The Shutdown is Over—Now How Do I Get Made Whole?

As a result of passage of Public Law No. 113-46, the Federal Government re-opened on October 17, after a sixteen day shutdown.  The new statute makes continuing appropriations through January 15, 2014 (thus ending the government shutdown), and increases the debt limit through February 7, 2014, which means a several months reprieve from the threat of another shutdown or debt ceiling impasse. Now that contractors and the government are resuming full performance of all contracts, contractors are assessing the impact that the shutdown has had on their contracts and whether contractual relief may be available.  Many contractors have suffered delays and increased costs from the closure of government facilities and the unavailability of government personnel for contract administration, or have continued performing in an underfunded status.

With the temporary resolution of the budget standoff, contractors should take stock of their contract funding and assess whether to seek relief for schedule and cost impact.   In making those determinations, contractors should take note of the following guidance:

Performance in Advance of Appropriations:  The Anti-Deficiency Act prohibits the federal government from obligating funds (or accepting voluntary service) in advance of appropriations, except as authorized by law. Because Congress did not provide any FY14 funding by the October 1 start of the fiscal year, agencies lacked funding to continue normal operations, and were required to shut down activities except for those funded with other than annual appropriations, activities undertaken pursuant to the constitutional powers of the President for national security and foreign relations, and activities necessary to protect human life and property.  In an effort to facilitate procurement of supplies and services necessary to support those activities that were excepted from the shutdown, on October 9, DoD  issued a contract clause that contracting officers were required to use when entering into contracts or issuing modifications or task/delivery orders, or exercising options for excepted activities. Notably, the clause was not applicable to any contract actions using existing appropriations (e.g., prior year funds) or to actions under the Pay Our Military Act, which was the authority relied upon by DoD on October 5 to reinstate the majority of furloughed DoD civilian employees as required to support members of the Armed Forces, and to authorize the payment of “allowances” to contractors who DoD determines are providing support to members of the Armed Forces in active service. The new contract provision, DFARS 252.232-7998 (Obligations in Advance of Fiscal Year 2014 Funding), provides that the DoD has authority to enter into the contractual action and to obligate the Government in advance of appropriations, and that payment will be made when appropriated funds become available.  While the DoD clause provides assurance of payment once funding is made available, the clause is not necessary to avoid a limitation of funds defense to recovery, so long as the contractor was performing “excepted” activities at the direction of the government. Any contractor performing “excepted” activities under a contract that was not fully funded at the time of the shutdown should communicate with the contracting officer regarding funding status and confirm that sufficient funds have now been obligated to the contract.

Cost and Schedule Impact: For many contractors, the shutdown has not created any funding issues, but has caused increased costs and schedule delays.  As we advised contractors at the beginning of the shutdown in our October 4 advisory, Costs and Delays Resulting From The Government Shutdown,” delays resulting from the shutdown should be excusable.  However, recovery of the cost impact resulting from the shutdown presents a thornier issue.  Undoubtedly, the government will assert that the shutdown was a sovereign act which insulates the government from liability.  In order to avoid a sovereign act defense, a contract will have to establish that the impact was suffered as a result of an action of the government acting in its contractual capacity or that the government has expressly or impliedly agreed in the contract to bear the risk of increased costs (e.g., where a stop work order was issued or the contract is cost-reimbursable).   Obviously, whether the sovereign acts doctrine is applicable and bars recovery is fact specific and must be determined on a case by case basis.  As contractors move forward in analyzing their particular situation, they should remember that consultant and legal costs incurred for preparation and negotiation of a request for equitable adjustment prior to the submission of a claim may be recoverable as long as those costs are in furtherance of contract administration.

If you have any questions on this Alert or the government shutdown, please contact the authors of this Alert or the McKenna attorney with which you typically work.

Author: Elizabeth Ferrell
Partner, McKenna Long & Aldridge LLP

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