Shutdowns are not new: there have been 21 in the last five decades, with the longest lasting 34 days in late 2018 and early 2019. While no one can predict if history will repeat itself this year, contractors cannot afford to take a “wait and see” approach. Understanding the risks, knowing how shutdowns affect contract performance and payments, and having a plan in place can make the difference between weathering the disruption or facing lasting setbacks. Even if a shutdown does not occur this year, contractors should understand the risks and prepare for potential impacts in the future.

Who is Impacted?

The federal government civil service civilian employees, the military, and the contractors who have federal government contracts are all impacted. Contractors are impacted because whether they are required to work or to stop work, the contractor will not be paid during a shutdown by the Government. This creates financial strain for businesses and ripple effects across local communities.

How will this affect your business?

Contractors will receive written direction from their agency’s Contracting Officer or Contracting Officer Representative on how to proceed with any action on their contract. They may receive a Stop Work Notice directing them not to report to work or they may receive a notice that they will need to be working because they have been deemed to be “essential” to the government. Regardless, the contractors will not be paid, because an invoice cannot be processed by the Government agency during the shutdown. If your company is deemed to be “essential” your payment for that work SHOULD be paid after the shutdown ends and the Government is back to work, subject to that individual agency guidelines and directives.

Every contractor should watch for written direction from their Contracting Officer and ask questions immediately as government personnel may not be available after the shutdown starts. Pull out your contract and read it! You may also have to provide notification to your subcontractors as the government does not communicate with firms’ subcontractors.

This is a crucial time to review your business planning and consider not having all your revenue coming from one client or one type of client. Think about diversification that includes multiple types of contracts so that if one client is shut down, you will have others providing cash flow. (Private work or Commercial work). And when a shutdown ends, the relief is not immediate as it takes time for the government to catch up and reach normal processing timeframes again.

Document, Document, Document!

It is important to document your costs during the shutdown. These costs could include facility rent, employee benefit costs, insurance costs, employee new hire processing is stopped at the agency, loss of inventory due to shelf life, material costs that were previously purchased, but not yet consumed in the contract or turned over the Government, and increased costs related to your payment tariff fees. You may be required to continue work without payment during the shutdown, minimize work with no payment, or stop work completely. You will need to prepare a request for “equitable adjustment” after the government reopens. See FAR 49.208 for more detail.

Another challenge you may face is that your employees may not be able to continue working for you without a paycheck. Consequently, you may lose some of your best people. These are the types of actions that should be documented, including all costs to recruit new employees, training, etc. If you find yourself in this situation, you need to consult with your firm’s legal counsel as to how you may proceed.

Steps for preparedness

1. Review your existing contracts with federal agencies to understand your obligations, particularly regarding any shutdown clauses. Determine how critical each contract is to your business operations.
2. If you have any outstanding, unpaid invoices, communicate with the Contacting Officer or COR to see if you can get that payment expedited prior to 30 September.
3. Communicate with your contracting officers and point of contact within the relevant federal agencies. Seek clarification on the impact of a potential shutdown on your specific contracts, including any guidance on how to proceed.
4. Be sure your business has adequate financial reserves to weather a potential shutdown. This may involve setting aside funds, securing lines of credit, or exploring financial assistance options.
5. Will a shutdown impact your supply chain? Identify critical suppliers and work with them to develop contingency plans in case of delays or disruptions.
6. Consider the impact on your workforce. Determine which employees are essential for contract performance and which can be furloughed or assigned to other tasks during a shutdown.
7. Maintain thorough records of all communication with government agencies, including emails, letters, and phone calls. Document any changes in contract terms, instructions, or directives provided by government representatives.
8. Create a comprehensive shutdown plan that outlines the steps you will take if a shutdown occurs. Include details about how you will prioritize contracts, manage finances, and communicate with employees and subcontractors.
9. Over the long term, consider diversifying your client base to reduce reliance on federal contracts. This can help stabilize your revenue during periods of fluctuation.

A government shutdown is disruptive, but it does not have to catch your business off guard. Whether you are navigating stop-work orders, delayed payments, or even a termination for convenience, preparation and documentation are your best defenses. Use this time to review your contracts, strengthen your financial and operational plans, and communicate with your team and subcontractors. And if the federal government sends you notice to terminate one of your contracts for convenience (T for C), contact your corporate attorney immediately for guidance. Please keep in mind that you may not be able to reach your Contracting Officer or COR during the shutdown, as they are not permitted to work.