We have been here before—a possible government shutdown. The good news is that government contractors are now resilient to these events, and most have contingency plans in place. But those new to government contracting need to develop a robust plan.
How we got here
Congress must enact appropriations bills providing discretionary funding to federal agencies and programs each fiscal year, which starts Oct.1. President Biden signed a continuing resolution on Sept. 30, just hours before the previous fiscal year ended, to avert a shutdown until Nov. 17.
Now we are getting close to the end of the continuing resolution, and the government has three options:
- Pass full-fiscal year appropriations bills
- Pass a short-term continuing resolution
- Endure a shutdown
Passing full-fiscal year appropriations bills would be ideal, but it is unlikely, as it is not part of current negotiations. Another continuing resolution is more likely because it has become the norm, as shown in the chart below:
All years are fiscal. Excludes continuing resolution from Sept. 30, 2023. Full-year spending deals weren’t reached for all agencies in fiscal 2007, 2011 and 2013. CR= continuing resolution. Sources: Congressional Research Service; Bloomberg; RSM US LLP
Effects on the economy
The Congressional Budget Office estimated the effects of the five-week partial shutdown between Dec. 22, 2018, and Jan.y 25, 2019, to be the following:
- $18 billion of delayed discretionary spending
- 0.3% of reduced real GDP in Q4 2018 through Q1 2019
- $3 billion of reduced real GDP in Q4 2018
- $8 billion in reduced real GDP in Q1 2019
As noted by RSM Chief Economist Joe Brusuelas in The economics of another U.S. government shutdown, “any government shutdown will affect about 25% of all discretionary spending,” which includes defense spending. Further “a shutdown would affect the government’s publishing of statistics on inflation and employment, which would create difficulties for the Federal Reserve in setting its policy rate should the impasse continue.”
To learn more about working with the federal government, visit RSM’s government contracting page.
What should government contractors do?
In the event of a shutdown, government contractors should focus on the following:
- Plan ahead: Assess your current contract portfolio to determine which contracts the shutdown might affect (e.g., unfunded programs, those requiring government official acceptance, those performed on government facilities). Develop a contingency plan for potential stop work orders.
- Communicate: Establishing fluid communication with your contracting officer will help you understand whether the shutdown will affect your programs or contracts. In turn, communicate with your subcontractors and vendors because the shutdown will also affect them.
- Check cash flows: Confirm that outstanding invoices have been approved and keep them up to date.
- Analyze incurred costs: Be diligent in tracking costs that are associated with the shutdown. Typically, delay and standby costs, including direct and indirect expenses, are recoverable if the contractor can demonstrate that the shutdown caused the issue and that the contractor took reasonable measures to minimize the impact.
- Reserves: Make sure you have enough reserves to cover fixed costs. We expect a shutdown to last between two to five weeks, based on recent history. Talk to a bank that specializes in financing government contractors to make sure you have a plan B.
As always, hope for the best but prepare for the worst. There is sufficient history to understand how long and how much a potential government shutdown may affect government contractors. We recommend that government contractors dust off their prior contingency plans and update as needed to be prepared.
