Contractors would share the pain of a government shutdown

When the government shut down for 27 days in 1995 and 1996, federal employees felt the impact most directly. But if the government ceased its operations next month because Congress failed to pass a spending bill to keep it running past March 4, hundreds of thousands of government contractors who provide a host of essential services that were not on the table 15 years ago would share the burden.

In the event of a shutdown, contractors would not receive payment for most services, or be able to renew expiring awards or even obtain access to federal facilities where they had been operating. While there might be little that the contractor community can do to keep agencies open, observers suggest there are many steps companies can -- and should -- take in the next nine days to prepare for the possible doomsday scenario.

On Wednesday morning, the Professional Services Council, a trade association, briefed industry officials on how to prepare for a shutdown and what to do if their programs are temporarily put on ice.

The first step is for firms with active contracts to engage in conversations with their contracting officer to determine how their program would be affected, said John Cooney, who served as the Office of Management and Budget's general counsel during the 1995 shutdowns.

For example, an agency could continue to obligate funds if:

  • The money is not limited to a single year (weapons systems contracts typically contain multiyear funding);
  • Statutes expressly permit obligations;
  • Spending is a necessary to perform specific essential duties, such as issuing Social Security checks;
  • Money is needed to terminate operations in an orderly way.
Federal employees performing jobs deemed as "essential," such as defense, health care, national security or emergency-related fields generally would be allowed to come to work during a shutdown. But, those decisions could be a bit more complicated for contractors.

"The people who are developing the wing to the Joint Strike Fighter will likely not be covered," Cooney said. "But the people buying ammunition that is going to be sent to Afghanistan in a couple of months will be protected."

Determining employees' and contractors' work status also could be based on whether the shutdown is labeled "hard" or "soft." During a soft shutdown, workers would be told to show up but do nothing productive to carry out the mission, Cooney said. Soft shutdowns are typical when an administration believes a budget compromise is near and it is unnecessary for workers to miss a full day.

The more likely scenario is a hard shutdown, during which federal and contract workers are furloughed. In this scenario, security guards would block employees from entering their buildings. Workers would be prohibited from volunteering their services and would be advised not to continue working under the false assumption that the financial terms could be worked out later.

There are a multitude of other factors that would determine if a firm should continue working on a particular contract, said Alan Chvotkin, PSC's executive vice president and counsel. Fixed-price contracts generally are paid in advance, allowing the company to continue providing the service. Programs with revolving funds that do not rely on congressional appropriations -- such as the General Services Administration's Public Buildings Service -- likewise would be exempt from the shutdown.

But, companies relying on cost-plus and time-and-materials contracts would not be so lucky. Cost-type contracts generally include a "limitations of funds" clause that would serve as a de facto stop on most work, Chvotkin said. Time-and-materials contracts, which are based on incurred costs, also would not be funded. And, while indefinite delivery-indefinite quantity contracts would remain valid, no new orders could be placed. Deadlines for filing bid protests and agency appeals, however, are unlikely to be pushed back because of a shutdown, he said.

A government shutdown would not make a contract null and void, unless the agency explicitly terminated an award for convenience. Contracting officers also could issue a stop-work order, bringing a hard stop to all work, but keeping the contract valid. More likely, he said, is that agencies would issue broad guidelines to their contractors instructing them of the rules and limitations.

If a contract is up for renewal or extension, then no funding could be appropriated to exercise those options, Chvotkin said. "Look at contracts expiring in next 30, 60, or 90 days," he suggested. "If you can get them exercised sooner rather than later, it's to your advantage to do so, while funds are still available."

If a shutdown occurs, then most contractors should not expect to be compensated. During all previous shutdowns, federal employees have received retroactive pay but Congress has never provided such authority to contractors. Cooney does not expect that to change now.

"It's conceivable that it could occur for contractor employees, but I would not count on it," he said. "There is no precedent for it. You will need to make a business decision if you want to pay your employees if they are furloughed."

But, Chvotkin said furloughs should be the last resort. Companies should consider reassigning staff to projects not affected by appropriations, or allow their employees to take mandatory training courses, or use vacation or leave time. The key, he said, is mitigation.

"Try to minimize the government's liability as well as your own through looking at possible work reassignments," he recommended.

No matter the amount of planning, there are a number of questions that contractors would face unique to their situation, PSC said. If an employee is on official travel overseas, should the company order the official back home, or take a wait-and-see approach? If a contractor is allowed to continue working, will there be a federal employee in place to accept delivery, or to approve a voucher? And, how should information technology vendors that help maintain an agency's website approach their jobs?

The key, according to Barry Anderson, who worked at OMB for 18 years, is communication. "This is the time to pick up the phone and follow up with agencies," said Anderson, who also served as acting director of the Congressional Budget Office.

Companies affected by a shutdown also were encouraged to be extremely detailed in their documentation, separating out the costs needed to halt a program and subsequently restart operations. Firms should then promptly seek reimbursement once the government is operating again, Chvotkin said.

"The stronger the documentation, the better chance you can demonstrate the cost incurred as part of the shutdown and stronger the opportunity for recovery," he said.

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