March 2025: Reducing the Negative Impacts of a Government Shutdown for Federal Contractors

On top of the uncertainty introduced through the Trump administration’s shifting priorities and rapid-fire executive orders, government contractors are now confronted with an impending shutdown as the federal government is set to run out of funding on March 14. Although the House of Representatives passed a six-month continuing resolution that would keep funding at current levels through the rest of the fiscal year (i.e., September 30), it remains to be seen whether the Senate has the votes to pass the continuing resolution before the deadline. As we approach the possibility of another government shutdown, it’s crucial for government contractors to be prepared for the potential impacts on their operations. While shutdowns are not new, each one brings its own set of challenges and uncertainties. The current administration’s executive orders and actions have added an extra layer of uncertainty for government contractors. Below we provide key considerations and steps to take to ensure your business remains resilient during this period.

1. Understand the Likely Consequences of a Shutdown: During a shutdown, non-essential government services are halted, and many federal employees are furloughed. For government contractors, this can mean delays in contract awards, payments, and approvals, which can significantly impact cash flow and project timelines. Anticipate the following consequences:
   1. Government facilities will be closed.
   2. No new contracts or modifications will be issued, and there will be delays in the acquisition process for procurements.
   3. Non-essential government employees will be furloughed and unavailable.
   4. Invoices will not be paid during a shutdown and may be delayed after the shutdown is over.
   5. Statutory deadlines for filing claims and bid protests will not be automatically extended.

2. Address Outstanding Issues Before a Shutdown: To the extent possible, take steps now to settle outstanding issues with the customer, such as approval of deliverables, payment of invoices, and issuance of modifications. Do the same after a shutdown, as the government will likely delay paying any invoices.

3. Contractual Obligations: Review your contracts to understand the implications of a shutdown. Some contracts may include clauses that address excusable delays, stop-work orders, or funding delays. It’s essential to be aware of your rights and obligations under these agreements.

4. Communication with Contracting Officers and Subcontractors: Maintain open lines of communication with your contracting officers. It is important to remember that once a shutdown commences, the contracting officer may be furloughed and unavailable, so ideally you should maintain close contact with your contracting officers for instructions in advance of the shutdown. The Federal Acquisition Regulation (FAR) does not specify what actions to take when there is a shutdown, so contracting officers have some discretion to handle contracts in different ways. Contractors should be prepared to receive different instructions from contract to contract. If FAR § 52.242-15, Stop-Work Order, is in your contract, the contracting officer may issue a stop-work order, which entitles you to an equitable adjustment for increased costs as a result of the work stoppage. If the contracting officer instructs you to stop work or if performance is impossible but the contracting officer gives unclear instructions, you should not perform work on the contract, as you might not be reimbursed for work performed during a shutdown. However, it is imperative that you seek a directive of the stop work from the contracting officer in writing. Further, contractors need to be mindful of the notice requirements built into a Stop-Work Order as a contractor commonly must assert its right to an adjustment within 30 days after the end of the period of the work stoppage. If a stop work order is not canceled and work covered is terminated for convenience, reimbursement is recoverable under the applicable termination clause. However, it would be unusual for a contracting officer to terminate a contract for convenience in response to a shutdown unless extenuating circumstances existed.

   Stay in contact with subcontractors, review your agreements as necessary to understand the “stop work” terms, and give subcontractors clear instructions on how to proceed (or not) on contract performance during a shutdown. If the contracting officer ordered a work stoppage, make sure the subcontractor is not performing on the contract; otherwise, you will owe the subcontractor for amounts you will not be able to recover from the government.

5. Financial Planning and Cost Mitigation: Assess your financial situation and plan for potential disruptions. Ensure you have sufficient reserves to cover operating expenses during the shutdown period. Consider delaying non-essential expenditures and prioritizing critical payments. Cost mitigation is particularly important because it is a key consideration in determining whether an equitable adjustment for increased costs resulting from a shutdown should be granted. You can mitigate costs by developing an alternative work plan for employees, such as reassigning them to other projects that must be performed during a shutdown, encouraging them to take vacation time, or having them work on non-billable matters such as training. As a last resort, you may need to furlough or lay off employees.

6. Document All Costs and Expenses: Document all costs incurred in connection with a shutdown, including wind-down, ramp-up, or acceleration of work, labor costs, and attorneys’ fees. You should also document all communications with contracting officers, employees, teaming partners, and vendors, as well as all shutdown-related actions. Generally, expenses incurred as a result of a shutdown should be recoverable, with the exception of backpay and consequential damages, which are not generally recoverable. Both the Stop-Work Order and the Changes FAR clauses, to the extent incorporated into your contract, may provide a vehicle for recovering your costs. However, the ability to recover will be affected by advance preparation, level of reasonable mitigation, and documentation of your costs.

7. Managing Your Workforce: In addition to the steps above, develop a plan for managing your workforce and addressing important labor and employment issues implicated by a shutdown.

8. 1. Don’t Risk Exemptions Under the Fair Labor Standards Act (FLSA): Employers should exercise caution not to lower the risk of losing an employee’s exempt status, which may trigger liability for overtime hours the employee worked prospectively and retrospectively. An exempt, salaried employee is entitled to receive his or her full salary for any week in which the employee performs work. Therefore, if the employee works on Monday and the government shuts down on Tuesday, the employee will be entitled to his or her salary for the entire work week.

      However, an employer can ask employees to take accrued paid time off for any partial week worked. Employers do not have to pay employees for full work weeks not worked, but it is critical that employers make sure that employees conduct no work at all during that week, not even checking email. Employers may want to consider instructing non-working employees not to do any work until instructed to do so, securing all remote devices, and restricting access to work applications.

   2. Beware of State Wage and Hour Laws: Be sure to check state wage and hour laws and regulations to ensure compliance. Many state laws regulate wages and benefits that the FLSA does not regulate. Steep penalties are imposed for non-compliance, for example, with respect to requirements for how frequently an employee must be paid. When the federal government shuts down, many employers struggle to make payroll, which often runs afoul of state law. Wage and hour issues generally do not affect employers now but tend to surface down the road after termination.

   3. Decide Whether to Furlough or Lay Off: The term “furlough” is generally associated with government employees but has more recently been used by private industry. A furlough is generally expected to be a temporary disruption, while a layoff is generally more definite. In either case, an employee is likely eligible for unemployment benefits. However, in a furlough situation, the employer still maintains fringe benefit programs, like health insurance, and collects or absorbs the employee portion of any premiums. With a layoff, the employee is effectively terminated, however temporarily, and may be eligible for 401(k) benefits and Consolidated Omnibus Budget Reconciliation Act coverage.

   4. Avoid Discrimination Claims: When choosing whom to lay off or furlough, approach the decision as you would any layoff. Before instituting the employment action, have a sound and well-documented process for selecting those who will be subject to the furlough or layoff. Make sure you analyze the results of your decision and determine whether the analysis indicates a disparate impact or discriminatory intent.

   5. Play Defense Against False Claims Act and / or Whistleblower Statutes: False Claims Act and whistleblower allegations are common where there are complex staffing and billing situations. Be mindful of the impact that workforce decisions will have on your ability to bill the government for certain workforce costs. You should also carefully review payments to the government and reconcile any discrepancies.

   6. Prepare for Security Clearance Processing Issues: Security clearances will usually not be processed during a shutdown. This is important for contract administration and staffing concerns. Advance staff management and planning will be critical to many employers who will have to ramp back up when a shutdown is over.

   7. Process Any Employment Verifications: The E-Verify system is usually offline during a shutdown. However, all new hires continue to be subject to I-9 employment verification by employers and must be processed through E-Verify as soon as possible.

   8. Communicate with Employees: Clear communication with employees is critical and avoids many employer-employee disputes. Keep in mind that once the government starts running again, employers are expected to have those employees back to work and performing immediately. Consider how you will notify employees of their work status.

What’s Next?

While a government shutdown has the potential to cause significant disruptions for government contractors, most contractors should be able to manage a shutdown, provided steps to mitigate risks are taken.

PilieroMazza is committed to helping government contractors navigate the challenges and uncertainty they’re facing at present and on the horizon. Please contact Jackie Unger, Nichole Atallah, Lauren Brier, or another member of our Government Contracts, Labor & Employment, or REAS, Claims, and Appeals practice groups if you have any questions or need assistance.

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If you’re seeking practical insights to gain a competitive edge by understanding the government’s compliance requirements, tune into PilieroMazza’s podcasts: GovCon Live!, Clocking in with PilieroMazza, and Ex Rel. Radio.