Reed Smith Client Alerts

Conventional wisdom goes that when prevention of an event is impossible, preparation is the best defense. This is certainly the case for federal contractors facing the impending federal government shutdown. The short-term continuing resolution currently funding federal operations will expire March 18. Though an additional resolution could be signed at that time to continue temporary funding of federal operations until the 2011 budget is passed (assuming the budget itself has not been passed by that point), another very real possibility is that federal agencies will be required to cease all but the most crucial operations.

A federal shutdown will mean different things to different contractors, but even those who don't stand to be severely or even marginally impacted in the short term would be well advised to take the time to consider the shutdown's potentially broader implications. Conventional wisdom also goes that adversity breeds opportunity, and while it may be harder for federal contractors to discern opportunity in this situation, it is there. The following are our six recommendations to federal contractors preparing to weather the potential federal shutdown and emerge on solid ground.

Assess the Shutdown's Potential Impact to Your Current Contract Funding

Perhaps the most obvious aspect of a shutdown is that its impact to current contracts correlates most directly with the funding of those contracts. A key element for determining whether contract funding may be halted in the absence of a federal budget is whether the contract is fully funded or incrementally funded. Under the Antideficiency Act ("ADA"), federal officials generally may not make payments or incur obligations in excess of available funds or before funds have been appropriated. Thus in the absence of a federal budget, work under contracts for which funding has not already been obligated may be halted.

The Department of Justice has found that contracts required for the performance of certain functions and services are exempt from the ADA's prohibition on the incurrence of obligations, including activities related to the constitutional duties of the president, food and drug inspection, air traffic control, responses to natural or manmade disasters, law enforcement, and the supervision of financial markets. Additionally, under Office of Management and Budget ("OMB") guidance, in the absence of a federal budget, officials may incur obligations "as necessary for orderly termination of an agency's functions," but no disbursements may be made against those obligations. (OMB also requires agencies to prepare contingency plans detailing the functions and employees that will be kept working in the event of a shutdown.) Moreover, certain agencies (for example, the Defense Finance Accounting Agency and the Defense Logistics Agency) are self-sustaining, meaning they can continue to operate under their own working capital funds during a federal shutdown.

Nevertheless, even if the necessary funding has been obligated to permit continued performance of your contract, logistical and other issues may arise during a shutdown to hinder that performance. The availability of funding is a necessary element, but it is not sufficient.

Communicate with Your Contracting Officer About Your Performance Expectations During the Shutdown

Regardless of whether it seems clear from the source or type of your contract funding, or the sheer nature of your work, that your contract performance will continue despite a federal shutdown, it is important to contact your contracting officer ("CO") to verify what is expected of you and provide assurances that you are prepared to meet those expectations. If you have even the slightest uncertainty about your performance expectations during a shutdown, your CO is the only individual from whom you should seek clarification.

Contacting your CO as soon as possible will enable you to determine your performance obligations during the shutdown and, if your performance is to continue, to address any logistical issues that may arise. For example, the absence or shortage of federal employees at a contract worksite may cause delays or barriers to your access. Recognizing these issues in advance and devising alternative means of access that are still within the terms of your contract will permit your continued efficient performance. You should document these discussions, and ask your CO to provide in writing any instruction or course of action regarding your expected performance during the shutdown.

Assess the Implications of Your Continuing Performance Expectations to Your Overall Operations

Ideally while you are clarifying your performance expectations with your CO, you should also determine how any contemplated change or stop to your contract performance during the shutdown will impact your overall operations. For example, the shutdown may require you to put your own employees or subcontractors on work furlough. On the other hand, your performance may continue as normal, but payments for your work may be delayed. Depending on the size of your contract in relation to your overall business, these changes could significantly impact your operations. Being conscious of these issues and being able to address them fully with your CO when discussing your performance expectations will enable you to identify ways to mitigate the consequences of the shutdown.

Communicate with Your Employees and Subcontractors About the Expected Impact to Overall Operations

Though uncertainty has become a part of reality for many, it does not have to be. Preserving your business in uneasy times is not only about adopting strategies and tactics to address work slowdowns and stoppages, but also about communicating the pertinent details of those plans to the people who will be responsible in some way for implementing them. Informing your employees and your subcontractors about their performance expectations during the shutdown will demonstrate that you have carefully and conscientiously approached the situation and are doing all that you can to keep your business-and their jobs-in place. Though in some cases the news will not be welcome or good, it must still be delivered-not only out of principle, but also because it may be required by federal, state, and/or local labor and employment laws, collective bargaining agreement, or contract.

Maintain These Dialogues, and Records of Your Performance, During the Shutdown

No one can predict how long a federal shutdown may last. As the shutdown continues, maintain regular communications with your CO and your employees and subcontractors about your performance expectations. And document everything, from records of the work you perform during the shutdown, to details of your communications with employees and subcontractors about their performance expectations, and any other measure taken (including any expense incurred) in conjunction with your continued performance. Also document the reasons for taking these measures, and how they support your performance expectations. Depending on your contract type and the applicability of certain contract clauses, you may be able to obtain reimbursement for costs you incurred to support your performance during the shutdown. But any claim for such reimbursement will require adequate documentation.

Be Mindful of the Shutdown's Tangential and Longer-Term Impacts and Opportunities

The focus during a federal shutdown will most certainly be on current contract performance, but two other "p"s deserve attention: proposals and protests. Unless you receive direct instruction to the contrary, assume that deadlines for submitting proposals to solicitations, responding to discussion questions posed by a contracting agency, filing documents to support a pre- or post-award protest, and any related activities, remain in effect. In fact, unless you are instructed otherwise, assume that any type of reporting you are supposed to make during the shutdown period must still happen. Erring on the side of caution should cost you nothing, and may save you from lost opportunities and certain penalties.

We have entered an era whose theme optimistically is "do more without more," but realistically is "do more with less." As budgets decrease and expectations about what should be accomplished with them increase, contractors equipped to anticipate federal funding streams that are less than ideal will be best-positioned to keep their federal work. One way to demonstrate that you are so equipped is to use your shutdown-focused dialogues with your customer as a springboard to show your ability to prepare for other funding contingencies. With contracting officers facing the same pressures to do more with less, customer service has become about not only meeting the needs of current conditions and current contracts, but also about showing that you will still be able to perform if conditions change. You don't need to promise the moon, but showing that you have the capability to get there, even if a problem arises, will instill confidence in your customers-the kind of confidence that breeds opportunity, even in times of adversity.