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What Does the 2013 Government Shutdown Mean for Government Contractors?

As of October 1st, 2013, the United States Federal Government has entered another shutdown. It’s hardly the first — shutdowns have occurred seventeen times over the last four decades. Despite being a situation that is hardly unprecedented, it’s less than pleasant if you are the owner of a business that does business with Government departments or contracts with companies that do. The wrench in the works this time around is the Patient Protection and Affordable Care Act — better known by its colloquial name, Obamacare.

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Background

Essentially, government spending must be approved by Congress: more specifically, there must be approval from the majority of members of the House of Representatives, the Senate, and from the President himself. In the case of a stalemate, no such approval is granted; and where there’s no approval, there can be no spending. The result is a Government shutdown while the disagreement is ironed out, whether Capitol Hill takes a day or a month to unlock.

In the meantime, all non-essential governmental services and departments are being suspended –  literally, shut down. What qualifies as non-essential? Quite a bit. To name just a few, the Departments of Commerce, Homeland Security, Agriculture, and Labor are all feeling the sting: a sting to the tune of approximately 800,000 civil servants being furloughed, for an indeterminate period of time. Losses are being estimated in the neighborhood of $10 billion.

So What Does This Mean if Your Company is a Government Contractor?

With so many departments and services suspended, what happens to business dealings directly tied to suddenly-defunct institutions? While the Federal scuffle might seem remote to many Americans, if you’re a government contractor, you’re likely to fall in the shutdown’s shadow.

Suppose you’re affiliated with a government contractor who provides some service or product to a suddenly-defunct department, such as the Environment Protection Agency or the Department of Labor. What happens when your business exchange is interrupted by a shutdown? What happens to contract employees? All non-essential department’s spending is halted immediately.  That means that if you are an individual or company that contracts with a Federal department that is deemed “unnecessary,” you will not be paid during the shutdown.

In the past, Congress has been able to retroactively pay furloughed workers who are employees of the Federal Government. However, there is no obligation on the part of Congress to make such payments to furloughed contract workers or employees of companies that contract with the Federal Government. The last time there was a shutdown (1995-96), it was reported that 1/5 of all contracts between the Federal Government and contracting companies were affected.  Employees who worked for those businesses that contracted with ‘non-essential’ Federal Departments were furloughed without pay.

Further, there is also a freeze on all new Federal spending commitments.  This can have an effect if you have bids outstanding that will get pushed back or even possibly suspended (depending on what the agreed budgetary outcome is).

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While much will be on temporary hold, government contractors will simply be forced to wait it out. Companies providing products will face changes to the method and timing of product deliveries, and changes in payment scheduling that can range from quarterly to per diem.

On the other hand, certain contracts will remain unaffected, such as those for building maintenance and food provided at U.S. Federal facilities. J. David Cox, president of the American Federation of Government Employees (AFGE), says, “…all these service contracts will be paid, the contractors will be paid regardless of a government shutdown. It’s a double standard that’s going on. Even if the services aren’t provided, the contracts must be paid.” He has also said of the shutdown, “Fifty percent of federal employees will go to work and not get paid. Back pay is totally dependent on the will of Congress.”