Preparing for the Next Government Shutdown
If you’re like many small businesses, you got into federal contracting, at least in part, because selling to Uncle Sam seemed like a safe bet. Unlike commercial customers, the government can levy taxes, run up mountains of debt without going bankrupt, and literally print money.
In recent years, though, partisan rancor in Washington has increasingly led to government shutdowns. And when the government shuts down, you may be faced with important questions like “do I keep working?” and “will I get paid?”– the very sort of things you sought to avoid by picking a supposedly safe customer.
In my years as a government contracts attorney, I advised dozens of clients through three government shutdowns: the lengthy shutdowns of 2013 and 2018-19 (the longest in U.S. history), plus a shorter shutdown in early 2018. And with control of Congress currently divided — Republicans control the Senate; Democrats the House — the risks of future shutdowns appear to be magnified.
The best time to prepare for a shutdown is before it happens. In this article, I’ll share some tips to help you prepare for the next government shutdown.
Determine “Essential Services”
Will you keep working during a shutdown? When the government shuts down, not everyone goes home. So-called “essential services” continue. Such services typically include functions like law enforcement, transportation security, air traffic control, power grid maintenance, and the like.
If your contract is classified as essential services, you’ll likely continue to perform as usual during a shutdown (although it’s possible that payments could be delayed). Since every contract is unique, the best bet is to talk to your Contracting Officer in advance of a shutdown. He or she is in the best position to know how your contract will be classified.
For additional guidance, you can also review the agency’s contingency plan. While agency contingency plans don’t go into contract-by-contract detail, they do set forth the types of functions that each agency considers essential.
Evaluate Contractual Terms & Seek Specific Guidance
If your contract isn’t classified as “essential,” that doesn’t necessarily mean that you’ll stop work in a government shutdown. This is where things can get tricky, and where it’s especially important to understand the terms of your contract — and to insist on clear guidance from your Contracting Officer if a shutdown occurs.
Unfortunately, the FAR doesn’t have a clause specifically directed at government shutdowns. Instead, shutdowns are often addressed under broader clauses like FAR 52.242-14 (Suspension of Work), FAR 52.242-15 (Stop Work Order) and FAR 52.242-17 (Government Delay of Work). FAR Subpart 43 provides additional guidance. Review your contracts carefully, as agency-specific FAR supplements, alternates, changes clauses (like FAR 52.243-1 (Changes: Fixed-Price) or unique contract clauses could also play a role.
Your rights and obligations will vary considerably depending on how the government suspends your performance (assuming it does). If you receive a generic suspension notice — one that doesn’t reference any FAR clause in your contract — insist on clarification, such as, “can you please confirm that this is a suspension of work under FAR 52.242-14?”
Also, be wary of suspension notices that come from anyone but the Contracting Officer. Other agency officials, such as Contracting Officer Representatives, may not have authority to suspend your work, or to delineate the terms and conditions of a suspension.
If you don’t get a suspension notice, but cannot perform your work (such as being locked out of a federal facility), you should, of course, diligently attempt to follow-up with the Contracting Officer to determine how to proceed. But, in such an event, you may need to quickly provide a formal written notice, under FAR 52.242-14 and/or FAR 52.242-17, of your de facto suspension. Failure to provide the written notice could waive your entitlement to an equitable adjustment, so be careful.
What if the agency doesn’t order you to suspend, and you’re not prevented from performing (such as by being locked out of a facility)? In this case, you may be contractually obligated to continue performance, although you should make every effort to secure specific, written guidance from your Contracting Officer. If you’re unable to obtain such guidance, it’s a good time to consult with legal counsel, who should be able to help you decide how to proceed.
Assuming you decide to continue working, I suggest documenting your decision in writing, including your expectation of payment. For instance, you may want to email the Contracting Officer, and perhaps even the Contracting Officer’s boss, saying something like, “we’re continuing to perform in the absence of any direction to the contrary, and are doing so with the expectation that we will be fully compensated for our work according to the terms of our contract.”
Further, you should determine whether the contract includes a “ceiling” clause, such as those found in FAR 52.232-20 (Limitation of Cost) and FAR 52.232-22 (Limitation of Funds). These clauses state (among other things) that when the ceiling is reached, the government is not obligated to pay for costs incurred above the ceiling, nor is the contractor required to continue performance.
A government shutdown can increase the risk that the Contracting Officer will be unable to upwardly adjust the ceiling. If that happens, and you continue to perform above the ceiling, you’re performing “at risk,” and may never get paid for your extra work. Choosing to stop work in this situation can be trickier than it sounds because you may want to please the customer and may believe that the Contracting Officer ultimately will reward your diligence. Just be aware, though, that there are no guarantees of payment if you perform at risk.
Plan to Mitigate and Recover Costs
Let’s say you’re providing 20 support staff at a federal facility. The government shuts down, and the facility closes. But the government could reopen at any moment, so laying off your employees isn’t a realistic option — otherwise, you won’t be able to service the contract when that happens. Can you continue to pay your employees, and get the government to pick up the tab?
As a general rule, when a contractor’s work is stopped or suspended, the contractor must immediately stop incurring costs, to the greatest extent reasonably possible. In fact, FAR 52.242-15 says it directly: a contractor shall take “all reasonable steps to minimize the incurrence of costs allocable to the work covered by the order during the period of work stoppage.” In government contracts legal circles, this principle is known as “mitigating” costs. The government is very unlikely to pay you for costs that you reasonably could have mitigated.
Of course, phrases like “reasonable steps” are open to interpretation. If your employees really must be ready to resume work at the drop of a hat, then laying them off may not be a reasonable mitigating measure. But could you require your employees to take vacation days or even unpaid leave? You may wish to consult with an employment lawyer regarding your options.
Once you’ve mitigated costs to the greatest extent reasonably possible, you can submit a request for equitable adjustment, but you still need to look out for contract-specific pitfalls. As I mentioned above, some of the clauses in question, such as FAR 52.242-14, may require to provide written notice of a suspension. In other cases, you may have a relatively short time frame to submit a request for equitable adjustment. For instance, FAR 52.242-15 allows you only 30 days after the end of a stop work order to submit an REA. Know your contract — and the Contracting Officer’s contractual basis for suspension — to make sure you don’t inadvertently waive your rights.
Addressing Subcontractors and Vendors
Your contracts with subcontractors, vendors and other suppliers should include terms protecting you, the prime contractor, from the ill effects of government shutdown. If you use 1099 independent contractors, remember that they are subcontractors, too, and you should build in the same protections in your agreements with them.
A few of the key protections I often recommended to clients include:
- Pay when Paid. Just like its name suggests, this clause says that the prime contractor won’t pay the subcontractor for some specified period (like 15 days) before the prime receives corresponding payment from the government. Government shutdowns can lead to payment delays, and the last thing you need is a subcontractor demanding payment when you’re still waiting on Uncle Sam.
- Stop/Suspension of Work. The subcontract should allow you to unilaterally stop or suspend the subcontractor’s work, just like the government can stop or suspend yours. You could simply flow-down the prime contract’s clauses, but you may wish to consider something better tailored to the prime/sub relationship — including a provision allowing you to stop or suspend your subcontractor’s work even if your own suspension is of the de facto variety (no notice from the government, but inability to perform your work). Be sure that your clause requires your subcontractor to mitigate its costs to the greatest extent possible.
- Ceiling Clauses. If the prime contract includes ceilings, you generally should incorporate similar provisions in your subcontracts — tailored, of course, to the subcontractor’s scope of work and anticipated costs. This will help ensure that the subcontractor bears the risk if it performs work in excess of those ceilings.
- Pass-Through REA. You’re not responsible for the government shutdown, so you certainly don’t want to be on the hook for any extra costs your subcontractor incurs. If anyone pays, it should be the government. But a subcontractor doesn’t have a contractual relationship with the government and can’t file an REA. The workaround for this “privity of contract” issue is called a pass-through clause. You, the prime, agree to “sponsor” your subcontractor’s request for costs against the government. The subcontractor, in turn, agrees to pursue its request through the pass-through process, not as a claim against you.
A Few Final Thoughts
As you navigate a shutdown, don’t forget the human element. Your Contracting Officer hates the shutdown as much as (and probably more than) you do. Other agency officials, like your COR, may be furloughed and uncertain about their own jobs. The agency may be too short-handed to quickly and effectively communicate with you, and you may find that some communications are unusually terse.
Recognize the stress government employees are under and do your best to work respectfully and collaboratively with them to get through the shutdown. Even two decades into the 21st Century, government contracting remains a “people business,” and it’s essential to preserve a good working relationship with your government customers, even in difficult times.
Government shutdowns are messy and complicated, but a little due diligence and advance planning can help reduce anxiety and make shutdowns easier to survive.
Nothing contained in this article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and information purposes only. Although the author strives to present accurate information, the information provided in this article is not guaranteed to be accurate, complete, or up-to-date. Reading this article does not establish an attorney-client relationship with the author.