vary, but generally, the government must pay within 30 days of being invoiced. If the government fails to make timely payments, they are still obligated to pay interest on the late payments. This applies to lump sum payments upon completion and periodic payments based on progress or milestones.
In a cost-reimbursement contract, the contractor commits to doing their best to complete the work required. They can get paid for their costs if they follow the contract rules. The contract sets an estimated total cost and a limit contractors cannot exceed without permission. Just like in a fixed-price contract, if the government doesn’t pay the contractor on time, the contractor will receive interest on the delayed payment.
Ways Government Contracting Businesses Can do to Prepare for Government Shutdowns
Determine if your contract will be affected
During a government shutdown, your work on contracts may be interrupted. Contracts that depend on long-term funding or have specific deadlines are usually safe. However, it could be impacted if your contract relies on annual funding. Keep an eye out for “stop-work” notices from your agency, which may be issued on the shutdown’s first day or even later. Also, review the option periods in your contract. Some may expire on September 30, while others may continue until later.
Companies with government contracts should ensure that all material orders are completed and bills are paid. They should maintain contact with departments for payments and paperwork and keep employees and clients informed about potential cutoffs.
Resources that may waste or expire during the shutdown should be used or sold, and equipment rentals should be returned. A reliable contract explaining the shutdown status is important for planning and executing preparations.
Communication with clients about implemented measures is important, as project timelines may be delayed or eliminated. The contract with the agency generally remains in place unless terminated before the shutdown.
Carefully plan and execute
Companies contracted with the government should anticipate the possibility of a shutdown and develop contingency plans to address the impact on materials, clients, employees, and the overall production process.
Additionally, companies should assess staffing needs, consider subcontractor arrangements, establish communication protocols, anticipate cash flow interruptions, and implement accounting measures to account for shutdown-related costs.
Implement the E-Verify system
Government contractors should take proactive measures in anticipation of a government shutdown. The E-Verify system, which verifies the citizenship status of new hires, is typically offline during a shutdown as the Department of Homeland Security maintains it. If E-Verify is unavailable, contractors should promptly complete the standard I-9 process for new workers.
Factor the potential cost impacts of a shutdown
Contractors should establish communication with contracting officers beforehand to discuss potential work disruptions in case the officers are unavailable during a government shutdown. Small businesses relying on government funding should also speak with their bank before funding deadlines to ensure they have enough cash flow to sustain themselves during a shutdown.
Initiate early communication with your contracting officer (CO). This allows them to update you promptly. You can quickly inform your employees and vendors if your contract is affected. Remember that your CO may not have more information than you currently have, but they will update you as soon as possible.
Don’t hesitate to contact your CO as needed, as they may be considered non-essential employees in some agencies and may not be available to address your concerns during shutdowns.
Meet the deadlines for proposals and legal actions
Even if there are delays in contract awards, government officials being furloughed, or government facilities being closed, assume that deadlines are still in effect. This is especially important for filling bid protests by contracting officers. Plan to meet all deadlines for submitting bids and proposals and contact the contracting agency for additional instructions.
While some legal deadlines may be extended in specific situations, the rules can differ depending on the legal forum and deadline. It’s best to assume that all deadlines remain the same to be safe.
What is the difference between a government shutdown and a government default?
A government shutdown occurs when Congress fails to approve funding legislation, leading to a temporary halt in government operations. This affects non-essential federal employers and some government services.
In contrast, government default happens when the government surpasses its borrowing limit and can’t pay all its creditors or fund existing programs. The consequences of a default are uncertain and have never occurred in U.S. history, while true government shutdowns have occurred four times.
Who are considered essential and non-essential government workers?
During a government shutdown, essential government workers are those involved in vital functions that affect public safety, national security, and protecting life and property. This includes roles such as law enforcement, military personnel, air traffic controllers, emergency medical services, and certain healthcare workers.
Non-essential government workers refer to employees whose roles are not directly related to essential functions. These include administrative staff, office personnel, and employees in non-critical government agencies or departments.
What is the difference between a partial and full government shutdown?
The government is composed of different departments and programs. In a full government shutdown, many departments and programs must close down or do only the most important services with mandatory funding, like the U.S. Postal Service. Others that need yearly funding will have to stop.
During a partial government shutdown, many government workers, about 800,000 of them, won’t be able to go to work or get paid until everything is sorted out. Only the most important services in those departments will keep running.
For example, the National Oceanic and Atmospheric Administration and the National Institute of Standards and Technology have research activities that fall under the Commerce Department would stop except for the ongoing real-time modeling for hurricane tracking and flight planning conducted for the Federal Aviation Administration.
Analysis has shown that both types of shutdowns can harm the economy by reducing GDP growth and causing financial losses. For example, a shutdown in 2017 could have led to a decrease of $6.5 billion per week in economic growth, and a partial shutdown in 2018-2019 reduced GDP by $11 billion.