United States: Contractors Should Prepare For Potential Shutdown

Last Updated: January 19 2018
Article by Daniel E. Chudd, Kathy Weinberg and Victoria Dalcourt

As Congress and the Administration appear to be careening toward a potential government shutdown – whether on Friday January 19 or once another short-term continuing resolution expires – it is a good time for government contractors to review their contracts and the potential effect a shutdown might have.

The Antideficiency Act mandates a partial government shutdown when Congress fails to appropriate annual funds. In such situations, agencies with a funding gap will be required to shut down all but a narrowly defined set of essential services and operations. The Act also prohibits the government in such situations from creating new obligations, such as awarding contracts, issuing task orders, exercising options, and making related payments in the absence of a sufficient appropriation legally available for that purpose. Additionally, the Act precludes many government employees from working during government shutdowns. However, there are exceptions for "essential" work and personnel.

In the event of a shutdown, the likely impact on contractors will largely depend upon the length of the shutdown and the nature of a company's contracts with the government. The least-impacted contracts are likely to be those that are fully funded, require minimal government supervision, and are unaffected by facility closures. In contrast, the most-impacted contracts are likely to be incrementally funded contracts for nonessential services, particularly where potentially furloughed government personnel or access to closed government facilities are necessary for the contractor to perform. A shutdown is also likely to affect the time of payment for work being performed on a contract as well as lead to potential contract schedule disruption and delays in procurement of new contracts.

Right to Payment Under Existing Contracts

One of the first questions contractors may have is whether they will have a right to be paid for continued work under existing contracts. This question largely depends on the type of contract and whether it has been fully funded. All cost-reimbursable contracts should contain either a limitation of funds or limitation of costs clause. These clauses are based on the basic assumption that the contractor should continue work that is adequately funded and should discontinue work that is not adequately funded. If a contractor continues to work even though funding has not been added to the contract to cover such continued work, the contractor does so at its own risk, regardless of the reason for the lack of funding. Even after a budget crisis is over, the Government is not required – morally, legally, or contractually – to add funds to the contract to retroactively cover work done in the absence of funding.

On the other hand, the Government cannot require continued performance after funding limits have been reached. While it may not be cost-effective – for the Government – for the contractor to stop work during a funding lapse, it is the only safe course for contractors. These rules, covering funding lapses in individual contracts, apply with equal or greater force when the funding lapses are caused by government shutdowns.

In contrast to cost-reimbursable contracts, fixed-price contracts normally are fully funded at the time of award. That means that funding concerns should not interfere with payment. According to DoD's contingency plan for 2015, contractors "performing under a fully funded contract (or contract option) that was awarded prior to the expiration of appropriations may continue to provide contract services, whether in support of excepted activities or not." Memorandum from Deputy Secretary of Defense dated September 25, 2015, "Guidance for Continuation of Operations During a Lapse of Appropriations." However, no contract options can be exercised, and no orders can be issued, and funding increments cannot be added, unless the contract is to support an excepted activity, e.g., military operations; recruiting activities; command, control, communications, computer, intelligence, surveillance, and reconnaissance activities required to support national or military requirements necessary for national security; activities to carry out or enforce treaties; emergency repair and non-deferrable maintenance for utilities; control of hazardous materials; foreign humanitarian assistance; activities to protect military personnel or property; etc. Although this 2015 guidance may not be applicable to a 2017 shutdown, a link to it (as well as many other sets of guidance from 2015) is currently posted on OMB's website (https://www.whitehouse.gov/omb/information-for-agencies/Agency-Contingency-Plans).

Effect on Time of Payment

Even where a contractor may have a right to get paid for continuing work for a shutdown, that right is only for the contractor to get paid eventually. During and even immediately after the shutdown, the Government may not be able to make timely payments for work that is performed. Contractors should therefore expect and prepare for delays in payment caused by a shutdown. This is especially important given that payment delays do not ordinarily excuse performance. Some businesses whose continued survival is dependent upon prompt payment may be entitled to use payment delays as excuses, but most companies will have to continue performance of funded operations even though they encounter payment delays.

Schedule and Price Adjustments for Delays

Shutdown-related government actions, or failures to act, that cause delays to contractor operations should give rise to a right to an equitable adjustment in the contract schedule. While a shutdown is likely a sovereign act, as discussed below, that will provide a defense to a claim for money, not to a claim for additional time to perform or a challenge to a wrongful default termination.

Even if funds are available to continue performance, lack of government personnel could impact performance. For example, if government inspectors must approve first article testing before the contractor is authorized to start production, then the absence of government inspectors can effectively slow or stop performance. Similarly, if the contractor is unable to proceed without government direction, and such direction is not forthcoming, the contractor may have to delay performance until it receives such direction.

Contractors may be able to use advance planning to lessen the effects of a shutdown in such situations. If the contractor can continue to perform without government supervision, on a contract that is fully funded, the contractor cannot use the shutdown as an excuse for non-performance.

In contrast to the schedule adjustments, contractors may have a more difficult time claiming any price adjustments as a result of a shutdown because the shutdown is likely to be deemed a sovereign act. As one Board explained in a shutdown-related case in 2000, the "governmental action's impact upon specific public contracts is merely incidental to the accomplishment of a broader governmental objective." Raytheon STX, Corp. v. Department of Commerce, GSBCA No. 14296-COM, 00-1 BCA ¶ 30,632; see also A-1 Real Estate, Inc., 1997 HUD BCA LEXIS 7, ("the legislative branch's failure to appropriate funds for certain Federal operations, thereby creating a government shutdown, falls within the ambit of a 'sovereign act' having manifest 'public and general' application.").

On exception may be if funds are made available to continue government operations at some level, then funding decisions by the agency (to fund some contracts but fail to fund others) may not constitute sovereign acts. In some cases, contractors can recover where "the funding shortage and work shutdown at issue were not due to any sovereign act by Congress which had not delayed in appropriating funds when so requested by the agency, but rather to the agency's own decisions in administering the contract." Cyrus Contr., Inc., 1998 IBCA LEXIS 9.

In addition, if the Contracting Officer takes any contractual action to effectuate, rather than just to communicate, the shutdown, it may be possible to argue that there has been a contractual action or a waiver of sovereign immunity. The Government can use any of its typical tools to control actions during a shutdown. These include issuing change orders or terminations for convenience and can delay, suspend, or stop work on contracts. All of these contractual actions, however, will give rise to the contractor's right to obtain the remedies specified in the contract. Thus, contracting officers were warned not to take contractual actions to effectuate the shutdown unless absolutely necessary.

Finally, the contracts themselves may also contain provisions constituting an allocation of risk of non-performance, costs, or delays, and those risk-allocation provisions may not be deemed to except the risks of government shutdowns. A careful review of a contractors major contracts may reveal risk-shifting provisions that could help identify future claims for increased costs.

What Should Contractors Do?

There are three steps that every government contractor should take to prepare for a possible government shutdown.

1. Review Your Contracts

First, review whether any clauses, special provisions, or other requirements in your contracts will apply during a funding gap or continuing resolution. This includes any obligations to continue working during the period based on the work being designated in the contract as essential to national security.

Second, review contracts with an eye toward the amount and type of contract funding. Incrementally funded contracts should contain either the Limitation of Cost clause, FAR 52.232-20, or the Limitation of Funds Clause, FAR 52.232-22, while contracts contingent on future fiscal year funding should contain the Availability of Funds clause, FAR 52.232-18. Reviewing how contracts are funded can give contractors insight into what work is likely to continue, and what is likely to stop, which is valuable for planning purposes (see step two for developing a shutdown contingency plan).

Third, check whether your contracts allocate shutdown-related risk to a particular party. Contracts may allocate risk of a shutdown to the government. If such contractual provisions can be identified in a contract, it is possible for contractors to recover the "out-of-pocket expenses" arising from the interruption of contract performance caused by a government shutdown.

Fourth, check to see whether any of your contracts set to expire before or shortly after the end of the fiscal year contain an extension or option clause. In such cases, contractors should consider asking for an extension so that renewal does not come due when agency contracting staff are potentially furloughed.

2. Develop a Shutdown Contingency Plan

Start by reviewing agency shutdown contingency plan guidance.

In the unlikely event of a shutdown, agencies will publish contingency plan guidance for the continuation of essential operations in the absence of available appropriations that will contain relevant information for contractors. To plan ahead, contractors can find contingency plan guidance published by agencies from previous years.

Plans should address what contractors will do with employees working on contracts that are subject to stop-work orders. In 2013, some contractor employees were laid off, furloughed, or required to use leave or take paid or unpaid time off during the shutdown. The ability of contract workers to be paid during the shutdown depended upon whether work was allowable based on the terms of the contract that they worked on and the availability of other assignments. Contractors should consider whether workers can be reassigned to other work, made to take vacation, or furloughed. Additionally, contractors should implement a system for notifying employees in the event of a shutdown.

Plans should establish a system for documenting all expenses, actions, and communications. In the event of a shutdown, contractors should document all communications, particularly instructions or directions for performance and assurances of payment. As mentioned above, in the event of a government shutdown, it may be possible to recover any resulting "out-of-pocket expenses." Contractors should carefully record all expenses, including the costs of winding down and resuming contract activities.

Plans should address practicalities such as how to ensure access to government buildings if contracted work is deemed "essential." If work is to continue during a shutdown, contractors should establish a plan in collaboration with government employees on site regarding how contract workers will have access to government facilities should a shutdown take place.

3. Communicate with Your Contracting Officer

During the government shutdown in 2013, contract management officials who were furloughed could not communicate with contractors to respond to questions. In anticipation of similar lapses in communication, contractors should reach out to contract officers now. Contractors can take this opportunity to verify important information such as:

  • The funding status of your contracts (if it is not clear from the contract documents)
  • Which facilities will remain open in the event of a shutdown
  • Whether equipment and/or personnel needed for performance will be available during a shutdown
  • Whether a contract is subject to any exceptions
  • What the agency's plan is with respect to continuing performance in the event of a shutdown

While contracting officers may not have the desired information readily available, reaching out to them now to establish a rapport may be beneficial, as you are more likely to be promptly informed of new information as it becomes available.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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