Federal Government Shutdown a Reality!

Last week we talked about a shut down but I thought this would not happen.  Well, the Federal Government has shut down as of 12:01am this morning.  We need to hope that this does not last too long.  I think the longer the government is shut down, the more difficult it will be on Federal Contractors, especially small business contractors.  We talked briefly last week about what the impact could be, especially the slowing down for payments.  It could obviously slow down issuing new contracts as well.  What are the other things that government contractors should do to help mitigate the impact?

First and foremost, the contractor should evaluate their contract(s) to see if they are supplying essential products or services.  If that is the case, the government has no choice but to continue to fund and pay for these critical services &/or products.  In other words, these essential products and services are exempted from the effects of the shutdown, although payments will most assuredly be delayed.  On the other hand, the government has guidelines for how to handle a shutdown (really, I'm not making this up).  The long and short of this is that... “Federal officers may not incur any obligations that cannot lawfully be funded from prior appropriations unless such obligations are otherwise authorized by law".  It also allows obligations to be committed for termination as necessary but funds may not be dispersed.  So that is a mouth full but basically it means that there is no authorization for disbursement of funds during the shutdown (essential services & products excluded).  I would suggest that every government contractor review their contracts to make sure where they stand.  Since most cost reimbursement type contracts are what is called incrementally funded, the question becomes where the funding will come from on these types of awards.  This most certainly will mean a delay in funding but it also could result in a reduction and/or elimination of funding going forward.  If your CO hasn't already given you a stop work order, you may want to review your contract and evaluate your risks of continuing work on the contract during the shut down. 

I think every contractor should ask several serious questions internally to prepare for the resolution of the situation when the government starts back up.  These questions should include:

  • Assess your cash flow position and make contingency plans for a reduction in cash flow proportional to your leverage in the Federal Contracting market (For incrementally funded contracts, determine the funding status and what contingency plans may be required)
  • Prioritize your expenses during the shutdown period and for several months following (until a cash stream can be restored)
  • Does your contract(s) have provisions in the contract for providing essential activities?  If so, what are the contract provisions and what contingency plan will this require?
  • Evaluate your contract to see if you may defer payment to your subcontractors as a result of a delay in payment from the Federal Government (pay when paid clause)
  • Evaluate each contract to calculate the risk of performing work on that contract during the shut down
  • Evaluate your direct charge employees and the contracts they charge to to determine if they may work during the shutdown.  Establish contingency plans
  • If you are submitting a proposal that is due there may not be anyone to receive the proposal.  Procurements will be delayed, plan accordingly
  • Your indirect rates may exceed your provisional rates - contractors will not be able to reduce indirect expenditures at the same pace the shutdown will reduce the contract direct base.  The government may choose to reimburse the "unabsorbed overhead" but they don't have to

As you can see, there are many factors to consider, especially if the shutdown lasts more than a day or so.  The longer the government shuts down, the larger the impact.  I would think that the impact grows exponentially as a function of the length of the shutdown.  Let's hope that it doesn't last long.