Government Shutdown: D Minus 7 and Counting

2/24/2011
By Sandra I. Erwin
Congress has a week left to come up with a budget before the witching hour of midnight March 4.
The rhetoric coming from the Capitol so far is not reassuring. And contractors are beginning to come to grips with the real possibility of a government shutdown.
Despite reams of federal laws and regulations that specifically address how government agencies and contractors would go about ceasing (nor not) operations in the absence of appropriated funding, there are still countless gray areas and hypotheticals that have industry on edge.
“A government shutdown is likely to create a host of unanswered questions and issues for contractors,” warns a recent alert memo fromMcKenna Long & Aldridge LLPto clients. The firm represents major federal contractors.
Questions that may be keeping corporate executives up at night: How shall a contractor proceed if the contracting officer has been furloughed and no stop work order has been issued? What happens in the case of delays caused by the furlough of inspectors who are required to inspect a work site before further work can continue? What if a contractor’s employees are denied access to a government facility because the facility has been shut down? Should contractors continue to perform work at a government facility where such performance is possible or where the service provided under the contract is, in the view of some officials, “essential”? Should contractors lay off employees? How can a contractor recover the costs associated with delays or increased expenses that flow from a government shutdown? How should contractors address subcontractor issues?
“The Office of Management and Budget guidance and agency shutdown plans are not going to address these kinds of questions, and there is no one set of answers or template that applies in every circumstance,” the McKenna memo states.
OMB provides agencies with guidance regarding how to proceed during a shutdown in OMB Circular No. A-11. It says that agencies may incur obligations “as necessary for orderly termination of an agency’s functions,” but no disbursements may be made. For federal employees, an immediate shutdown effect is the “shutdown furlough,” and only those who perform emergency duties or who fall in other specified categories (such as members of Congress and the president) are not subject to furlough.
McKenna attorneys say there are steps that contractors can take to position themselves to weather the storm and survive a shutdown with minimum risk of uncompensated performance, inadvertent overbilling, or performance default. The firm recommends that its clients consider the following issues in developing a shutdown contingency plan: The nature of the product or service that is the subject of the government contract and the place of performance; the type of contract — fixed price or cost reimbursement; whether the contract is incrementally funded or fully funded; whether the contract include clauses such as limitation of cost or funds; what additional expenses will be occasioned by the government shutdown; what subcontractors will be affected by a government shutdown.
“The bottom line is that a government shutdown of even relatively brief duration can have significant consequences for contractors,” says the memo.
Even if a shutdown is averted and Congress manages to extend temporary funding under a “continuing resolution,” contractors are still at risk, caution Jim Schweiter and Herb Fenster, attorneys at McKenna’s government contracts practice. “For government contractors, the use of CRs in place of actual new appropriations has serious consequences, many of which are neither even recognized nor often well-understood,” they write in theBureau of National Affairs' Federal Contracts Report.
For the defense industry, there are alsoworries about the damage that a shutdown or a CR may cause on Wall Street. Defense stock prices have steadily risen since late 2010, and saw a dramatic rally after Defense Secretary Robert Gates unveiled his 2012 budget plans Jan. 6. Investors were reassured by projections that the 2012-2016 budget top line would be cut by $78 billion — a far smaller reduction than the Bowles-Simpson deficit commission had sought. But the current political standoff over funding priorities and the absence of an approved budget six months into fiscal year 2011 is throwing a wrench into Wall Street’s thinking about the defense industry’s cash flow in the near term, says David J. Berteau, senior adviser and director of the defense industrial initiatives group at the Center for Strategic and International Studies.
For defense investors, the fear of a shutdown is real, said Berteau. The reason Wall Street likes defense suppliers is because of the steady cash flow provided by government contracts.
An industry lobbyist told National Defense that the real frustration for defense executives is not the possibility of reduced Pentagon spending but rather being clueless about what Congress will do next. “We know where the Defense Department is going,” the lobbyist said. But the unpredictability of Congress is a serious cause for concern.

Topics: Defense Contracting, Government Policy

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