Don’t Let the Shutdown Shut You Down: How to Prepare

By: Zohra Tejani , Joyce Tong Oelrich , Ju Yun (Julie) Son , Pinar Bailey, Ph.D.

Each year, Congress passes annual appropriation bills to continue funding federal agencies and federal programs through the next fiscal year. As of today, with the new fiscal year looming on October 1, 2023, Congress has yet to pass any appropriations bills. The prospect of a federal government shutdown approaches. A shutdown will affect performance of and payments under a wide variety of government contracts, including grant agreements, funding awards and procurement contracts, that private parties have with various federal agencies of the Executive Branch. What can Fenwick clients that hold government contracts expect?

FAQ

Background 

What is a federal government shutdown?

Remember the Constitution and separation of powers? Congress has “the power of the purse,” whereas the Executive Branch acts using the funds Congress provides. To protect its spending power, Congress passed the Antideficiency Act to prohibit Executive Branch officials from spending or promising money before Congress appropriates the funds. In other words, the Executive Branch must ask for spending money from its sibling, Congress. Fun fact: Federal employees take compliance with the Antideficiency Act very seriously because a violation carries criminal penalties! If Congress doesn’t pass the annual appropriations bill or an interim continuing resolution before the new fiscal year, the federal agencies experience what is called a “funding gap” or “funding lapse,” also known as a government shutdown.

How long do the shutdowns usually last?

There have been 21 government shutdowns in the past five decades. The shortest shutdown lasted several hours, whereas the most recent, from late 2018 to early 2019, lasted 35 days—the longest.

What happens during a government shutdown?

Agencies will staff only the “essential” employees who will continue to work during the shutdown but without pay. Generally, law enforcement, prison employees, Border Patrol, Forest Service firefighters and weather forecasters are “essential,” as are air traffic controllers and Transportation Security Administration (TSA) officers. The U.S. Postal Service, however, is an independent agency, so you should still receive mail service. While most automatic government benefits like Social Security, Medicare and Medicaid have a separate funding stream, others like the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) and school meals are funded through the annual appropriations process and will be shut down.

What is a continuing resolution (CR)?

To avoid a shutdown, Congress may pass one or more interim CRs to extend the fiscal year by providing interim budget authority to agencies.

Is a CR a return to status quo?

A CR allows funding for all existing programs to continue, usually at previous funding levels. CRs typically don’t fund new programs, projects and activities. New this year, Congress passed the Fiscal Responsibility Act of 2023 that reduces the amount of money available in January 2024 for any budget account, with a particularly significant cut in defense spending.

How does the federal shutdown affect federal contracts?

When Congress has not passed a budget, federal agencies must shut down affected projects and activities and furlough nonessential personnel. Companies with federal government contracts should be mindful of potential delays and other impacts the shutdown may have on their performance, such as stop-work orders, unavailability of federal employees to provide necessary oversight, limited access to federal facilities and/or unavailability of funds for the payment of invoices. Further, expect initial delays in the acquisition process for procurements, as well as for payments, and extended delays beyond the duration of the shutdown due to backlogs the shutdown may cause.

Will the shutdown affect my company’s government contract?

It depends. A shutdown typically affects certain federal agencies; thus, depending on the agency, a shutdown may have varying impacts on your government contract. Among other variables, here are some considerations:

  • Is the contract fully funded with annual appropriations or funded by a non-lapsing appropriation?
  • Does contract performance require government oversight?
  • Are your government employee contacts exempt from the shutdown?
  • Is your contract for an exempt product, service, function or program?
  • Did your agency determine that your contract is “essential”?
  • If you perform on-site, are the federal facilities accessible?

How can I determine whether and how my company’s federal contract will be affected?

Reach out to your federal agency contracting officer(s) now—don’t wait. Ask the agency’s views on whether performance under the contract will continue. The contracting officer’s guidance may also help companies avoid disputes or simplify potential dispute resolution.

As a company with a federal government contract, are there are ways to prepare for a possible shutdown and mitigate its effects?

Ahead of the shutdown, companies with federal government contracts may consider taking the following steps:

  • Contact government customers now to determine if staff will be deemed “essential.”
  • Ask the contract office if obligations can be accelerated.
  • Ask if contracts could be modified post-shutdown to make up lost funding or revenue.
  • Train employees on client agency staff furloughs, potential work-site closures and halt of background check processes.

Will companies with federal government contracts be reimbursed for losses incurred or delays caused by the federal government shutdown?

It depends:

  • Be aware that contracts have been ineligible for lost payments even when federal workers received backpay.
  • Review your contract terms. The terms may shed light on any reimbursement and how the appropriated budget, when passed, should address performance during the shutdown. Based on previous federal shutdown litigation, some contractors could recover costs incurred due to the government shutdown.
  • Keep comprehensive records of direct and indirect costs resulting from direction from government contracting officers. Such costs may include costs incurred to demobilize personnel or equipment from a government facility.
  • Expect that interest payable on invoices may continue to accrue under the Prompt Payment Act and your company may seek interest payments for any invoices not timely paid.

Will the government shutdown extend deadlines for federal contracting?

Do not assume that any statutory deadlines for filing claims or bid protests will automatically be extended.

What else should companies with federal contracts consider?

Once you have identified whether the shutdown affects your government contract, you should address near-term funding issues that may arise in the event of a shutdown or decreased defense funding under a CR:

  • If an option is set to expire, request to exercise the option now if funds are available.
  • Seek short-term funding sources to continue meeting your obligations to third parties that are noncancelable.
  • Consider reassigning personnel to unaffected projects, schedule training and/or vacation for personnel who are performing on impacted government contracts, determine pay and leave policies for personnel most at risk, and consider reducing hours for subcontractors.