Does a Government default due to the debt ceiling result in a Government shutdown? Well maybe. It all depends on how the Government reacts or directs its contracting officers to react. A default is different than the – shall we say it – normal – yes, we said it – Government shutdowns we have been dealing with for the past decade or so.
Under a typical beginning of the Government fiscal year shutdown the issue is the appropriation of new funds. New contracts and existing contracts relying on current year funds are impacted. And yes, Federal offices may be closed impacting some programs. However, the Government has the money to pay its current bills – your requests for payment.
Under a default the Government has the appropriated funds and can continue to incur obligations. It simply does not have the money to pay those obligations – yes, again your requests for payment.
What is a Government Contractor To Do?
We simply do not have a straightforward answer. It is going to come down to how the Government reacts to the default and what it instructs it contracting officer to do. Below are a couple potential scenarios.
The Government Attempts to Limit the Incurrence of Additional Obligations
Contracting Officer may issue stop work orders. If a contracting officer sends a stop work order the contractor is going to be required to stop work as efficiently as possible and start collecting data to support a request for payment or equitable adjustment. Again, this is complicated by the type of contract. Continuing to perform at the contractor’s risk after a stop work order is likely to be seen, at least by DCAA, as failing to comply with the contracting officer’s written direction in the stop work order.
The Government Does Nothing
Remember the Government is not like a business. The contracting officers have appropriated funds (i.e., budget) to continue to obligate – so spending money that may or may not get paid to whom it is owed is not really the contracting officer’s problem. A contractor may find itself in the position of being expected to continue performance with a question as to if and when payment for that performance will be forthcoming. FAR 52.233-1, Disputes, clause incorporated into most Government contracts, requires in (i) that “[t]he Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.” We believe this requires the contractor to go out at its own risk to continue performance.
The way we see this second scenario is that the Government can start spending your money directly from your bank account versus having to tax you first – what is the world coming to?
Let us all hope that the children can play nice and get this resolved. But if not:
- Follow the direction of any stop work orders and start accounting for the cost impact of that stop work order to support a future request for payment or claim (FAR 52.242-15 Stop-Work Order).
- Continue performance if no direction is otherwise given and make sure you collect any interest due on delayed payments (FAR 52.232-25 Prompt Payment and FAR 52.233-1 Disputes)
- Continue to track the impact of limitations of cost or payments requirements due to funding on specific contracts (FAR 52.232-20 Limitation of Cost and FAR 52.232-22 Limitation of Funds)
Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractors from contract award to contract closeout. We would be happy to be part of your team.