A government shutdown can be a significant disruption for small business federal contractors. Preparing in advance and taking the proper steps can help mitigate the financial and operational impact of a shutdown.

The following is a non-exhaustive set of steps and issues that small business contractors may consider:

• Review Your Contracts: Scrutinize every contract for clauses related to funding, stop-work orders, excusable delays, or the Availability of Funds clause (FAR 52.232-18). Identify which contracts are funded by annual appropriations versus those with multi-year or “no-year” funding. This will help you determine which projects are most at risk.  The impact of a shutdown varies greatly depending on the type of contract.  Create a master spreadsheet listing all contracts, agencies, funding status, and current work phases.
  • Fixed-Price Contracts: You may be required to continue work, even if payments are delayed. If you are ordered to stop, you may be able to seek an equitable adjustment for costs incurred during the shutdown after the government reopens.
  • Cost-Reimbursement Contracts: The government may issue a stop-work order, halting your work and preventing you from incurring further costs. If a shutdown occurs without a formal order, consider stopping work to avoid non-reimbursable costs.
  • Contracts with Stop-Work Clauses: If your contract includes a stop-work order clause (FAR 52.242-15), the government may use this to direct you to cease work. Ensure you understand the terms, as they may provide for adjustments to the contract price or delivery schedule.
  • Essential Services & Multi-Year Funding: Contracts for “essential services” (like national security or public safety) or those funded by multi-year appropriations are less likely to be affected. However, you may still want to confirm this with your contracting officer. Even if you’re deemed essential, payments can be delayed if non-essential personnel who process invoices are furloughed.

• Communicate with Contracting Officers (COs): Open a line of communication with the CO for each of your contracts. Request explicit, written guidance on how they expect you to proceed if a shutdown occurs. Generally, it is not a good idea to assume anything. Among other things, you may want to ask if your contract is considered “essential” and what their plan is for funding and operations.  Keep a detailed log of all communications with your CO, including dates, times, and the content of conversations. This log should also include any written correspondence and official notices.  Monitor agency websites and social media for guidance specific to shutdowns.

• Track Everything: Create a separate accounting code to track all shutdown-related costs. This includes idle employee time, shutdown and start-up expenses, and any other costs directly attributable to the shutdown.  You may be able to submit requests for equitable adjustments or claims to recover the expenses incurred due to a government shutdown.  Try to avoid incurring costs that could be deemed unallowable (e.g., voluntary work without authorization).

• Manage Your Workforce: Navigating employee relations during a shutdown is challenging and requires careful legal consideration.   Consider how you will handle employees during a shutdown – whether to maintain payroll or furlough them.
  • Furloughs vs. Layoffs: Develop a furlough policy in advance: clarify pay status, benefits continuation, and return-to-work expectations. A furlough is a temporary, unpaid leave with the expectation of returning to work. A layoff is a permanent separation. Furloughs are often preferable to layoffs because they help you retain talent for when the government reopens.
  • Fair Labor Standards Act (FLSA): Be careful with partial-week furloughs, particularly with exempt employees, as they could impact those employees’ classification as employees exempt from overtime pay requirements.
  • WARN Act: The federal Worker Adjustment and Retraining Notification (WARN) Act requires employers with 100 or more employees to provide 60 days’ advance notice of a “mass layoff.” While a government shutdown may be considered an “unforeseeable business circumstance” that waives the notice period, you may want to consider consulting with legal counsel.  There may also be state-specific notification requirements for significant layoffs.
  • Benefits and Security Clearances: Have a plan in place for how employees will continue to pay their portion of health insurance premiums if they are furloughed or on unpaid leave, with the expectation of returning.  Also, be aware that security clearance processing will likely be suspended.

• Subcontractors:  Inform your subcontractors and vendors of the potential shutdown and its impact on your shared projects.  Review your subcontracts for stop-work or other relevant clauses that may impact your project. Ensure you can flow down any stop-work orders you receive from the government to your subcontractors to avoid being held liable for their costs.

• Safeguard Core Operations Beyond the Contract.  Maintain IT systems and data security — especially for classified or sensitive government information. Ensure facility security if federal sites or contractor workspaces are closed.  Protect equipment and government-furnished property with logs and storage measures.  Preserve all work products completed through the shutdown start date: document work stoppage date and circumstances for each contract.  Consider photographing or video recording work sites to show the status at shutdown.

• Critical FAR Clauses:
  • FAR 52.249-14 (Excusable Delays): Provides relief from performance delays due to government shutdowns.
  • FAR 52.232-18 (Availability of Funds): May automatically suspend work when funds unavailable.
  • FAR 52.243-1 and 2 (Changes): Government may issue stop work orders.
  • FAR 52.249-2 (Termination for Convenience): Government retains right to terminate.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.