A lapse in federal funding, commonly known as a government shutdown, disrupts operations across the country, but the consequences are severe for federal contractors. While direct federal employees are protected by law with a guarantee of back pay once the government reopens, contracted staff and their employers face a precarious financial situation. These private-sector partners perform a wide array of services, often absorbing the immediate operational and monetary shock of a funding halt. The vulnerability of this workforce creates widespread financial instability for both businesses and individual workers.
Defining the Federal Contractor
Understanding the impact of a shutdown requires differentiating between the three primary groups working with the federal government. The first group is direct federal employees, or civil servants, who are protected by law guaranteeing back pay for furloughed time. The second group consists of employees of contracting firms, paid by their private employer to perform work under a government contract. This group is the core subject of financial uncertainty during a funding lapse.
The third group includes independent contractors and consultants who contract directly with the government or a prime contractor. The rules governing employment and compensation during a shutdown are distinctly different for these groups. Unlike civil servants, employees of federal contractors have no blanket legal guarantee of back pay for lost work. This difference places contracted workers in a financially vulnerable position during any period of non-appropriation.
Immediate Impact of a Shutdown on Contracts
A lapse in appropriations triggers immediate operational consequences for existing federal contracts due to the Antideficiency Act, which prohibits federal agencies from obligating funds without congressional approval. Agencies must swiftly cease all non-essential activities, leading to the suspension of work on most contracts. This suspension is typically formalized through the issuance of a “stop-work order” from the Contracting Officer (CO) to the prime contractor.
A stop-work order directs the contractor to halt all or part of the work immediately, often requiring a rapid and costly demobilization of staff and equipment. Even contracts that are technically funded can be disrupted if the work requires access to a government facility that is closed or if government oversight from a furloughed federal employee is necessary.
The Critical Issue of Contractor Compensation and Back Pay
The most pressing concern for contracted personnel is the lack of guaranteed compensation for work missed during a shutdown. Unlike federal employees, who are entitled to back pay under the Government Employee Fair Treatment Act of 2019, federal contractors and their employees have no statutory right to be paid for the period of work stoppage. The financial peril for these workers is immediate and severe, as their employer’s ability to pay them is directly tied to government funding.
Whether a contractor can recover costs, including employee salaries for “idle time,” depends entirely on the terms of the contract and the specific actions taken by the government. If a formal stop-work order is issued, the contractor may be entitled to an equitable adjustment under the Federal Acquisition Regulation (FAR) clauses, which can cover costs associated with demobilization and remobilization. However, this adjustment is not a guarantee of back pay for all employees, but rather a contractual mechanism for recovering specific, allowable costs.
For a contracting company to pay its employees during a shutdown, it must either use its own funds and risk not being reimbursed or furlough its staff. The government is legally prohibited from accepting voluntary services, meaning that if a contractor continues to work without an appropriation, there is a high risk they will not be paid for that effort. Consequently, the lack of a legal mandate for back pay forces companies to make difficult decisions that directly impact the livelihoods of their employees.
Factors Determining the Severity of Impact
The severity of the disruption is largely determined by the contract’s funding mechanism and the nature of the work. Contracts supporting “excepted activities,” such as those related to national security or the protection of life and property, are often deemed essential and may continue operations. These activities have been legally determined to be necessary even without new appropriations, allowing the work to proceed.
A contract’s funding source is another significant factor in determining its vulnerability. Contracts funded by multi-year appropriations or revolving funds do not rely on annual appropriations and often possess the financial stability to continue operating until that specific funding is exhausted. In contrast, contracts reliant on annual appropriations are the most susceptible to an immediate stop-work order, as the authority to spend the money ends abruptly with the fiscal year.
Actions Contractors Should Take During a Shutdown
Contracting companies must take proactive steps to mitigate financial losses and ensure compliance when a shutdown occurs.
- Contact the Contracting Officer (CO) for guidance and request a written stop-work order, as this formal directive establishes the clearest path for potential cost recovery later.
- Establish separate cost codes immediately to meticulously track all shutdown-related expenses, including wind-down costs, idle labor, and administrative overhead.
- Advise furloughed employees that they may be eligible to file for state unemployment benefits, as they are technically laid off by their private employer.
- Implement mitigation strategies for employees, such as reassigning them to non-billable internal projects or encouraging the use of accrued Paid Time Off (PTO).
The goal is to minimize non-billable overhead while preserving the workforce, and all actions must be carefully documented to justify all claimed costs after the shutdown.
Financial Recovery and Claiming Costs Post-Shutdown
Once the government reopens, the focus shifts to the administrative and legal process of financial recovery for the costs incurred during the stoppage. Contractors who received a formal stop-work order can seek an equitable adjustment under the Federal Acquisition Regulation (FAR) clause 52.242-15 to recover costs. This process aims to compensate the contractor for the cost and schedule impact of the government-directed work stoppage.
Recoverable categories of costs often include standby labor, demobilization and remobilization expenses, subcontractor pass-through costs, and administrative expenses. Contractors without a formal stop-work order may attempt to recover costs under the “Changes” clause (FAR 52.243) or the “Government Delay of Work” clause (FAR 52.242-17), though recovery under the latter typically prohibits the recovery of profit. All claims must be meticulously documented, adhering to FAR cost principles for allowability, and submitted to the Contracting Officer for approval.