The Next Shutdown: How Gov't Contractors Can Prepare

Author:Ms Kristen Ittig, Joshua F. Alloy, Stuart W. Turner, Amanda J. Sherwood and Nathaniel Castellano
Profession:Arnold & Porter Kaye Scholer LLP

Congress' short-term spending bill signed on Monday ended the nearly three-day government shutdown. As this spending bill only appropriates funding for government operations for three weeks, however, and does not resolve the underlying political disputes, it is unlikely to put an end to shutdown politics for good, or even for long.

Participants in the federal market would be wise to review the issues and challenges presented by shutdowns in order to remain prepared for what may come.

What Activities Can Continue During a Shutdown?

During a shutdown, federal contractors must determine whether they may continue performing. A government shutdown is not a self-executing stop-work order; a shutdown itself does not suspend a company's obligations to perform or the government's obligation to pay for performance.1 What matters is whether a contractor's work requires any new appropriation or authorization of spending, and whether critical government personnel, facilities, and resources are available.

Of course, if your contracting officer issues a stop-work order, then stop work and comply with the order. If you do not receive a stop-work order, then you must consider (1) whether your contract is deemed required to support "exempt" government activities and (2) how your contract is funded.

Is Your Contract Required to Support Activities Exempt From the Anti-Deficiency Act?

Many of the legal complications of a government shutdown derive from the Anti-Deficiency Act, which makes it a crime to obligate the United States to spend funds that Congress has not previously appropriated.2 The Anti-Deficiency Act permits four narrow exceptions:

Obligations not impacted by annual appropriations (multi-year appropriations, indefinite ("no-year") appropriations, or obligations authorized outside of annual appropriations bills. One example is Social Security. Obligations in advance of appropriations permitted by statute. For example, under the Civil War-era "Feed and Forage Act," the secretary of defense or the secretary of homeland security may contract for necessary clothing, subsistence, forage, fuel, quarters, transportation, and medical or hospital supplies without an appropriation.3 Activities "necessarily implied" by the duties of a given agency during a shutdown (distributing Social Security checks, contracting for emergency services, closing impacted functions). Constitutional duties, including certain foreign relations and national security functions.4 Besides prohibiting over-obligation of available funds, the Anti-Deficiency Act also prohibits accepting personal services without compensation. Relevant to a government shutdown, this provision contains a narrow exception permitting the government to employ personal services exceeding those authorized by law "for emergencies involving the safety of human life or the protection of property."5

Applying these exceptions to the Anti-Deficiency Act, the U.S. Department of Defense shutdown guidance provides detailed information about which DOD activities are "excepted" and can therefore continue during a shutdown.6 Moreover, contractors supporting these types of exempted programs may even receive new contract awards during a shutdown.7

If Your Work Is Subject to the Anti-Deficiency Act, How Is Your Contract Funded?

If you do not receive a stop-work order and do not perform a contract required to support an excepted activity, than the principal question is how your contract is funded. If your contract is fully funded, then continue to perform unless and until your contracting officer directs otherwise.8 Certain agencies, such as the U.S. Department of Energy, for example, operates mostly on multiyear or no-year appropriations, and therefore expect little interruption of work during shutdowns.9

Some contracts do not depend on appropriated funds at all, and are therefore not obviously threatened by a gap in federal appropriations. For example, contracts with nonappropriated fund entities may be funded with the revenue those entities generate on their own. Likewise, contracts that involve, for example, selling surplus government property may not be directly impacted by a lack of agency funding, as they do not involve payment by the government, but rather sharing of profits on sales of government surplus with the government. However, if such contracts require deliveries from federal sources, or other federal approval or processing, a shutdown may nonetheless prevent work from going forward.

The real concern during a shutdown is for contracts that are incrementally funded and subject to the "availability of funds," "limitation of funds" or "limitation of cost" clauses.10 While each clause is different, they all generally provide that the government has no obligation to pay for work performed or costs incurred unless and until funds are properly allocated and obligated to the contract. They also generally require contractors to provide notice at various times before the contract exceeds a certain value, and failure to provide such notice can further limit the government's liability. If a contract's funding runs out during a shutdown, or a shutdown prevents a contractor from providing the contracting officer with t,he required notice, the contractor may face the threat of performing "at risk," meaning the government will have no legal obligation to pay for the...

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