As Congress continues to grapple with budget deadlines, the possibility of a government shutdown is never far from the minds of federal contractors. Unlike many federal employees, who may be furloughed with back pay authorized by Congress, government contractors often bear the brunt of shutdowns in the form of stopped work, delayed payments, or even contract terminations. With the potential for significant financial and operational impact, contractors should be proactive in both preparing for and managing the effects of a shutdown.

1. Review Your Contracts for Shutdown Implications

Every federal contract is different, and the impact of a shutdown depends on the nature of the contract and its funding. Contractors should carefully review:

• Funding Clauses – Determine whether your contract is fully funded or incrementally funded. Fully funded contracts may continue through a shutdown, while incrementally funded contracts could be halted once funds are exhausted.
• Stop-Work Clauses – Understand the procedures and rights triggered if the government issues a stop-work order in connection with your contract.
• Termination Clauses – Review the termination clauses in your contracts and subcontracts, and ensure compliance with notice and reporting requirements.

2. Communicate with Your Contracting Officer

Open communication with the contracting officer (CO) is essential. Contractors should:

• Consider seeking written guidance on whether work should continue or stop.
• Where feasible, document all instructions from the CO, particularly regarding funding availability.

3. Develop an Internal Contingency Plan

Contractors should be prepared for work stoppages or delays by:

• Identifying which contracts are most vulnerable to funding lapses.
• Creating staffing plans to address potential furloughs or reassignments, as well as ramp-up plans for post-shutdown activities.
• Forecasting cash flow impacts, especially if invoice processing is delayed.

A clear plan can help minimize disruption and allow for quick adjustments if the shutdown extends for days, weeks, or longer.

4. Preserve Your Rights to Compensation

If performance is delayed or halted due to a shutdown, contractors may be entitled to certain remedies via requests for equitable adjustments (REAs) and/or formal claims under the Contract Disputes Act (CDA). As such, contractors should maintain thorough records of costs and impacts to support potential recovery (e.g., track communications, labor charges, and all shutdown-related impacts in real time). Consider creating separate cost and time accounting codes for both shutdown-related labor and activities and ramp-up labor and costs for when the shutdown has been lifted. Contractors should also consider consulting with experienced government contracts counsel early on to formulate a plan of attack for pursuing REAs and claims.

5. Stay Engaged in the Long Term

Shutdowns are disruptive, but they are also part of the risk landscape for federal contractors. To strengthen resilience:

• Build reserves and diversify revenue streams to reduce reliance on incremental government funding.
• Monitor congressional budget activity and agency contingency plans.
• Educate your workforce on the implications of a shutdown to maintain morale and compliance.

Final Thoughts

Government shutdowns create uncertainty and financial strain, but contractors who prepare in advance and respond strategically can mitigate risks and preserve their rights. Careful contract review, proactive communication with contracting officers, and diligent documentation of impacts will position contractors to weather the storm — and recover costs where possible — once the government reopens.

If you have any questions about any of the foregoing, please do not hesitate to contact Aron Beezley or Nathaniel Greeson.