25 days and counting, the partial government shutdown has left many federal employees with an endless weekend and no paycheck. While those workers grapple with the financial hardship and uncertainty as Congress and the Administration try to reconcile their differences, contractors working under a government contract may be forced to deal with their own issues.
Government contractors may feel the impact of the shutdown in three primary ways: (1) availability of funds, (2) financing performance of the contract, and (3) handling financial responsibility for an idle workforce.
Availability of Funds
Federal contractors first have to assess the availability of funds following the shutdown. The answer may affect the contractor’s decision whether to continue working during the shutdown.
Federal contracts are either fully funded or incrementally funded. A fully funded contract means that funds have already been obligated to the contract, either to cover the price of a fixed-price contract or to cover the estimated cost of a cost-reimbursement contract. No issues arise with respect to fully funded contracts during a government shutdown. An incrementally funded contract is one where the contract is partially funded with additional funds anticipated to be provided in the future. Incremental funding is used when the total cost of a project cannot be covered within the current allocated budget because the project spans multiple years. A government shutdown creates issues with respect to incrementally funded contracts.
If contractors choose to continue working under an incrementally funded contract during the shutdown, they need to consider the possibility that, following the end of the shutdown, the government will not fully fund the contractor’s contract. In such cases, the contractor may not be able to recover the costs that it expended in continuing work.
The Anti-Deficiency Act, Pub.L. 97–258, 96 Stat. 923, prohibits federal agencies from obligating or expending federal funds in advance or in excess of an appropriation and from accepting voluntary services. However, the Anti-Deficiency Act has been held by the Government Accountability Office and federal courts to contain certain exceptions where the government can incur obligations despite a lapse in funds. See GAO, Principles of Federal Appropriations Law, 3rd ed., vol. II, p. 6-150. Contractors with incrementally funded contracts who choose to continue working during the shutdown should confer with counsel to determine if their activities fit within any of the exceptions. Alternatively, they should at least attempt to obtain some assurance that the government will fund their efforts once the shutdown is ended.
Financing Performance of the Contract
In terms of financing, the impact will depend on the type of contract at issue. The two most common forms of government contracts are (1) Fixed-Price and (2) Cost-Reimbursement.
Under a fixed-price type contract (FAR Subpart 16.2), the contractor takes the risk by agreeing to deliver the product or service required at a price not to exceed an agreed upon maximum.
Payment terms can be handled in a variety of ways. If the contract provides for payment due on delivery, the contractor has agreed to self-finance the performance of the contract in exchange for getting paid in a lump sum upon completion. For those contracts being completed and delivered during the partial government shutdown, contractors should invoice the government in the normal course of business. Payment terms generally require the government to pay within 30 days after being invoiced or else interest begins to accrue. See 31 U.S.C. 3903(c)(1). The fact that the government is shut down does not alleviate the government from incurring the obligation to pay interest on late payments.
The case is similar with respect to progress or milestone payments, where the government must make periodic payments based on either cost incurred by the contractor or on a percentage of stage of completion achieved under the contract. In the event of a government shutdown, where the government is unable to make a progress payment, the contractor is entitled to interest on the government’s late payment.
Under a cost-reimbursement type of contract (FAR Subpart 16.3), the contractor agrees to provide its best effort to complete the required contract effort. The contract allows the contractor to be paid for allowable incurred costs as prescribed by the contract. These contracts include an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor cannot exceed without the approval of the Contracting Officer. As with a fixed-price contract, if the government does not pay invoices within the prescribed time period, the contractor is entitled to interest on the delayed payment.
Financial Responsibility for an Idle Workforce
The more significant problem is where the contractor cannot continue normal performance because either they are denied access to government facilities or government personnel are not available to meet the government’s obligations under the contract (e.g. there are no government personnel available to inspect the product, there are no government personnel available to direct work to the contractor, etc.). In these cases, the contractor may be faced with an idle workforce.
If the government has formally suspended performance under the contract, the financial consequences of the matter will be handled under the contract’s Suspension of Work clause. If the government has not formally suspended performance, the contractor ostensibly is entitled to make claim to recover the reasonable costs in suffered as a result of the government’s failure to meet its obligations under the contract. There is, of course, uncertainty in what, after the fact, may be considered to have been “reasonable.” With that in mind, contractors should attempt to reach some type of advance agreement regarding what steps are reasonable (and, thus, what types of costs the government will recognize as being allowable under a future claim).
Contractors operating during a government shutdown have to make the difficult financial (and moral) decision to either continue work and pay its employees, or to furlough its workforce. Contractors who elect to continue working through the government shutdown certainly take on some level of risk—either through self-financing or arranged financing, they continue to pay their workforce with no guarantee they will be able to recoup those costs from the government.
On the other hand, contractors who furlough their employees potentially face extra costs later on when the government reopens. These types of costs include remobilization of workforce or equipment, as well as replacing employees who resigned during the shutdown. While there is no guarantee that these incurred costs are recoverable from the government, contractors under a cost-reimbursement type contract have reason to be optimistic, as these costs are “reasonable” under the guise of the FAR. Contractors under a fixed-price type contract would have the same argument; however, these costs could be more difficult to recover as the contractor holds more risk.
Advice to Contractors During A Government Shutdown
An old adage has proclaimed it is easier to ask forgiveness than it is to get permission. A government shutdown is an exception to this. No matter what type of contract you are operating under, the best advice is to speak with your Contracting Officer to obtain direction and guidance. During a partial government shutdown such as the one we are currently experiencing, certain agencies will continue operating while others will not. Performance of your contract may be impacted if you work out of a government facility or rely on furloughed government employees. Your Contracting Officer can provide guidance on what government personnel will continue working. Where your contract is impacted to the point that performance is impracticable, it may make sense for the government to issue a stop-work order under FAR 52.242-15 (for construction contracts, this would take the form of a suspension-of-work order under FAR 52.242-14). The contract generally provides other mechanisms through which these impacts can be handled, such as the Changes clause (FAR 52.243-1) and the Government Delay of Work clause (FAR 52.242-17).
As discussed above, incrementally funded contracts will be more heavily impacted than fully funded contracts due to the Limitation of Funds clause (FAR 52.232-22), pursuant to which the government is not obligated to pay more than the funding currently allotted to incrementally funded contracts. Contractors who expect the shutdown to increase costs above what has been allotted are required to (1) notify the Contracting Officer in advance of incurring those costs if they expect to be reimbursed and (2) receive approval from the Contracting Officer that additional funds have been provided to cover those increased cost of performance. Contractors who fail to provide such notice are faced with continuing performance at the risk of not getting paid for those increased costs.
Another avenue for contractors is to have the Contracting Officer approve any unexpected costs ahead of time through an Advance Agreement. Advance Agreements are discussed in FAR 31.109(a), which states “[t]o avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability under the specific cost principles . . . contracting officers and contractors should seek advance agreement on the treatment of special or unusual costs and on statistical sampling methodologies at 31.205-6(c).”
The Contracting Officer may be resistant based on the Anti-Deficiency Act discussed above. However, FAR 31.109 will generally allow Advance Agreements to cover the types of costs a contractor may incur during a government shutdown (i.e. general and administrative costs, costs of idle facilities and idle capacity, etc.).
As a last resort, contractors incurring significant financial hardship during the shutdown could resort to contract litigation against the government. The government may attempt to escape liability for non-payment pursuant to a jurisdictional theory of sovereign immunity—however, it is questionable whether this would be successful inasmuch as it appears that the government is acting in its contractual capacity rather than its sovereign capacity.