Background

As described in detail in a recent Washington Update, there is once again a reasonable likelihood that we are headed for a government shutdown beginning Thursday, October 1. This article puts aside politics to focus on the relevant facts and several practical steps for government contractors to consider in advance of the potential shutdown.

In particular, this article provides information regarding what parts of the government will be impacted by a shutdown, and the practical impact on government contractors. The article then provides potential courses of action for contractors to consider with respect to working on-site at government facilities, items to review in the contract documents, issues regarding subcontractors, and employee considerations.

A shutdown would cause certain immediate impacts on government contractors. These include furloughing of “non-essential” federal employees (placing them in a temporary, non-duty, non-pay status), and the closing of many federal facilities.

Government employees exempted from furlough include presidential appointees, members of Congress, uniformed military personnel, and federal employees rated "essential." "Essential" employees are those performing duties vital to national defense, public health and safety, or other crucial operations. The Office of Management and Budget (OMB) defines "essential" government services and "essential" employees as those providing for the national security, including the conduct of foreign relations essential to national security or the safety of life and property; providing for benefit payments and the performance of contract obligations under no-year or multi-year or other funds remaining available for those purposes; and conducting essential activities to the extent that they protect life and property, including:

  • medical care of inpatients and emergency outpatient care;
  • activities essential to ensure continued public health and safety, including safe use of food, drugs and hazardous materials;
  • continuance of air traffic control and other transportation safety functions and the protection of transport property;
  • border and coastal protection and surveillance;
  • protection of federal lands, buildings, waterways, equipment and other property owned by the United States;
  • care of prisoners and other persons in the custody of the United States;
  • law enforcement and criminal investigations;
  • emergency and disaster assistance;
  • activities that ensure production of power and maintenance of the power distribution system;
  • activities essential to the preservation of the essential elements of the money and banking system of the United States, including borrowing and tax collection activities of the Treasury; and
  • activities necessary to maintain protection of research property.

Government Contracts

Funding and required performance for existing government contracts generally are not stopped simply because the government has shut down. An existing contract with remaining period of performance and obligated funding remains in effect and should be performed during the shutdown unless the contract is terminated or placed on stop work status by the contracting officer, or until obligated funding is exhausted. However, the following issues may directly and significantly impact existing contracts.

Work On-Site at USG Facilities

During a shutdown only essential personnel can work on-site at U.S. Government facilities. Contractor employees may not be included as essential personnel. As a practical matter, contractor employees may have difficulty getting to work on U.S. government facilities – security offices, installation access points, and certain buildings and offices likely will close during the shutdown.

Contractors with employees working on-site at U.S. government facilities should coordinate with contracting officers and contracting officer’s representatives in advance to determine whether contractor personnel will be permitted to access the facilities and whether government property and equipment will be available for use. Additionally, determine whether government personnel will be available for tasks such as supervising, approving or testing contractor work during the shutdown.

If contractor personnel are deemed to be “essential” to continuing work during the shutdown, seek to have this determination made in writing by the contracting officer, identifying specific employees by name or by labor category where possible.

Some contractor employees may be permitted to work from alternate locations, such as from a contractor – owned facility, during the shutdown. Whether an employee can continue to be productive, can work with little or no supervision, and has the necessary equipment to perform necessary tasks may be a case-by-case determination that should be discussed with the contracting officer or contracting officer’s representative in advance of a shutdown.

Other Contract Considerations

Because many government employees will be furloughed and will be prohibited from conducting normal business during the shutdown, contractors should anticipate that contract options will not be exercised, no new contract modifications will be issued (including funding modifications), pending or new invoices will not be paid, and ongoing procurement activities (competitive and sole source) will be delayed. Some contracting officers may proactively issue “stop work” orders on certain non-essential contracts, but because the inevitability of a shutdown is unlikely to be known until late in the evening of September 30, issuance of stop work orders is unlikely.

Contractors should analyze their contracts in advance of the shutdown to estimate a “burn rate” and determine when obligated funding will run out. Consider seeking additional funding in advance if your contracting officer has funds available for obligation. Finally, continue to pay close attention to any obligations to notify the government of the status of funds remaining on individual contracts, and send “75% letters” even if you don’t believe the recipient of those notices will be working.

If funding on a contract is exhausted during the shutdown, it will be for contractors to determine whether to stop work or to continue working at risk in anticipation of receiving reimbursement after the shutdown is concluded.

Subcontractors

Keep in mind that many of the issues described above will also apply to subcontractors. If prime contractor employees are not permitted to work on government sites during the shutdown, then almost certainly subcontractors will not be granted site access either. Similarly, if prime contractor employees cannot work from alternate locations then consider advising subcontractors similarly. Be prepared as well for requests from subcontractors for authority to proceed commitments and for various forms of risk authorization requests as your subcontractors will be making decisions about whether to work at risk during the shutdown. Obviously, prime contractors should be extremely cautious about directing subcontractors in ways that could give rise to subsequent claims.

Employees and Employee Benefits

As companies determine contract work is affected by the shutdown, they must then consider what instructions to provide to their impacted employees. Many companies require that employees who are unable to charge their time to contract activities during the shutdown take accrued vacation or other paid time off. Some companies do not permit employees to be placed in any unpaid status until such accrued leave is exhausted. Some companies may have indirect work for certain employees, or will allow employees to complete necessary training during the shutdown. Some employees may have to be furloughed or otherwise placed in an unpaid status of some sort. Often, these decisions are driven by company policies, but potentially significant legal implications exist as well – especially under the Fair Labor Standards Act and state wage and hour laws. Contractors should consult with legal counsel before instituting unpaid leave or furloughs for employees to ensure compliance with these laws.

In prior shutdowns, it has been reported that many government and contractor employees who were furloughed filed for unemployment compensation during the term of the shutdown. Eligibility for unemployment is generally determined by state law requirements, so employees will need to talk with their respective state offices to get specifics.

Employee benefits can also be affected, and companies should determine in advance how employee benefits policies will be applied to employees affected by the shutdown. For example, will health insurance coverage be continued for employees who are furloughed or placed in unpaid status? Will leave or other benefits accruals be frozen?

Additionally, the Worker Adjustment and Retraining Notification (WARN) Act or one of many equivalent state statutes may require some advance notification to employees affected by a facility closing or layoff event, depending upon factors including the number of affected employees. Though it is potentially already too late to provide advance notification in all cases, companies should understand and evaluate the potential consequences of a WARN Act violation as part of their planning.

While understandably most government contractors will continue to hope that a shutdown can be avoided, using the time before a potential shutdown to plan and prepare is advisable just in case our elected leaders are unable to pass legislation to keep the government open beyond the end of this month.