Each year, Congress must pass multiple spending bills to fund the federal government and to set spending budgets and appropriations priorities. In lieu of these bills, Congress can also pass what is called a “continuing resolution” as a measure to fund the federal government for a more limited period. The last continuing resolution was passed on March 28, 2013, and expires on Sept. 30, 2013.

If Congress can’t come to an agreement on terms for another continuing resolution for funding the government by 11:59 p.m. on Sept. 30, the federal government will shut down. As of Sept. 26, the House and Senate are still in a dispute over the terms of a continuing resolution due to disagreement over funding portions of the Affordable Care Act (“Obamacare”). Consequently, no one knows what will happen when the continuing resolution expires.

The uncertainty surrounding this potential government shutdown makes prudent planning by government contractors even more important. Contractors are no strangers to this kind of uncertainty, having dealt with sequestration and disputes over the debt ceiling in the past, but a government shutdown presents a unique set of problems.

What will happen if the government shuts down?

Most of the federal government will cease to operate. The regulations governing federal government shutdowns divide federal activities and employees into “excepted” and “non-excepted” personnel. Only those activities and personnel that are “excepted” will continue to operate, unless an agency has a separate funding source. Some “excepted” federal functions that will continue include those related to national security, such as the military (though servicemembers’ pay may be delayed), functions related to the protection of life and property (air traffic control, prisons, federal law enforcement, etc.), Social Security payments, the United States Postal Service and the Federal Reserve.

In 2011, the Office of Management and Budget (“OMB”) estimated that almost 1.2 of the 2 million federal employees were non-excepted and would be furloughed without pay during a shutdown. The OMB posted extensive agency-specific contingency plans for a government shutdown at that time. Some of the federal government services the OMB determined would be affected by a shutdown include:

• Unemployment benefits: The federal funds that help states pay the costs of their unemployment programs could be affected.
• Veterans’ services: While VA hospitals would remain open, veterans’ benefits could be delayed or reduced.
• National parks: National parks and the National Wildlife Refuge Systems would be among the first places to close.
• Museums: National museums, including the Smithsonian Institution, would close.
• Passports: Passport and visa applications would not be processed. In the 1996 shutdown, over 200,000 passport applications and 30,000 daily visa applications went unprocessed.
• IRS processing of tax refunds for some returns would be suspended.
• FHA new home loan guarantees might cease.
• SBA approval of applications for business loan guarantees and direct loans to small businesses would likely cease.
• Farm loans and farm payments would cease.

How does a shutdown affect government contractors specifically?

While a government shutdown would have an indirect impact on many Americans in most cases, the impact on government contractors would be marked and would occur almost immediately because the Anti-Deficiency Act prohibits federal agencies from incurring obligations exceeding or in advance of an appropriation. There are exceptions, however. Contractors possessing contracts that are essential and support excepted activities might not be affected. This would largely depend on how the OMB and the agencies define the scope of those activities in the event of a shutdown. Contracts that were funded at the time the contract was formed, as well as certain multi-year contracts, would likely be unaffected as they do not depend on new government appropriations.

If a shutdown occurs, government contractors would be impacted as follows:

• No new contracts would be awarded.
• No modifications would be issued to existing contracts.
• No new task orders would be awarded on indefinite delivery/indefinite quantity (IDIQ) contracts.
• There would be a lack of funds for cost contracts where incurred costs exceed the contracted amount.
• Government facilities would close and there would be limited access to facilities that remain open.
• Government procurement personnel would not be available because they would be furloughed.
• Contract payments would be delayed due to government finance personnel being furloughed.

How can a government contractor prepare for a shutdown?

First, contractors should assess their contracts and evaluate which contracts would be affected by a shutdown. Frank and open discussion with procurement officials — who are also preparing for a shutdown at the direction of the OMB — is critical at this stage. Contractors should also document all communications with their contract’s procurement officials in preparation for claiming recoverable costs related to the shutdown at a later date.

Contractors should also mitigate the cost of a shutdown to the extent possible at this late stage, much like the contractor community did in advance of sequestration. By doing so, contractors can limit the impact on their employees and on contract performance, setting the stage for success when funding is restored.