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When Uncle Sam Locks the Door and You Can’t Get In


What to Do to Survive a Government Shutdown

Monday, the House, Senate and the Executive Office reached an agreement and the government reopened after three days. However, a chance remains that come February 8th, we could face a similar situation. When a government shutdown occurs, there is plenty of sympathy for government employees likely to suffer from a lockout. But what about the government contractors and their employees?

As one of those entities, you need to create an actionable plan that will help protect you and those you employ. After the 1995-1996 shutdown, all federal employees were made whole and received compensation for the time associated with the shutdown. However, no corresponding compensation or guidance was issued for the contractors or their employees.

Our recommendations focus on awareness, communications and readiness.

Do this: Conduct a working capital and contract assessment.

When a federal shutdown occurs, you need to be precisely aware of your working capital needs and alternate sources. Although your customer may not be at work and able to pay you, your obligations to your employees remain. Start with an inventory of cash resources including lines of credit, deposits and receivables. Make sure that these resources are ready and available to you.

Take all legal steps to increase your liquidity while simultaneously deferring actions that require cash. For example, you may want to delay paying vendor invoices before they are due. If you have receivables due from government customers, talk to them immediately about the possibility of quick approval and payment before a possible government closure.

Brief your contracts for funding availability, deliverable requirements and other pertinent requirements in preparation for a discussion with your contracting officer or subcontract administrator.

Do this: Communicate with your contracting officer, if possible.

Yes, time is of the essence, but this communication needs to be formal and accurate. Most important is to determine exactly what your contracting officer expects of you, or in the event of a subcontract – your subcontract administrator. The fact that the building is closed does not necessarily release you from your obligations.

For example, if you are expected to deliver a report during a shutdown, how do you ensure that you will not be punished if you are unable to deliver? Document the conversations – and the answers to your questions – in writing, not just an email.

This can help protect you from negative fallout like a poor performance review because of failure to deliver work or employees as stipulated in your contract. Talk deliverables, hours of service commitment – every possible component of your contractor relationship.

Be mindful that your only point of contact for such a discussion should be your contracting officer; no substitute will do. That’s because only he or she is authorized to make decisions on your contract.

Do not do this: Wait out the storm and assess the impact on your employees and payroll once the crisis is over.

A passive approach could mean a disaster in the making. An employment contingency plan should be put in place right away describing exactly how you will handle employees who are unable to fulfill their obligations during a government closure.

Depending on your contract expectations, your employees’ personal financial situation and your tolerance for risk, there are at least five personnel strategies that companies are considering:

  1. Assign the affected employees to other contracts not subject to the shutdown. This type of lateral labor shift is an ideal solution providing that all your contracts are not affected by the shutdown.
  2. Use the time “off” to deliver required training while keeping costs reasonable and allowable. This may require some logistical creativity but with so much computer-based training available you may be able to do this while your employees are home, in front of their own computers (fuzzy slippers not required).
  3. Encourage your employees to take vacation during the anticipated shutdown. For those employees without banked vacation, offer leave without pay.
  4. Allow your employees to work on indirect tasking or to “sit on the bench” resulting in additional indirect costs. This could result in future cost allowability challenges by the auditors or lengthy timelines for resolution. While this would address employee needs or concerns, it is also the riskiest in terms of out of pocket expenses and cash flow.
  5. Furlough or lay-off employees as a last resort. While this permits the collection of unemployment, it will also drive up your unemployment insurance costs and other indirect costs.

Of course, all of these actions put you - the contractor - at risk. The indirect cost increases will be paired with decreasing direct labor costs directly associated with a government shutdown – combining as a “double whammy” increasing your indirect expense rates on federal contracts. If your contracts include caps or ceilings on indirect rates, you will need to calculate the impact and work to see how you might work with your customer to have them accept the higher rate. Again, it is a matter of communication.

At the end of the day, if your contract is fully funded, you may not face any negative personnel impact. On the other hand, working and communicating with your employees on the potential impact and actions required may help to mitigate the hopefully short-term impact.

“Planning is Everything”

When asked about preparing for the D-Day invasion during World War II, General Dwight Eisenhower remarked, “Plans are nothing. Planning is everything.” The same holds true in the world of government contracts and the possibility of a federal government shutdown.

In our experience the process of planning, with an emphasis on understanding your working capital needs and resources, clear and open communication and a proactive approach to managing employees expectations, is simply common sense – and good business – regardless of what is happening – or not happening - on Capitol Hill.

If you have any questions regarding the points in this article or on what to do in the event of a shutdown, please contact Bill Walter with any questions you may have.


Bill Walter, Director | Government Contracting
703.970.0509 |

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