02.24.11

04.08.11: Update to this Client Alert Available: Mitigating the Impact of a Shutdown

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Without extension of the current continuing resolution that expires March 4, 2011 or passage of a 2011 budget appropriations bill, the Government is expected to shutdown those Government services not deemed essential. “Essential” activities are limited to those efforts necessary to protect life and property. Historically this has included Defense, National Security and Emergency activities.

In the event of a shutdown, non-essential Government personnel would be furloughed for an indefinite period of time. The furlough would last until another appropriations act is signed into law – either through a continuing resolution or a normal appropriations bill.

In the event of a shutdown, it is expected that Government personnel would not be available to perform administrative functions that are critical to contract financing and performance. These functions could include program management, contract administration, receiving, inspection, invoice processing and invoice payment. As an example, during the extended Government shutdown from 12/16/1995 to 1/6/1996, the furlough included most Defense Contract Audit Agency (DCAA) personnel including those responsible for reviewing and approving contractor vouchers.

As a preemptive action to mitigate the impact of a potential shutdown, it is suggested that contractors take the following course of action:

1. First, contractors should reach out to their Contracting Officers to obtain guidance and clarification on expectations of performance in the event of a shutdown. Any such communication should be documented. While it is up to the Contracting Officer to issue a stop-work order, as necessary, contractors should ensure that they proactively obtain clarification from Contracting Officers as to which programs they anticipate will be impacted.
2. Contractors should identify the contracts in their existing book of business that would potentially be impacted by a shutdown. Not all contracts will necessarily be impacted to the same extent. Factors such as the contract type, the funding status and whether the contract is “essential” will influence whether any individual contract is impacted by a shutdown.
3. Regardless of whether a contract is directly impacted by a shutdown, to the extent it is permitted by the contract, contractors should expedite preparation of invoices/vouchers to allow sufficient time for Government processing in advance of a pending shutdown. This would serve to minimize any payment and financing delays caused by the shutdown.
4. Contractors should proactively plan for contingency activities for direct program staff that could be impacted by a shutdown. Options to consider may include using any shutdown time to address training requirements, encouraging the use of leave/PTO during the shutdown period, utilizing impacted staff to facilitate internal administrative programs and functions that would have otherwise been procured or outsourced, and re-deploying staff to non Government contracts.
5. Prime contractors should develop a plan for providing notification and instructions to subcontractors as necessary. It may be necessary for prime contractors to issue stop-work orders to their subcontractors. Alternatively, if the Government expects work on a contract to continue during a shutdown, prime contractors should ensure that their subs are fulfilling their performance obligations. To the extent that a potential shutdown is prolonged and that it impacts a prime contractor’s financing, consideration should be made to renegotiating payment terms and conditions on subcontracts. Conversely, subcontractors should seek instructions and direction from their prime contractors.
6. If a stop-work order is issued under a contract, contractors should separately track associated shutdown costs (e.g., costs incurred on a program while ramping up and ramping down), as these costs may be recoverable.
7. Finally, contractors should seek necessary legal advice to address any unique aspects of the shut down and the impact on individual contracts.

Contractors face uncertainties related to the possible Government shutdown. Expectations related to performance requirements and recovery of costs on any individual contract will depend upon the unique set of circumstances associated with the contract.

Should you have any questions you may contact Sajeev Malaveetil, Principal, at (703) 770-1060 or at smalaveetil@argy.com.

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