April 24, 2017

Contractors Should Start Preparing for a Possible Shutdown Now

Holland & Knight Government Contracts Blog
Eric S. Crusius

With less than a week before the federal government’s appropriated funding runs out, confidence in avoiding a potential shutdown is waning.  Because of that, contractors should exercise prudence and immediately begin preparations for a potential shutdown.

The Current Political Situation

While it is true that the same party controls both houses of Congress and the Presidency, the limited time prior to a lapse in funding coupled with differing spending priorities among the members of Congress and the President could lead to a shutdown (or a series of short continuing resolutions followed by a shutdown). For instance, White House budget director Mick Mulvaney reiterated that the President would not sign onto any spending bill or extension that excluded funding for a border wall. On the other hand, the Democrats are requiring that Affordable Care Act cost-sharing payments be included; a position with which the Trump administration disagrees. As reported by Politico, other possible roadblocks include cutting off grants to "sanctuary cities," increased defense spending, funds to pay for medical expenses incurred at Planned Parenthood, and an existing coal miners' health care program (which finds resistance from the Heritage Foundation and like-minded Republicans).

All of these competing priorities make any negotiation to fund the government moving forward a sticky wicket. 

The Anatomy of a Government Shutdown

A shutdown is simply caused by a lapse in appropriated funding. The requirement that the Government only spends what has been appropriated by Congress is based on Article 1, Section 9, Clause 7 of the U.S. Constitution and reiterated by the Anti-Deficiency Act (31 U.S.C. § 1341) which provides, in relevant part, that: "(a)(1) An officer or employee of the United States Government…may not- (A) make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the expenditure or obligation; (B) involve either government in a contract or obligation for the payment of money."

Until the Carter administration, the government routinely ignored the Anti-Deficiency Act and continued normal operations even without funding.  That changed in 1980 when Carter’s Attorney General, Benjamin Civiletti prepared what is now known as the Civiletti Memorandum.  Civiletti concluded that the government could not spend money that was not appropriated by Congress – with a few exceptions.
A 2013 Congressional Research Service Report detailed those exceptions, which include:

(1) activities "necessary to bring about the orderly termination of an agency's functions"; (2) administration of benefit payments provided through funds that remain available in the absence of new appropriations, including, in the case of DOD, military retirement benefits; (3) activities and purchases financed with prior year funds and ongoing activities for which funding has already been obligated; (4) activities undertaken on the basis of constitutional authorities of the President; and (5) activities related to "emergencies involving the safety of human life or the protection of property." The Defense Department attributes its authority to carry on national security-related operations mainly to Section 1342 of the Antideficiency Act, which permits the continuation of activities to protect human life and property.

Nevertheless, contracts in the above categories can be impacted if furloughed government workers or shuddered government sites are necessary for performance. Further, contracts will not be awarded, RFPs will not be released, and most procurement activities will grind to a halt.

A couple of other interesting issues that have presented problems in past shutdowns include:

  • What happens with IT/Internet contracts? A government agency may host a website that has some services impacted by a shutdown and others that are not.
  • What about prime contractors that do not flow down terminations for convenience in their subcontracts? Contracts between prime and subcontractors are generally viewed as commercial contracts, so such clauses need to be present.
  • What about subcontractors? Subcontractors need to communicate with prime contractors to ensure they have direction because subcontractors may not have insight into whether a prime contract would be impacted by a shutdown.

A Contractor's Action Plan

Contractors are, of course, obligated to continue performance unless they hear otherwise from the Government. Nevertheless, contractors should reach out to their contracting agencies for guidance on the status of their contracts. Moreover, contractors would generally also be best served by:
  • Taking inventory of their contracts and personnel on those contracts and drafting an action plan;
  • Determining whether a contract may fall under the exceptions noted above and confirm that exception with the contracting agency;
  • Documenting all wind-down and start-up costs and create separate accounting categories for those costs;
  • Deciding whether employees on impacted contracts can be reassigned or be asked to take paid vacation or overdue training;
  • Documenting all actions and communicate with all parties involved;
  • Mitigating costs whenever possible; and
  • In the event of a shutdown, seeking recovery of expenses as soon as possible.

What happens to each particular contract depends on the type of contract, how it is funded and whether it falls under an exception noted above. 

Because the political situation is uncertain, contractors would be wise to pay attention to their contracts and the news to see what happens next.

We will continue to monitor this situation and issue additional alerts as necessary.

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