Legal CornerBy: Elizabeth Ferrell, Partner, McKenna Long & Aldridge LLP

At the beginning of September, pundits were predicting that a Continuing Resolution would be enacted by the September 30 deadline for FY2014 appropriations. Now political wrangling over Obamacare threatens to derail the appropriations process and create a funding gap beginning on October 1. Absent appropriations to fund their operations, federal agencies simply may not operate. Unfortunately, the political rhetoric has become increasingly strident, and it seems more likely that Congress will not be able to agree on federal funding in a timely fashion. The consequences for Government contractors that flow from a Government shutdown can be significant. Several key points bear mention.

It is first important to understand the effect of a shutdown on Government employees and facilities. First, The Office of Management and Budget (OMB) provides agencies with guidance regarding how to proceed during a shutdown in OMB Circular No. A-11. In brief, agencies may not incur any obligations unless authorized by law. Agencies may incur obligations “as necessary for orderly termination of an agency’s functions,” but no disbursements may be made. During an absence of appropriations, agency heads must limit obligations to those needed to maintain the minimum level of essential activities necessary to protect life and property. Agency heads are required to develop and keep on hand shutdown plans, which are approved and monitored by OMB. Earlier this week, OMB issued a Memorandum for the Heads of Executive Departments and Agencies on “Planning for Agency Operations during a Potential Lapse in Appropriations,” asking agencies to update their plans for operations in the absence of appropriations.

For federal employees, an immediate shutdown effect is the “shutdown furlough.” Generally only those employees who are performing emergency work involving the safety of human life or the protection of property, those who are involved in suspending agency operations, or who fall in other specified categories (such as members of Congress and the President) are not subject to furlough. As the OMB Memorandum makes clear, federal employees who supervise or support contract performance (such as C.O.’s and COTR’s) are not excepted from furlough, and ongoing operational and administrative activities relating to contract administration (including oversight, inspection, accounting and payment) cannot continue when there is a lapse of funding.

A lapse of appropriations also generally means that there are no additional funds made available for contracts – -either the award of new contracts or the obligation of funds to existing contracts. While contractors can continue performing existing contracts within the limits of obligated funding, performance may be delayed or disrupted by the lack of Government personnel for contract administration or by the shuttering of non-essential Government facilities.

There are steps that contractors can take now to position themselves to weather the storm and survive a shutdown with minimum adverse impact. Among the key factors for contractors to consider in developing a shutdown contingency plan are:

Determine Nature of Contract Work:

  • Has agency identified your contract as providing an essential activity necessary to protect life and property (and excepted from “shutdown”)?
  • Document any shutdown exception and get clarification of which Government personnel will be available for contract administration and payment.

Assess Cash flow:

  • Plan for a disruption of cash flow.
  • Ask C.O. whether outstanding invoices can be paid by the Government before October 1.
  • Determine if payments to subcontractors be deferred (e.g., when there is a pay when paid clause).

Review Contract type and Funding status:

  • Determine if contracts are fixed price or cost reimbursement and incrementally funded or fully funded.
  • For incrementally funded contracts, determine funding status (and whether additional funding is needed in the near term).
  • Review options set for exercise in the next few months.

Assess Impact of Furloughs on Performance:

  • Communicate with C.O. on status of Government personnel and Government facilities necessary for your performance.
  • Communicate with the C.O. on whether a stop work order will be issued.
  • Determine what work can be performed in the absence of Government employees.
  • Consider whether work-arounds will ease the disruption caused by the furloughs.
  • Communicate with subcontractors on shutdown plans.

Prepare for Claims:

  • Document adverse impact on performance (written narrative, project logs, daily reports).
  • Establish separate charge lines to capture increased costs flowing from shutdown.
  • Notify the C.O. of any performance issues caused by the shutdown (even if the C.O. is furloughed).
  • Advise subcontractors to document impact in the same fashion.

The bottom line is that a Government shutdown of even relatively brief duration can have significant consequences for contractors if they have not anticipated the ways in which contract performance may be disrupted and considered how to best protect themselves. The shutdown process is complex, but with prudent planning, affirmative steps can be taken to create the greatest likelihood that a contractor will be made whole once Congress gets its act together and Government funding is resumed.