Contracting

Government shutdown puts contractors in precarious position

There's never a convenient time for a full or even a partial government shutdown, but we've reached the beginning of the end of another fiscal year with the lik...

Tom Temin@tteminWFED

September 26, 2023 10:29 am

9 min read

There’s never a convenient time for a full or even a partial government shutdown, but we’ve reached the beginning of the end of another fiscal year with the likelihood of a shutdown rising. So how can contractors make sure they’re ready for it and minimize the damage? As always for these kinds of questions, the Federal Drive with Tom Temin Executive Producer Eric White turned to Larry Allen of Allen Federal Business Partners.

Eric White So it’s looking like a partial shutdown is more than likely, but not quite sure where things currently stand. What are you hearing mostly from the folks who are on the government contracting side? What are they preparing for — the worst, or just this is business as usual now?

Larry Allen Well, Eric, I wouldn’t say that it’s business as usual, but contractors are in a really complex time because they’re simultaneously trying to grab and close last minute business before this fiscal year closes down. But in the meantime, they have to make sure that they have their in-place contracts managed properly for a potential shutdown. By the way, I do think that’s going to happen. I think whether it happens on October 1st, or maybe we get a short term [continuing resolution] that takes us into October and then a shutdown — one way or the other, I think the chances of that are probably better than 75%. I don’t say that with happiness, by the way, but I’m just looking at the situation and all I’m really hoping for is that if we do get one, that it’s not going to be very long. But if you’re a government contractor, you need to be communicating with your government contracting officers, the people that manage your contracts. You need to understand what’s going to shut down on their end, whether or not you’re going to get paid, whether or not expedited pay is available. And then you need to go turn around, if you’re a services contractor especially, and tell your service employees what they’re going to be doing while there’s a shutdown. They’re not going to be able to volunteer business. They’re not going to be able to go and work on a government site if that’s something that they’ve been doing.

Eric White Yeah. And the day to day operations are obviously going to be greatly affected. But I wanted to zero in on this time of year, and it goes across the board: Everybody is busy. This is when everybody’s trying to, like you said, get ready for the following year and finish up the fiscal year itself. Having this dispute occur during this time period, how much more difficult does that make it for businesses that work with the government?

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Larry Allen I think it makes it very difficult, Eric, and I’ll tell you why. There’s been a tendency in the government market over the last couple of years to really backload contract award actions. If you look at some of the awards that are made the last two weeks of September, there is really a substantial amount of government business that gets done, even in the services area. Used to be that by now most of the major service projects were locked up. And whether or not you’re talking services or products, large projects are mostly locked up. But there are a lot of medium-sized and smaller pieces of business that contractors are going to be pursuing and government agencies are going to be handing out right up until midnight on September 30th, which of course this year is a Saturday. So happy weekend, guys. And that’s a distraction. They want to get the business in under the line, which I totally understand. But somebody has to be figuring out what happens when the sun comes up October 1st and we don’t have an appropriations. What’s that going to mean for your business? What’s that going to mean for your employees that right now have a charge number?

Eric White And you said you were hoping and holding out the best hope that it’s going to be a short one, but you never know how these things can go and how stubborn everybody can be on both sides. What should they do to potentially prepare for a longer term shutdown, but also maintain that you’ve got to keep things going in the short term, too?

Larry Allen So I think one of the biggest things that’s important to understand, Eric, is that the shutdowns don’t happen all at once. Everybody says, “we run out of money on X date and, on X date, everything closes down.” That’s not really the case. You’ll have some things that absolutely do close down as soon as the government runs out of money. But you’ll also have some functions that continue on, things that have alternate sources of funding, either permanently or at least for a little while. So you could have a project or a couple of projects that are funded for the first five or six weeks or three weeks of the shutdown. But after that, that money runs out and those things then have to shut down. On the other side, you can have some things that are at first deemed non-essential that shut down. But after two or three weeks, people deemed them essential. Suddenly we have to go on with that function regardless. And so some projects could start back up after initially being shut down. That’s extremely confusing for contractors, and for government, frankly. We’ve already seen some government agencies kind of telegraph this, that that’s probably going to happen in the event that a shutdown lasts more than two weeks. So you need to really keep those communications sharp. This is not a time, if you’re a contractor, to tell all of your contract managers and senior management people that it’s a great time to go take a vacation because it’s not. You could find that something that is closed down suddenly has to be restarted and you have to make sure that people are available for that. Similarly, you have to be prepared to wind down operations over time that may operate for a couple of weeks, but then run out of money if this is, in fact, a protracted shutdown.

Eric White In other news, there was an interesting maneuver by one particular contractor, and it’s a big one. It’s Verizon, who actually blew the whistle on themselves and said, “oh, yeah, there’s a little bit of waste and abuse going on here” and decided to come forward with it. Obviously, that’s what you’re supposed to do, but it seems as if maybe they may have done it out of self-interest as well.

Larry Allen Eric, that’s right. Most companies try to fly low under the radar and they do actually, I think, try to comply with their government contract requirements. But Verizon here, I think, is notable for turning themselves in and saying, “hey,we didn’t do what we said we were going to do under this telecommunications contract.” And I think that hats off to Verizon, they set a great example. And I’ll tell you that for a couple of reasons. First of all, every contractor needs to be reminded that they have a mandatory disclosure clause in their contracts. So when they have credible evidence of wrongdoing and that’s the standard, then they are supposed to report it, at least to the [contracting officer (CO)]. Technically, the law says you’re supposed to report that both to the CO and the inspector general. Of course, I would advocate any company, before you make a disclosure, make sure you’re working with competent outside counsel that understands government contracts on that type of disclosure. But you have to remember that you are bound by the mandatory disclosure rule. Also by coming clean, while Verizon has to pay a fine today, they get to live to contract again another day. And that’s taking the long view. If you blow the whistle on yourself, you’re going to end up paying a fine, but you’re going to end up paying less of a fine up front and fewer legal fees because it’s not going to be protracted over a number of years. But you’re also likely not going to find yourself in front of a suspension or debarment official, which means that you get to maintain your participation in the federal market, not only the federal market, Eric, but also increasingly state and local government markets that look to the federal excluded parties list to see whether or not a company they want to do business with is on it.

Eric White It’s not all on the companies though, right? Agencies are going to have to be proactive in ensuring that their contracts are being fulfilled and that they’re being used in a necessary way. What else is going on on that front, especially with a big agency like the General Services Administration?

Larry Allen Well, I think those agencies really need to provide oversight. And you look at the GSA Office of the Inspector General, in their semiannual report, they come out with some real doozies. And I think, a lot of the times, Eric, when we talk about government contract compliance, we’re talking about civil fines. And of course, there are a lot of things that happen in the civil arena, but it’s not limited to that, as the GSA IG’s most recent semiannual report showed, there are two cases of contractors that were convicted of criminal False Claims Act lapses, and that’s a real problem. One company got itself, the owner of the company got himself a 30 month sentence in federal prison. So, you know, congratulations. And on top of that, got a $5 million fine. While the IG report didn’t say whether or not the company was suspended or debarred, my guess, Eric, is that both the owner and the company, at a minimum, found themselves on the suspended list for a period of time in separate actions. That’s important to remember too. Both people and companies can end up on that suspended or disbarred list.