Shutdown Delay Equals a Second Chance for Contractors

Authored by GovWin’s Lindley Ashline

If you’re a government contractor, the two-week continuing resolution passed by Congress this week to temporarily prevent a government shutdown is a second chance to prepare for the consequences such a shutdown would bring.

Experts at today’s GovWin.com Instant Webinar, “Surviving a Government Shutdown,” shared some background on how shutdowns work, how they affect contractors and what contractors can do to prepare.

Download Tom Marcinko’s whitepaper, A Contractor’s Guide to Surviving the Government Shutdown [PDF].as well as the slides from the Webinar [PDF].

How a Shutdown Works

At its most basic, a shutdown is caused by Congress’ failure to get all the way through the appropriations process. The process involves a number of appropriation areas such as defense that are passed through subcommittees and committees and are then presented to the full Senate. Both political parties attempt to reconcile the bill, and if they are successful, they send a bill to the president to sign.

“The Republicans came in and they’re making a statement by taking a hard line,” leading to a stalemate, said Deniece Peterson, INPUT’s Manager, Industry Analysis.

When a government shutdown begins, all non-essential employees are furloughed without pay. Essential functions include medical care, public health and safety, air traffic control, law enforcement, banking and other similar areas.

Every government agency must have a shutdown plan that lists essential functions and describes how the agency handles closing and reopening.

Consequences of a Shutdown

The most obvious effect of a shutdown for contractors is delayed or cancelled agency procurements. However, shutdowns may affect almost every aspect of a contractor’s business, from projected earnings to in-progress proposals to increased expenses. The prospect of work stoppages leads to lower employee morale, and actual stoppages can cause furloughs or layoffs.

In past shutdowns, federal employees did receive back pay after the shutdown was over. For contractors, payment isn’t so simple. Thomas Marcinko, Principal Consultant at Aronson LLC (and author of a whitepaper on how government contractors should prepare for a shutdown), says that contracts will fall into one of four categories:

1. Essential functions, which are immune to shutdowns
2. Stop work orders, which cause all work to cease, but are governed by the clearest regulations and law and should ensure that contractors are reimbursed
3. Not essential, but can be performed, which can slip into category 4 at any time
4. No stop work order, but can’t be performed, the riskiest category due to its likelihood of incurring non-reimbursable costs

Contractors trying to gauge the effect of a shutdown should look at impacts per appropriation area, Peterson said. “Due to the way agencies are grouped, this shutdown would likely have less impact” than the last shutdown in 1995.

Actions You Can Take Now

Only four percent of respondents to the in-webinar poll felt that their companies were “very prepared” for a shutdown. There are a number of steps contractors can take right now to avoid the worst effects of a shutdown. Marcinko outlined 11 things contractors should do to minimize risk:

1. Treat the response to a shutdown as a project, with a project leader, established requirements, project plan and success metrics.

2. Review all contracts and determine how they will be affected by a shutdown. Ask questions: Is this contract performed in a government facility that’s likely to be shut down? Can it be performed without any government employees present?

3. Obtain guidance from the contracting officer. Document the guidance, the way you follow it and the decisions you make along the way.

4. Develop a plan for affected employees. Ideally, plan to move them to a functional contract, but you may have to consider forced leave, furloughs or layoffs.

5. Be aware that the shutdown does not affect deadlines such as those for bid protests or debriefings on lost awards.

6. Don’t forget about subcontractors. Include them (and their contracts with you) in your contingency plan and provide them as much information as you can.

7. Track shutdown costs per contract for the best chance of reimbursement.

8. Notify the contracting officer of cost impacts; don’t assume he or she is aware of all costs.

9. Project how your cash flow will be affected and notify your bank.

10. Collect receivables and process modifications now.

11. Don’t forget about business development. Work on increasing your percentage of work for the private sector; diversifying makes you less risky to investors and helps stabilize your business in events such as shutdowns. “If you’ve got 60-40, even 50-50, percent associated with government and private-sector work, the investor community considers it lower risk [than just government work],” said Jennifer McKinney, INPUT Principal Analyst.

The next deadline for Congress is the end of the continuing resolution on March 18, 2011. If the Senate is still stalemated, a shutdown is likely to occur. “My crystal ball’s in the shop,” said Peterson, “but if you compare [the potential shutdown to the 1995 shutdown], I wouldn’t be surprised if this one were longer.”

To help you plan, we’ve compiled a list of other shutdown-related webinars, questions and answers, to-do lists and other resources.