October 3, 2013
The government shutdown is already creating headaches for government contractors. Among other things, closed government sites, lack of government direction, and the absence of critical government employees is impacting the cost and schedule of government contract performance.
Understandably, contractors are wondering who will be responsible for the costs and delays resulting from the shutdown. While the answer to this question will depend on the circumstances of a particular contract and the impact the shutdown has on that contract, as a general matter, contractors should keep in mind the following guidance as they consider how best to protect their interests during the shutdown:
- Document that cost impacts and performance delays result from government contractual action. There is risk that a government shutdown is a sovereign act, precluding any contractual recovery. To mitigate this risk, ensure that you have received, or will receive, a stop work notice or some other contractual direction and that this direction is maintained in the contract file.
- Costs resulting from the government shutdown should be recoverable. When contractual direction exists, costs reasonably incurred as the result of the government shutdown should be recovered through the Stop-Work Order, Government Delay of Work, or Changes clauses, so long as the impacts and delays arise during a period where the contract is funded (see below). The existence of funding establishes that the government has an obligation that it must honor.
- Schedule impacts from the government shutdown should be addressed through extensions to the period of performance. Schedule impacts resulting from the government shutdown also are likely addressable through the Stop-Work Order, Government Delay of Work, or Changes clauses of the contract.
- Contractors must mitigate the impact of the shutdown. While contractors may be entitled to recover costs and/or receive schedule adjustments to address the impact of the government shutdown, contractors are responsible for taking reasonable actions to reduce the cost and/or schedule impact of the shutdown. These actions may include examining the feasibility of work-arounds, diverting employees to commercial efforts, and potentially furloughing employees. If a contractor fails to take mitigation steps, the government may attempt to reduce the total costs and/or length of the extension provided to address the impact of the shutdown.
- Cost and schedule impacts should be tracked carefully. In order to recover increased costs or receive a schedule adjustment because of the shutdown, contractors must be able to demonstrate that the impact occurred and tie the impact to the shutdown. Employees that are prevented from performing work, therefore, should provide detailed time entries and record their labor costs in segregated accounts to demonstrate the labor cost impact of the shutdown. Other cost impacts, such as costs associated with rescheduling work or deliveries, should be similarly documented. Likewise, any schedule impact should be fully documented and demonstrated through a critical path or similar schedule analysis.
- Funding is critical! Contractors are required to track the use of funds under incrementally-funded contracts and notify the government if costs incurred (including potential termination liability and delay costs) will exceed 75% of the total amount of funding available. When costs reach the available funding, the government must either terminate the contract or provide more funding. Any work performed that results in costs incurred in excess of the available funding will be “at risk” and may not be recoverable under the contract, depending on the circumstances.
Until the shutdown is resolved and appropriations are obtained, no new funding will become available for contract performance. Thus, contractors performing incrementally funded contracts must closely monitor performance costs (including potential termination liability and delay costs) because, once those costs exceed the available funding, contractors risk non-recovery of costs incurred during performance.
- Options are at risk. Contract options must be exercised in strict accordance with their terms. If an option expires, the government can no longer exercise the option. The government, however, can only exercise an option if money is available to fund performance. Thus, the shutdown means that the government will likely be unable to exercise contract options and, instead, may be forced to allow contracts to expire and, later, obtain those same goods or services through a reprocurement, which might involve a competition and/or the submission of updated cost or pricing data.
The government shutdown may be short-lived, but its implications for contractors will likely persist long after the current budget dispute is resolved. Contractors must act now to best position themselves to obtain full reimbursement of costs and/or contract extensions to address the impact of the shutdown, including, critically, documenting on a contract-by-contract basis why certain actions were taken or not taken.