Seven Things Contractors Should Know About the Federal Shutdown

Published: January 21, 2018

Federal Market AnalysisBudgetPolicy and Legislation

Federal contractors and employees find themselves in a familiar situation – in the midst of a government shutdown. While the political drama continues to play out, industry veterans and newbies alike are watching closely to determine how this shutdown will affect them.

The House passed another Continuing Resolution (CR) to fund the government until February 16, 2018. The bill also contained language to extend the Children’s Health Insurance Program (CHIP), which is a major goal for the Congressional Democrats. However, it does not address another priority, which is addressing the Deferred Action for Childhood Arrivals (DACA) policy, which allowed some people who entered the US illegally as minors to receive deferred action for deportation as well as other benefits. President Trump rescinded the program in September 2017, with a 6 month “wind down” delay to give Congress time to come up with a replacement. Without this provision, the CR proposal failed in the Senate and initiated the shutdown.

Although shutdowns are generally avoided (the last one occurring from October 1-16, 2013), budget uncertainty is the norm. According to a report from the Government Accountability Office (GAO), Congress has passed CRs in all but 4 of the last 40 years, with 2001 holding the record for the highest number of CRs (a whopping 21!).

 Federal employees and contractors are now caught in the budgetary cross-hairs, so it’s important to know what to expect during a shutdown.

Agencies cannot incur obligations unless it’s otherwise authorized by law; but they have permission to incur obligations (but not payments) necessary for the “orderly termination of an agency’s functions,” and to perform “essential” duties. This includes:

  • Medical care – Inpatient and emergency outpatient
  • Activities to ensure continued public health and safety
  • Continuance of air traffic control and other transportation safety functions
  • Border and coastal protection and surveillance
  • Protection of federal lands, buildings, waterways, and other property
  • Care of prisoners
  • Law enforcement and criminal investigation
  • Emergency and disaster assistance
  • Activities essential to the preservation of the money and banking system
  • Ensure the production of power
  • Maintain protection of research property

Agencies are allowed to spend funds that DO NOT originate from annual appropriations. 

Agencies such as GSA and the US Postal Service, which fund much of their operations with user fees, can continuing operating. Obligations made from FY 2017 dollars, and programs funded with multi-year dollars can also continue to operate, however, they may be impacted by the lack of federal employees around to manage them if they are not considered essential services.

A government shutdown impacts everyone, but the scope of the impact depends on who you are. A federal hiatus impacts anyone relying on or providing federal services.

  • Non-exempt federal employees:
    • Depending on the length of the shutdown, they would be furloughed with benefits intact
    • Based on past shutdowns, Congress often comes back later and provides back pay
  • Agencies (depends on the length of the shutdown):
    • Ripple effect from delayed programs (timing and increased contracting costs)
    • Lost revenue from user fees collected for various services across government. Many agencies rely heavily   on user fees and collections. The losses for lost revenue in the 1995 shutdown was the hundreds of millions when accounting for the ripple effect of lost revenue for states and small businesses  that dovetail on some government services.
    • Administrative costs associated with shutting down and ramping up – this was estimated in the millions for some agencies in 1996.
    • Additional costs and penalties related to late payments to various entities, including contractors. Contractors can receive reimbursement for some costs incurred due to the shutdown.
    • Lost productivity
    • Loss of disillusioned employees who leave public sector employment
    • Inability to hire, making it difficult to fill positions by end of fiscal year
  • Federal Contractors:
    • The ability to continue to work depends on the nature of the contract and where the work is performed.  Information and communications systems that support historically-defined “essential functions” will likely be operational (e.g. supporting defense communication networks, information security, systems related to critical infrastructure protection, etc.). Implications:
      • Incrementally funded contracts not funded
      • Delays in program solicitations and awards
      • Part of contracts may be essential while others aren’t
      • Delayed payments - vendors with products paid for in advance are likely unaffected but services not yet rendered will be halted
      • Direct and indirect expenses due to the shutdown may or may not be recouped
      • Impact on schedule and milestone-based performance metrics
      • Potential need for employee layoffs – depends on length of the shutdown
  • Citizens: Services are limited; call centers not staffed; applications for visas, social security and veteran’s benefits are paid but can be delayed; and museums and national parks are closed. However, there are reports that President Trump is working to keep museums and parks open. According to Federal News Radio, a Department of Interior spokesperson noted that road and restrooms will remain open, but anything requiring staffing and maintenance will be closed.

Federal employees supporting essential functions will get paid after appropriations are passed.

However, it’s up to Congress to decide to pay non-essential furloughed employees once the shutdown is over.  In past shutdowns, all employees (essential and non-essential) did receive back pay.

The number of essential employees can vary and may be more than you think.

It’s highly likely that more employees will be exempt than furloughed. Agencies are required to develop shutdown contingency plans that assesses the number of employees who are exempt from being furloughed, mainly those whose salaries are not funded through appropriations, they work on activities that are authorized or necessarily implied by law, those who are critical to the President’s ability to execute his constitutional duties, and those necessary to protect life and property.

In the 2013 shutdown, the number of actual furloughed employees varied across agencies, as well when compared to the number of planned furloughed employees.  For example, GAO’s report shows that the Department of Energy planned to furlough 96% of its employees but only furloughed 4%, while the National Institutes of Health planned to furlough 73% of its employees but ended up furloughing 80%.

Mandatory programs are exempt but will still be affected.

For example, Social Security payments will continue and field offices will be open, but they cannot issue or replace Social Security cards.

OMB asserts that there are budget options that may make this shutdown different than 2013. OMB Director, Mick Mulvaney said that during the last shutdown, the Obama administration “did not encourage agencies to use carry-forward funds, funds that they were sitting on, nor did they encourage agencies to use transfer authority.”

What Should Contractors Do?

Regardless of whether this shutdown lasts 10 days or 100 days, contractors should have a shutdown plan, because it’s likely that 2018 will not be last year that this occurs.  Contractors should treat like its shutdown plan like a real project with a project owner, and resources assigned to identify and document how schedules, costs, employee status would be affected.  Contractors should:

  • Review contracts (funding, period and place of performance, statement of work, etc.)
  • Classify contracts
    • Essential
    • Stop work order
    • Not essential but can be performed
    • No stop work order but can’t be performed
  • Separately document costs incurred specifically due to the shutdown
  •   Analyze the impact of:
    • Award delays     
    • Task orders/Modifications being delayed     
    • Options not being exercised     
    • Work deadlines NOT being extended
  • If your contracting officers have not been furloughed, talk to them NOW about the potential impact and solutions to mitigate impact once operations resume
  • Identify possible reassignments for affected employees
  • Develop contingency plans for subcontractors
  • Collect outstanding receivables ASAP (if possible)
  • Reevaluate/slim down your BD pipeline and Bid & Proposal (B&P) costs

The best thing contractors can do now is arm themselves with information about their customer’s plans and positions, and develop internal strategies to mitigate the impact of a prolonged shutdown.