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How likely is a government-wide shutdown? Given the current political climate, anything is possible. The last shutdown, for Fiscal Year 2019, lasted 35 days and was the longest shutdown to date.
While uncertainty remains for this upcoming fiscal year, government contractors should keep these considerations in mind.
What a federal contractor should do now
1. Prime contracts: Organize your prime contracts and discuss them with your contracting officers to see which contracts will remain funded and operational. Submit your invoices early if possible. Seek to settle any open change orders or REAs. If there are change orders you are waiting to submit, getting them submitted as soon as possible could avoid later delays if there is a shutdown.
2. Subcontracts: Organize your subcontracts and talk with your prime contractor to see which contracts they believe or have heard will remain funded and operational. For those that do not, figure out where you fall in the hierarchy of subcontractors. Submit your invoices early if possible. Prepare to flow down any stop work notices that may come as a result of a government shutdown so that you are not stuck with unrecoverable subcontractor costs.
3. Make multiple contingency plans for varying lengths of shutdowns:
a. Staffing: Determine which staff would be idled by a shutdown and decide what to do with them (overhead vs. furlough). This may be a good time for vacations or training. And look at WARN Act employee advance notification requirements to see if they apply to your company.
b. Subcontractors: Make a plan for what you will do with subcontractors, and take a look at your subcontract provisions to make sure you can do what you plan to do.
c. Communications: Develop a communication plan to be used during the shutdown, and put the mechanisms in place now.
d. Cash flow: Plan for an interruption in cash flow and talk with your bankers now.
e. Accounting: Have accounting provide for segregation of shutdown costs in case they are recoverable. This can include the costs to shut down operations for you and for your subs, any unavoidable costs of managing or maintaining capacity during the shutdown, and the eventual restart costs when the shutdown is over.
Indirect Rates: A shutdown and suspension of work often has the effect of reducing a contractor’s indirect cost bases which result in increased indirect rates. Carefully managing expenses during a shutdown, so as not to unnecessarily burden the indirect cost pools, is important. When the government returns to work, assessing the shutdown impact on rates and subsequent impact to job costs is a good exercise so that cost increases can be addressed with government customers.
Documentation: Document everything! It is important that the contemporaneous record of company decisions and actions is maintained in order to justify costs incurred and avoided during a shutdown/stop-work scenario. These are often called upon when negotiating changes to contracts as a result of shutdown activity.
It is also good practice to advise your subcontractors of these leading practices as well to avoid later disputes over stop-work cost burden.
What a federal contractor needs to know
Funded contracts, regardless of contract type – firm fixed-price (FFP), cost plus (CP), time and materials (T&M), etc. – should be unaffected as long as any required access to government facilities or personnel is still available. If not, it may not be possible to continue performance, and direct costs incurred during a lapse in performance will probably not be allowable. It is critical that contractors document any inability to work (government facilities locked, no access to government personnel, etc.).
Of course, if you receive a stop-work order, everything changes. This is one of the few instances where a stop-work order probably isn’t the worst-case scenario. At least under a stop-work scenario, there are specific rules concerning allowability of shutdown costs. (Follow FAR Subpart 42.1303 requirements.)
And remember that the Antideficiency Act (31 U.S.C. § 1342) prohibits the government from accepting “voluntary services” from contractors. Don’t volunteer – you will not be paid, and it may impact your ability to recover other shutdown-related costs, such as unabsorbed overhead and employee separation costs. Submission dates will not be changed due to a government shutdown. Even if there is no one at the government to receive your filing– Government Accountability Office (GAO), Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA), etc. – you must still meet the filing deadline.
Below is a flowchart that CohnReznick developed to help assess shutdown exposure on a contract-by-contract basis. We recommend that companies distribute the flowchart to project managers; have them annotate the chart with the task or contract name/number and value; and then highlight or annotate each active contract or task order. When done, the company can compile the results to assemble a good picture of the impact of a shutdown. Not a bad start on an action plan, either.
Subject matter expertise
Kristen Soles
CPA, Partner - Managing Partner, Advisory - Global Consulting Solutions and Government Contracting Industry Leader
Richard Meene
Principal
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This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.