Even Short Government Shutdowns Impact Contractors

The White House is seen at sunset Saturday, Jan. 20, 2018, in Washington.

The White House is seen at sunset Saturday, Jan. 20, 2018, in Washington. Alex Brandon/AP

Prolonged funding lapse could have a significant impact on companies' cash flow and their employees' paychecks.

As agency operations grind to a halt amid a government shutdown, it’s not only federal employees who are facing a stop-work order. The myriad of government contractors supporting day to day operations are also on hiatus, and such companies should ensure they are well prepared, whether for a short shutdown or a long haul.

Federal contractors should have heard from their respective agency customers by now about whether their work would be exempt from a shutdown—due to national security or threat to life or property—but many might still be left with uncertainty, particularly when it comes to retaining their workforces.

“If you viewed this as a company town, it’s like the factory shut down, and we don’t know when it’s going to reopen,” said Democratic Congressman Gerry Connolly, whose state of Virginia is tied along with Maryland and the District as home to the most federal contracting dollars per capita, according to WalletHub. “It creates enormous anxiety and uncertainty for federal workers and federal contractors who are trying to be good public servants. The effect is devastating.”

“A lot of companies will try to keep their employees on the payroll through the shutdown,” said Stan Soloway, president and CEO of Celero Strategies and former deputy undersecretary of defense for acquisition reform, suggesting temporary work or use of paid time off, dependent on cash flow.

If the shutdown lasts for one week, maybe two, this won’t be too difficult, he said. “At the end of the first week or second week, it becomes harder … and much more significant on the individual level.”

Soloway noted many companies should have contingency funds in place, but the government isn’t always a prompt payer, meaning invoices from early January, December and even November might be outstanding, leading to cash flow concerns.

“The best thing contractors can do now is arm themselves with information about their customer’s plans and positions, and develop internal strategies to mitigate the impact of a prolonged shutdown,” according to Deniece Peterson, director of federal market analysis for Deltek. “Contractors should treat [their] shutdown plans like a real project with a project owner, and resources assigned to identify and document how schedules, costs, employee status would be affected.”

Peterson laid out seven things contractors should have in such a plan in a Jan. 21 blog post, including identifying and documenting added costs incurred due to the shutdown and creating contingency plans for paying employees and subcontractors.

More so, if companies are not being paid during a shutdown, there is little reason to expect their employees will be made whole after it ends. Since federal contracts are paid based on work performed, rather than on a salaried basis, there is no standard mechanism for back pay for furloughed contractors.

“Contractors often end up suffering more than federal civilian employees do from the same shutdown effect,” said David Berteau, president and CEO of the Professional Services Council. “History says that, while civilian employees who are forced not to work will eventually be paid, contractors under the same instructions will not be.”

PSC, Deltek and others urged companies to prepare for this reality prior to the shutdown. While contractors aren’t able to do government work during a shutdown, they might be expected to return to work immediately once Congress approves funding. To bridge that gap, contractors should have other, temporary work ready for their employees to keep them on the clock and ready to return.

“The bottom line is: four or five days, there’s a cost, a disruption,” Soloway said, though it can be mitigated. “After two weeks, it really starts to build up.”

“Regardless of whether this shutdown lasts 10 days or 100 days, contractors should have a shutdown plan because it’s likely that 2018 will not be the last year that this occurs,” Peterson said.