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Government Shutdowns: The Less-Publicized Impact on Government Contractors Government Shutdowns: The Less-Publicized Impact on Government Contractors

Government Shutdowns: The Less-Publicized Impact on Government Contractors

On the eve of the current government shutdown becoming the longest in American history, the financial plight of federal employees has been well documented in the media. Less well known, however, are the severe financial impacts that government contractors face during prolonged government shutdowns. Further, unlike federal employees who have historically received back pay at the end of shutdowns, the government does not typically take voluntary steps to compensate contractors for their shutdown losses. Therefore, contractors should review their contracts to determine what remedies they have for losses incurred due to this unprecedented government shutdown. These losses can occur in at least the following types of scenarios.

Lost Revenues and Contract Opportunities

During a government shutdown, the Antideficiency Act prohibits the government from spending funds Congress has not appropriated. This prohibition often requires contracting officers to issue stop-work orders on contracts that are not fully funded or to require supervision by furloughed federal employees. These stop-work orders can harm contractors in the form of lost profits and increased costs. Depending on the terms of their contracts, however, contractors may have contractual remedies to recover shutdown losses.

A government shutdown can also have longer-term impacts by preventing contracting officers from making new contract awards, awarding contract options and issuing new task or delivery orders. These are all potential lost (or delayed) opportunities for government contractors.

Lost workforce

Another potential harm to government contractors caused by shutdowns is the loss of key personnel and other employees. When the government orders a contractor to stop performance during a government shutdown, the contractor loses revenue for an unknown period of time.  Therefore, contractors are frequently faced with the impossible choice of indefinitely paying furloughed employees or laying those employees off during the shutdown period. For contractors who can’t afford to pay idle employees, there is a tremendous risk that temporarily displaced employees will seek employment elsewhere to replace lost paychecks. Once the shutdown ends, these employees must be replaced, and the inefficiencies of replacing them can increase the costs of performance. Contracts should be carefully reviewed to determine whether they provide a remedy for these unanticipated costs.

Delay Costs and Impacts

In addition, contractors impacted by shutdowns are often forced to delay operations, which can significantly increase their costs of performance. Several examples come to mind.

First, even if a contract is not suspended during the shutdown, federal employees responsible for processing invoices and issuing payments may be furloughed, preventing payments from being issued until the shutdown ends. The government, however, can require contractors to continue performance without payment, which can cause significant financial harm.

A second example is the inability to access locations where the contractor must perform its contractual responsibilities. Construction contractors, for example, may run into difficulties accessing a construction site or may not be able to perform construction activities because required government quality-control personnel are unable to be on-site. In these and other similar situations, contractors should consider requests to extend their periods of performance to ensure timely completion of their projects and avoid potential sanctions such as terminations or liquidated damages. Further, these delays may justify requests for equitable adjustments based on delay or constructive changes to the contract.

A third example is contractors who export goods and services to other countries. These contractors must comply with the International Traffic in Arms  Regulations (ITAR) and other export requirements. When, as now, the Departments of State and Commerce are shut down, the government’s export control regime grinds to a halt, which can increase costs and frustrate a contractor’s ability to export goods and services in a timely manner.

Conclusion

Ultimately, the longer the government shutdown lasts, the more harm it will cause government contractors and their employees. If you have questions about mitigating the impacts of the government shutdown, please contact Joshua Schnell or Aaron Woodward, co-chairs of Ice Miller’s Government Contracts Practice.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
 
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