The government is an engine that requires constant motion to enable the consistent delivery of public services. A government shutdown, a possibility that may happen on October 1st, can have adverse effects on this engine, affecting established systems, networks, and businesses, such as the government contracting industry.
What is a government shutdown?
A government shutdown occurs when the legislative branch, also known as Congress, doesn’t enact or delay the approval of the federal budget for the upcoming fiscal year. Congress must approve the budget legislation, consisting of 12 appropriations bills under the Antideficiency Act, and have it signed by the President by the end of the day every September 30.
Due to the lack of funding, some federal agencies and offices may partially or entirely halt operations. In the meantime, Congress can work out a temporary extension, called continuing resolution (CR), which continues funding levels from their previous fiscal year to keep government services running while deliberation for the approval of federal legislation continues.
What happens during a government shutdown?
During a government shutdown, funding remains limited. Most federal agencies rely on cash reserves until the funding legislation is enacted. Although the government can set out a CR, it’s meant to be a temporary funding solution to keep services running in the short run. Expect these changes amid the lack of funding brought on by a government shutdown.
Mandatory government programs remain operational
Mandatory government programs, such as Medicare, Medicaid, and Social Security, don’t need annual approval by Congress, so they remain relatively unaffected by a government shutdown. However, government offices handling these mandatory programs may operate at a limited capacity during a shutdown.
Other mandatory spending activities, such as border protection, air traffic control, power grid maintenance, law enforcement, and medical care, are not subject to appropriations. Moreover, the federal government can continue with its timely payment of interest in the nation’s debts and payments to bondholders.
Cessation of non-essential government agencies
Amid the lack of funding from the federal government, only essential government offices remain operational. Ensuring a limited budget for running all necessary government functions is crucial amid a shutdown. Although they remain active, essential government operations may not run at full capacity, causing delays in essential public services.
On the other hand, non-essential government agencies cease operations unless they are self-sustainable or can operate through a collection of funds and other revenue sources. For agencies that can’t fund their operations, their employees may be furloughed or given unpaid leaves, affecting their livelihood and possibly benefits.
Postponement of essential workers’ payments
The livelihood of non-essential workers isn’t the only ones affected; essential workers’ payments may be postponed indefinitely to reduce agency costs. Although essential workers remain employed, their paychecks in the duration of a shutdown aren’t guaranteed unless a bill specifies funding for the work hours.
In addition, limiting work hours due to a government shutdown can risk their coverage of their benefits, such as the COBRA health plan. Suppose essential and even non-essential government workers want to continue the coverage of their benefits. In that case, they may have to pay for their plans themselves for the entirety of a government shutdown.
Disbursement of veteran and unemployment benefits persists
A government shutdown doesn’t affect the disbursement of veteran benefits and unemployment insurance. Unlike federal government agencies that rely on the annual federal budget for the specific fiscal year, these benefits receive funding from programs covered by advanced Congressional appropriations.
With the continued stream of funding for unemployment benefits, furloughed non-essential government employees are welcome to apply for temporary unemployment benefits depending on state requirements. However, anticipate prolonged claims processing due to the partial or full cessation of operations across federal government agencies.
Stagnation or decline in economic growth
The lack of funding, halted government services, and disruption to government processes can massively impact the financial market. According to the estimation of Goldman Sachs, a government shutdown can reduce the nation’s GDP by 0.2% each week. In 2019, more than two weeks of shutdown resulted in an estimated $24 billion in losses to the U.S. economy.
How does a government shutdown affect government contracting businesses?
Government contracting businesses are heavily dependent on the federal government. Any change, especially as drastic as a government shutdown, can change the industry operations, processes, and systems. A government shutdown can affect government contracting businesses, systems, and processes, such as:
Existing government contracts continue with work performances
Government contracts awarded prior to a shutdown carry on with the agreement, business as usual. As funding, duration, and task orders have been authorized in the previous fiscal year, the contract remains valid until obligated funds are exhausted or unless the contracting activity orders to pause all work performances.
In instances when funding runs out in the middle of a shutdown, contractors can work out provisional funding with the contracting activity. Nonetheless, here’s how contractors can go about a shutdown, depending on two of the most common government contract types.
- For fixed-price contracts, contractors can risk financing the contract through completion, even after the maximum funding amount has been depleted. Contractors can invoice the government, giving a 30-day period to make timely payments or whatever payment terms are finalized. Late payments are subject to interest.
- For cost-reimbursement contracts, contractors fully finance the contract through completion or until the set estimated total cost and excess are met. Similarly, the government is required to make timely payments within 30 days following the invoice or pay interest for delayed payments.
Disruptions to subcontractors and related businesses
Although subcontractors and associated businesses don’t work directly with the federal government, they also experience disruptions during a government shutdown. The nature of subcontracting, an indirect exchange with the government, doesn’t guarantee reimbursement from the federal government, making them susceptible to non-compensation.
Amid a government shutdown, subcontractors must communicate closely with the prime contractor to get notified of changes in the terms and conditions under the contract. If the contracting activity puts a stop order to the contract, subcontractors are recommended to cease operations to prevent adverse disruptions and possible conflict.
Potential losses and delays in completing the contract
Due to the lack of funding and limited operations of government agencies, prime government contractors are to expect losses. Small businesses and subcontractors secure agreements with government contractors, not the federal government, holding them accountable to adhere to the terms and conditions outlined in the contracts.
Regardless of the effects of the government shutdown on contractors’ operations, government contractors have obligations to keep with contracted enterprises. For any changes in payments, funding, performances, and other resources, communicate them with associated subcontractors and small businesses as soon as possible.
How many times has a government shutdown happened?
A government shutdown isn’t a new occurrence. The last time it happened was in 2018–2019, when the United States government recorded a historic 35-day shutdown, the longest in the nation’s history, due to a funding dispute over the expansion of the U.S.–Mexico border wall.
Since the U.S. government enacted the current budget appropriation process in 1976, the nation has experienced a total of 21 financial gaps and four government shutdowns. If Congress doesn’t meet the September 30 deadline for passing the appropriation bills, the 22nd financial gap and possibly the fifth government shutdown is imminent.
How can the federal government avoid a shutdown?
The legislative branch, both the House of Representatives and the Senate, ultimately has the power to avoid or negate a government shutdown. To avoid a shutdown, Congress must settle all disagreements, pass all 12 appropriations bills, and have them signed by the President into law on or before September 30.
Otherwise, if the set date has already lapsed, Congress can pass a CR, providing stopgap funding to operate essential government offices. For emergencies during a shutdown, a short-term bill may also be passed to provide emergency assistance to natural disaster victims. The only way to cease a government shutdown is for Congress to pass 12 appropriation bills.
Disagreements leading to a government shutdown, such as bureaucracy, political differences, and long deliberation processes, among others, are inevitable. As a government contractor in the government contracting business, it’s crucial to take note of these measures and countermeasures to adapt accordingly to any changes in the government landscape.
Start looking into the government contracting industry with this beginner’s guide.
