government shutdown
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Government Shutdown? How A Federal Contractor Can Prepare 

Key Details: The Federal Government narrowly avoided a shutdown as President Biden signed a stopgap funding measure the evening of Thursday, September 30, 2021, allowing Federal agencies to remain open and operative through December 3, 2021. The continuing resolution prevented hundreds of thousands of employees from becoming furloughed. However, a potential debt default is still looming as the United States approaches its borrowing limit.

The U.S. Department of the Treasury estimates that the United States will exhaust all options and flexibility to avoid breaching the debt limit around the middle of October. While Congress is poised to pass an emergency debt limit extension to cover current spending levels into December 2021, for the contracting community, this sets up a potential repeat scenario from the end of the fiscal year where legislative negotiation over budgets, funding, and the national debt limit could revive concerns of a Federal Government shutdown in early December 2021. For federal contractors, planning and diligence is required to reduce the risks and costs associated with a government shutdown.

Learning From Past Government Shutdowns

The most recent government shutdown occurred during the Trump Administration and spanned from December 22, 2018, to January 25, 2019. It resulted in many federal employees and contract workers being furloughed and placed on temporary leave while essential workers were required to work without pay. The Federal Government also experienced a shutdown during the Obama Administration where the White House was pressured into lower discretionary spending levels. This led to 40% of the federal workforce being furloughed.

With a possible government shutdown still on the horizon, federal contractors may want to consider seeking advice and resources from trusted advisors to navigate the complex employment issues accompanying a shutdown. Government shutdowns will have a varying degree of impact on each contractor depending on their contract and services portfolio. This article is for informative purposes only and should not serve as legal or planning advice – discuss these items with experts and advisors.

What Happens During a Government Shutdown?

  • Agencies cease operations unless authorized to continue.
  • Contractors are not entitled to reimbursement of unfunded work.
  • The terms of contracts and funding sources for service contractors determine whether the work will be considered essential or funded.
  • Many contractors may end up furloughing employees.
  • Access to federal facilities for contractors will be limited.
  • There may be a disproportionate adverse effect on T&M (Time & Material) and cost-type contracts as opposed to fixed-price contracts due to the contractor’s inability to access facilities, access federal personnel, bill hours, incur labor costs, and/or receive incremental funding under certain contract varieties.

Analyze Your Contracts 

  • Some contracts may be unaffected or less affected by the shutdown so it will be necessary to understand where your specific business situation.
  • Contracts for activities that are considered essential or that are affiliated with agencies that have already been given funding are less likely to be affected.
  • Contracts authorized by law are less likely to be affected.

Wage Considerations  

  • Non-essential government employees are normally furloughed during a shutdown. Contractors must consider if there are proactive steps to limit any long-term damage.
  • Contractors must be mindful of their work and contract obligations under federal and state laws.
  • Previous government shutdowns saw contractors requiring exempt employees to take vacation time to cover compensation. This may be a viable solution to mitigate costs.
  • Contractors should instruct their employees to not perform work while furloughed as even responding to emails requires salary to be paid for the entire week.
  • Working reduced weeks is also an option that can be considered. However, contractors must be aware of salary basis implications.

Communication

  • Speak with your contracting officer. They should provide a formal notice that includes a Stop Work Order under the Federal Acquisition Regulations (FAR). Contracting officers will also be able to document decisions made regarding which tasks will continue.
  • Effective communication with your employees will also lower the long-term impact of a shutdown.
  • Communicate with your subcontractors to mitigate costs incurred during the shutdown.

Documentation  

  • Contracts must take proactive steps in determining and documenting which of their contracting activities will cease during a shutdown.
  • Some activities may be exempted and may continue with work.
  • Documentation is key during a shutdown. If shut down related costs are incurred documentation of key action items will help substantiate and support any potential opportunities for shutdown cost recovery.

Explore Alternatives

  • Develop flexible contingency plans surrounding employee arrangements, notifying employees, and strategies on communicating with subcontractors and vendors.

As Congress has given itself a window to resolve federal funding and debt issues, federal contractors have similarly received a timeline to prepare for a December 2021 shutdown event. It is more important now than ever to speak with a trusted advisor to plan ahead. Contact Ryan and Wetmore today to speak with an expert.

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Peter Ryan

About Peter Ryan

Partner, Co-founder, & CPA

Peter T. Ryan co-founded Ryan & Wetmore in 1988 with business partner Michael J. Wetmore. Peter provides clients with the best strategies for success. His expertise extends across various industries, including government contracting. Peter obtained a Master of Business Administration in Finance from the University of Baltimore and a Bachelor of Arts in Accounting from the Catholic University of America.

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About Rosie Cheng

Finance Consultant

Rosie Cheng is a Finance Consultant at Ryan & Wetmore. She focuses on government contracting services and produces many of the firm’s government contracting newsletters. Rosie graduated from Georgetown University with a Master of Science in Management and from William and Mary with a Bachelor of Business Administration.