The continued operation of the U.S. Government depends on an annual cycle of the House, Senate, and President agreeing on spending.  The President submits the annual budget request to Congress, the House and Senate each work separately to develop their own budget resolutions, and if the resolutions differ from each other and from the President’s request, then they all begin the process of attempting to resolve the differences. 

If Congress fails to pass a budget, or if the President disapproves the budget passed by Congress, a Government shutdown may occur.  With the exception of those involved in essential functions or work in areas that have a separate budget process, federal civilian employees are told to stay home, and federal government contractors are directed to stop work.  Then the U.S. Government slows to a halt through an “orderly shutdown” process.  When the shutdown ends, operations start again.  The process of shutting down and starting up costs taxpayers a lot of money, and for federal contractors, they must consider who is going to ultimately pay for all the disruption.  Unless federal government contractors plan ahead, they could be left with a great deal of disruption costs.

Unfortunately, as of today (September 28, 2023), the U.S. Congress has only three days to resolve the funding issue.  We are facing the fourth partial government shutdown in a decade.

Here is some information that is intended to assist contractors in understanding the key issues with respect to Government shutdowns and how to mitigate losses and recover costs:

1. Act now:

  • Create a Mission-Essential Contractor Services Plan of the type contemplated in DFARS 252.237- 7023, even if your contract is not a defense contract. Submit the plan to your CO for information, input, discussion, and comment. Ideally, obtain CO approval.

  • Make a written policy to address shutdowns, and consider seriously a policy that employees must take available paid time off. Require the workforce to utilize accrued paid time off when not billing work to another contract or engaging in indirect work to sustain the readiness of the workforce to return to work. Request the Government to accept the labor costs associated with keeping the idle workforce in standby by allowing them to bill direct hours for all employees who maintained full readiness to return to work and were not utilized continuously as excepted labor or were otherwise unable to fully perform their duties without access to facility. Communications with the Government during the shutdown process and during the shutdown period will be important in establishing the reasonableness of these decisions.

2.  If a shutdown occurs, act quickly. Keep paperwork documenting mitigation efforts and communications with the Government. Document decisions, including justifications for incurring shutdown-related costs. Be prepared to outline the steps taken to mitigate the impact of the shutdown. Be able to show that costs were incurred as a result of the Government’s direction to stop work. If possible, communicate with the CO about delays and work stoppages and seek guidance. Keeping a record of all communications will be valuable to resolving claims to recover shutdown-related costs.

3. Know the rules: Is there is a stop work order? A standby order? Perhaps there is simply a notice that contractors will not be able to access and perform work on certain Government facilities. Review your contract and the agency shutdown plan closely. Consider the contract type, such as a time-and-materials or firm-fixed- price contract. Is work performed on-site, off-site, or both? Is the work for manufacturing or advisory and assistance services, or is it work that the contractor may be able to perform in the absence of Government personnel?

4. In past shutdowns, some contractors were asked to continue to work under the terms of their contract until obligations were liquidated so long as the employees did not need supervision or as long as the agency could provide adequate supervision of the projects. Accordingly, closely monitor costs incurred not unlike a contractor would under the FAR 52.232-20 “Limitation of Costs” clause. Give notice as the incurred costs approach the obligation ceiling. Unless directed by the CO, stop work when the funds are expended.

5. The Government may instruct contractors that they cannot come onto federal facilities, which may be the primary workplace of the contractor’s employees. If this happens, contractors should attempt to seek guidance from the CO as to whether work can be performed from alternative locations, such as the contractor’s corporate offices or from home. Where the contract provides that a contractor will have access to the Government facility, the contract could be interpreted as implying that Government will be responsible for costs incurred if the contractor does not have access.

6. If working from other locations is not a viable alternative, then contractors may mitigate losses and limit costs by moving employees to other projects or contracts, if the funding agency will approve the shift. Failing this, perhaps use the opportunity to conduct human resources training or compliance training, such as the business ethics and compliance training required by the FAR 52.203-13 “Contractor Code of Business Ethics and Conduct” clause. Alternatively, perform work on bids and proposals, research and development, skill building, and marketing efforts. Although these may not be directly chargeable to a contract, these activities may ultimately pay off in the future.

7. Implement change order accounting. Contractors can increase their recovery chances and maximize recovery of losses if they implement change order accounting. Create a separate charge code to help identify and segregate costs that are shutdown related. The types of costs contractors may want to capture are costs of idle workers, facilities, and equipment, severance costs, unabsorbed overhead, and shutdown and restart costs. Note that recovery of an additional fee, however, is unlikely since an increase in fee is normally only permitted when new work is added to a contract.

8. Timely prepare a request for equitable adjustment, setting out costs during the shutdown period that were incurred specifically for the contract and as a result of the shutdown. Refer to FAR 52.243-2, “Changes—Cost- Reimbursement,” FAR 52.243-3, “Changes—Time-and- Materials or Labor-Hours,” and other appropriate clauses. Remember that contractors should give timely notice of potential requests for equitable adjustment or claims, and they should work to link their requests and claims to specific provisions of their contracts.

This information is not a substitute for professional representation in any specific situations, and it is prudent to contact your legal counsel and your other government contract professionals about appropriate steps to take to protect your business.

See J. Gabig, R. Raleigh, and C. Lockwood, “A Contractor’s Guide to Government Shutdowns”, Briefing Papers (2nd Series), Issue 19-13 (Thomson Reuters), Dec. 2019