September 25, 2015
We’ve been here before – several times. So why is this shutdown threat different than those in previous years? Sequestration and an upcoming election year make for an unpredictable political calculus, and may change the risk associated with funding and cost recoverability.
In the past, a company could probably predict with some level of comfort which efforts would be funded when the “crisis” was over and which were just too risky to perform at risk. In today’s environment, though, it’s a coin toss at best.
What’s a Federal contractor to do? Pretty much the same as in previous years, only more carefully:
1. PRIME CONTRACTS: Organize your prime contracts and discuss them with your Contracting Officers to see which contracts will remain funded and operational.
2. SUBCONTRACTS: Organize your subcontracts and talk with your prime contractor to see which contracts they believe or have heard will remain funded and operational, and for those that do not, where you fall in the hierarchy of subcontractors.
3. Make contingency plans for a shutdown:
a. STAFFING: Determine which staff would be idled by a shutdown and decide what to do with idle staff (overhead vs. furlough).
b. SUBCONTRACTORS: Plan now for what you will do with your subcontractors; review your subcontract provisions to make sure you can do what you plan to do.
c. COMMUNICATIONS: Develop a communication plan to be used during the shutdown and put the mechanisms in place now.
d. CASH FLOW: Plan for an interruption in cash flow and talk with your bankers now.
e. ACCOUNTING: Have Accounting provide for segregation of shutdown costs in case they are recoverable.
Recoverability of direct costs incurred during a shutdown in anticipation of a future award is extremely doubtful. Similarly, recoverability of direct costs incurred on a contract that was previously funded but is now out of money (the infamous “waiting for the mod” situation) isn’t much better. It is possible, or even likely, that costs incurred during a gap in funding that occurs during a shutdown may be specifically barred from reimbursement when that modification finally arrives.
Funded contracts, regardless of type, should be unaffected as long as any required access to Government facilities or personnel is still available. If not, it may not be possible to continue performance and direct costs incurred during a lapse in performance will probably not be allowable.
Of course, if you receive a stop work order, everything changes. This is one of the few instances where a stop work order probably isn’t the worst case scenario. At least under a stop work scenario, there are specific rules concerning allowability of shutdown costs.
CohnReznick has developed a flowchart to help assess shutdown exposure on a contract-by-contract basis. We recommend that a company distribute the flowchart to project managers; have them annotate the chart with the task or contract name/number and value; and then highlight or annotate each active contract or task order. When done, the company can compile the results to assemble a good picture of the impact of a shutdown. Not a bad start on an action plan, either.
How likely is a Government-wide shutdown? Congress has been known to let the clock tick down to 30 minutes before the deadline, but at least they were talking. This time is anyone’s guess. All we can do is to be prepared for a long weekend at the beginning of October.