Six Things Contractors Should Know About the Federal Shutdown

As industry observers, we've been somewhat trained over the last several budget cycles to expect to be taken to the edge of the fiscal cliff, only to be jerked back at the very last moment. Not this time. We're in Day 2 of the first shutdown since 1995, and with the debt ceiling debate coming within the next 2 weeks, it seems unlikely that government operations will resume before then. Contractors are caught in the cross-hairs, so we've assumed some of the most important things to know about government shutdowns, and recommendations for what to do now.

1.    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 property1

2.    Agencies are allowed to spend funds that DO NOT originate from annual appropriations. 
Agencies such as GSA, which funds much of its operations with user fees, have funds to continuing running - at least for now. Obligations made from FY 2013 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.

3.    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 backpay

    Agencies (depends on the length of the shutdown):
    •   Increased backlogs for transaction and process-heavy agencies like SSA, VA, and State
    •   Ripple effect from delayed programs
    •   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

    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 delayed; museums and national parks are closed.

4.    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, employees did receive backpay.

5.    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. During the 1996 shutdown:
    •   Roughly 64% of employees of agencies funded through the Commerce, Justice, State and Judiciary appropriations bill were NOT subject to furlough
    •   53% of Interior’s employees were exempt
    •   78% of employees under VA, HUD and the “Independent  Agency” category were exempt.

6.    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.

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 2013 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.