Government Contracts Monitor

Possible Federal Government Shut-Down – Actions to Take Now

April 25, 2017

As President Trump approaches the end of his first 100 days, there is a risk that the Federal Government could shut-down starting at midnight this coming Friday, when current funding expires. Congress, which is finally back from its two-week Easter recess, is working on both a short one- or two- week interim extension, as well as a longer extension through the end of the current Government fiscal year (i.e., September 30, 2017). Prospects for some agreement have improved with President Trump’s withdrawal of his demand that any extension include initial funding for the proposed U.S./Mexico border wall, and statement that he will defer seeking such funding until Fall as part of the FY18 budget. However, there are still a number of other issues to be resolved, and there are elements on both sides of the aisle that appear willing, and even eager, to let a shut-down occur. President Trump has stated he wants to avoid a shut-down. However, he needs Democratic support to pass the needed extension. Democrats have been united in opposing virtually everything, and are eager to embarrass the President (although they don’t want to be blamed for a shut-down). Meanwhile, some Republicans appear to believe that a shut-down wouldn’t be that serious. The odds at this point suggest that some resolution will be reached, at least on an interim basis. However, Government agencies are preparing for the possibility, and last Friday OMB issued contingency plans just in case, which are available for review here.

Contractors similarly need to start planning and communicating with their respective government contracting officers about how to address a possible federal government shut-down, possibly as early as this coming Saturday if some continuing resolution is not passed. If there is a shut-down, virtually all federal government contractors face serious impacts. Action now will enable contractors to respond appropriately in the event of a shut-down, and to minimize adverse impacts to government programs, control non-reimbursable costs and mitigate, document and account for shut-down costs for which the government will be liable.

Recommended Actions: Every government contractor should review the contingency plans of the respective agencies with which they deal, and take the following steps now:

Review and determine the impact of a shut-down on each individual contract and pending contract actions;
Communicate with the cognizant contracting officer on each contract about a shut-down’s effects and the actions to be taken, including, as to ongoing contracts, access to government facilities, personnel and information (including classified information), and how to obtain any needed government approvals, authorizations (including for payment) and directions, or obtain inspection and acceptance of goods being delivered;
Avoid volunteering or agreeing to continue work under shut-down contracts that will not be compensable;
Determine the impact on employees and how best to respond, including whether to reassign, otherwise engage (e.g., training), put on paid vacation leave or furlough such employees, and timely communicate the same to the employees (special problems may arise and need to be decided in the case of employees overseas or operating at a distance from their “home” base);
Notify (in writing) and coordinate with any teaming partners and affected subcontractors and suppliers immediately upon receipt of any actual or constructive “stop work” order, and ensure that each is aware of its flow-down duties and responsibilities, including the duties to mitigate, and to separately document and account for, all shut-down related costs;
Set-up separate cost accounts for shut-down costs for each affected contract, and ensure that all cognizant personnel fully document and account for all associated costs;
Identify and take all reasonable steps to mitigate shut-down related costs, and document all decisions; coordinate such actions, where necessary, with the cognizant contracting officer in an effort to get him/her to buy into, or at least be aware of, your cost mitigation efforts and decisions; and
Timely submit and claim reimbursement for all reasonably incurred shut-down costs.

In addition, contractors should assess the impact of a shut-down on non-contract deadlines. Contractors also may want to assess their ability and plans to continue other business operations in view of delays in government payments in the event of a shut-down.

Background: No money can be paid from the Treasury except pursuant to Congressionally-passed funding authorizations. Federal officials cannot obligate funds before an appropriations measure has been enacted, and cannot accept voluntary services. However, contracting officers are authorized to incur costs necessary to shut-down operations.

This means that contractors cannot rely upon oral or even written assurances, and should not “volunteer,” with the expectation of being paid later. While government employees have been paid retroactively in connection with past shut-downs, the same cannot be said as to contractor employees. Contractors therefore need to protect themselves.

Current Status: The federal Government is presently operating under a continuing resolution (CR) that expires at midnight this coming Friday. Thereafter, the Government must shut-down unless some new CR is passed and signed by the President. It is possible that Congress could pass a short-term CR extension to buy an extra week or two to permit further negotiation of a longer-term resolution to the end of the fiscal year. However, even if an interim resolution is reached by midnight this coming Friday, the situation will recur when that expires unless a longer-term resolution is reached. If no resolution is agreed, there will be a lapse in funding and the government will shut-down at midnight, April 28, 2017.

Legal Parameters: If there is a shut-down, all contracts dependent upon FY17 funding will be shut-down, with only limited exceptions for activities determined necessary to save lives or protect property. Contracts that are already fully funded will not be affected, nor will those few contracts otherwise authorized by law to continue notwithstanding a shut-down.

Ideally each contracting officer would issue a “stop work” order for each affected contract, directing each contractor specifically as to what to do on such contract. However, it is more likely that contracting officers will issue broad guidance memos affecting multiple contracts, under which each affected contract will be subject to a “stop work” order. Upon receipt of notice, each affected contractor will be obligated to shut-down operations as directed, and mitigate the government’s shut-down costs exposure. Contractors will be entitled to recover reasonable and necessary shut-down costs. However, contractors will need to carefully document and separately account for such costs, and timely submit appropriately documented claims to recover them. Re-start costs will need to be tracked separately, and should be negotiated at the time of re-start. “Volunteered” interim activities will not be reimbursed; and any promises or agreements to compensate interim activities likely will not be honored as being outside the authority of any involved government official.

During any shut-down contracting officers will be barred from making new awards, issuing new task orders under ID/IQ contracts, entering into contract amendments or modifications and exercising contract options, which depend on current year funding. Note that other government deadlines, such as for option exercises, proposal submission, claims and agency appeals, bid protests and court filings, will not necessarily be stayed by a shut-down, and contractors will need to assess carefully their obligations in each such instance.

Conclusion: If a shut-down occurs, such will have far-reaching consequences for all government contractors, going to the very heart of their business operations. Contractors need to be prepared and take appropriate actions to minimize their costs and the adverse business impacts of a shut-down. The key is careful planning and timely and regular communication with all involved, particularly the relevant government contracting officers.