Unless Congress takes action by March 4, 2011, most federal agencies will be required to cease operations, presenting significant challenges for contractors. Whether you’re optimistic or pessimistic about the prospects of a political solution that would avoid the looming government shutdown, preparing for it is a necessity. News reports on the issue are interesting, but they don’t do much in the way of developing a strategy for handling a shutdown. Here is a look at some of the key questions presented, with answers based on decisions that came out of the now infamous 1995 government shutdown.

How will a government shutdown affect my work?

Most contractors will continue performing despite the shutdown. The closure of government offices and the unavailability of government employees may cause delays and interference, but much of these costs will be recoverable when the government comes back to work. Those who are unable to perform because they are denied access to government facilities will need to take steps to mitigate the resulting loss of productivity.  All contractors will need to quantify the impacts of the government shutdown and retain documents reflecting them.

Contractors performing incrementally-funded contracts may be required to stop work. Except for emergencies involving the safety of human life or the protection of property, the Anti-Deficiency Act requires contractors performing incrementally-funded contracts to stop work when they have reached the limit of available funds. Contractors are not permitted to perform work on projects for which the appropriations have been exhausted, even if additional appropriations are being sought and the lack of funding is temporary. PCL Constr. Serv. v. United States, 41 Fed. Cl. 242, 257 (1998). Contractors who perform work above an applicable cost ceiling do so at their own risk. Ray Comm., Inc. v. Dept. of State, GSBCA No. 15509-ST, 06-1 BCA ¶ 33,273 (Apr. 28, 2006).

Can I recoup additional costs incurred as a result of the shutdown?

Contractors should be able to recover additional costs incurred as a result of the government shutdown. The decision in Raytheon STX Corp. v. Dep’t of Commerce, GSBCA No. 14296-COM, 00-1 BCA ¶ 30,632 (Oct. 28, 1999), addresses precisely this question. There, the board sustained a claim seeking to recover salary and layoff costs paid to employees during the 1995 government shutdown. Despite the fact that the government shutdown was a public and general act within the meaning of the Sovereign Acts doctrine, the Board sustained the claim because the contract allocated these costs to the government and because the closure of government offices interfered with the contractor’s ability to perform. Unabsorbed overhead, delay damages, and inefficiency costs would also be compensable if the shutdown has an impact on the contractor’s performance.

Another case from the 1995 government shutdown, however, shows that a shutdown alone may not be enough to support a claim for additional compensation. In Cleveland Telecomm. Corp. v. United States, 39 Fed. Cl. 649 (1997), a labor arbitrator deemed the 1995 shutdown a “holiday,” which required the contractor to pay its employees premium time. The Court of Federal Claims rejected the contractor’s effort to recoup those costs from the government, holding that there had been no change that would justify payment of additional compensation. Quoting the contracting officer’s final decision, “[t]here were no new burdens, hardships or hazards to the contractor’s employees. . .[d]uring the furlough periods, the services required, time, and place of performance remained unchanged . . . .”

What should I do now to prepare for a possible shutdown?

First and foremost, contractors should communicate with their contracting officers to determine how each of their contracts will be affected. There are numerous factors at play in determining whether the contractor should continue performance. Guidance from the contracting officer will promote the avoidance of disputes and simplify the task of resolving them.

Second, contractors should consider addressing any near-term funding issues. Is the contract subject to a limitation-of-funds clause? Is an option about to expire? Are the available funds sufficient to allow the work to continue during a shutdown? It may be prudent to have the government exercise expiring options now, while funds are still available.

Third, contractors should consider taking steps to mitigate the impact of a shutdown. Is it feasible to reassign personnel to projects not impacted by the shutdown? Perhaps the furlough period presents an opportunity to fulfill training obligations or to use vacation time.

Fourth, contractors should quantify and document any additional expenses that may be incurred as a result of the shutdown. Additional costs incurred to demobilize personnel or equipment from a government facility may be compensable. Detailed documentation will give the contractor the best chance of recovering them.

Finally, contractors should be aware that the closure of government offices does not mean that time stops. Interest payable under the Prompt Payment Act will continue to accrue on invoices that are not timely paid. A convenient interest calculator can be found on the Department of the Treasury’s website.

Read more entries on government funding shortfalls, including the government shutdown and sequestration under the Budget Control Act.