A Prolonged Government Shutdown Would Impact Contractors
by Nick Schwellenbach, 9/25/2013
A government shutdown, particularly if it is prolonged, will affect more than just federal workers and their families. The large number of people employed by federal contractors and subcontractors could be at risk of furloughs, delays in pay, and adverse impacts to the companies they work for.
Paul Light of New York University pegged the total number of federal contract employees at 7.6 million in 2005, according to the Congressional Research Service in a 2011 report.
The Congressional Research Service stated in a recent report that the two fiscal year (FY) 1996 shutdowns impacted contractors. It noted the effects on the densest geographical concentration of federal contractors: “Of $18 billion in Washington, DC, area contracts, $3.7 billion (over 20%) reportedly were affected adversely by the funding lapse… employees of federal contractors reportedly were furloughed without pay.”
If a shutdown lasts much more than a handful of days, the impacts will likely be much greater on contractors this time around.
“If there is a shutdown, many, if not most, contractor employees, whether they work in a federal facility or not, would lose pay for the shutdown days, just as their companies would lose the revenue,” Stan Soloway told The Washington Post by email. Soloway is president and chief executive of the Professional Services Council, which represents contractors. “Only work that is funded can continue and because shutdown is akin to a lapse in appropriations, there is no funding for the work involved…”
Contractors Could Be Affected On a Larger Scale
No appropriations bills are currently in effect for fiscal year 2014, especially the bill that funds the Defense Department – this is in contrast to the situation during both FY 1996 shutdowns when a substantial number of appropriations bills had been enacted, shielding vast parts of the government from a shutdown. Notably, the defense appropriations bill was enacted before the second 21-day shutdown in FY 1996.
The Defense Department obligated over 60 percent of total federal contract dollars in FY 2012. Since the mid-1990s, contracting has grown enormously, particularly due to the post-9/11 boom in defense contracting, especially for services (rather than for goods). “The estimated number of federal contract jobs increased by more than 70% between 1999 and 2005 (from more than 4.4 million to more than 7.6 million)—a change that was reportedly driven almost entirely by increased spending at DOD during this period,” according to CRS in a 2011 report.
There was further growth in contracting since 2005, although there has been some contraction in the last couple years. However, it still is substantially up. “In a time of austerity, the U.S. government’s reliance on the private sector for a range of services has declined for two consecutive years. Even so, real services contract spending in 2012 remains more than 80 percent above the level in 2000,” according to a recent study by the Center for Strategic and International Studies.
This would mean far more contractor employees and their companies could feel impacts this time around compared to FY 1996.
The Payment Situation is Confusing and Could Affect Business Operations
“A shutdown means that there’s no additional funding that is made available for contracts,” Elizabeth Ferrell, a government contracts expert at McKenna Long & Aldridge, told Politico. “So with very limited exceptions, there are no new contract awards, no additional funding obligated to existing contracts, contractors are faced with performing when there are no government people around, government people will be furloughed.”
The Congressional Research Service elaborated on the exceptions: “In the event of a lapse in funding, the Defense Department would have the authority to obligate funds for goods and services needed to sustain its continuing operations – i.e., it can sign contracts with a binding commitment to pay providers – but it does not have authority to issue checks for amounts obligated in advance of appropriations.”
However, “It is not clear that all vendors would be willing to provide goods or services” with the expectation that the payments they are due could be significantly delayed, according to the Congressional Research Service.
The type of work the contract covers could significantly affect whether payments would be forthcoming or not during a shutdown if funding had been previously appropriated:
There is also likely to be a considerable amount of confusion among contractors because funds remaining available from prior years can continue to be distributed, but not new funds. In DOD appropriations acts, funding for R&D is typically available for obligation for two years, for most procurement for three years, and for shipbuilding for five years. Contract authority to purchase stocks of material for inventories is not limited by fiscal year. Unobligated balances of funds for those purposes would remain available even in the absence of new funding.
Money for operation and maintenance, however, is generally available for obligation for only one year, so most funding for day to operations of the Department would lapse and operations could continue only under the Anti-Deficiency Act exceptions that allows the obligation of funds, but not disbursements. Whether vendors could be paid, therefore, depends on which pot of money obligations are made from, and money for more immediate, readiness-related activities would generally not be used to make prompt payments.
Under the threat of criminal penalties, generally the Anti-Deficiency Act does not allow the government to enter into contracts without active appropriations.
Ferrell, the contracting expert, added that a shutdown could affect publicly traded contractors’ stock prices and also lead smaller companies that are more vulnerable to cash flow disruptions to shutter their doors, particularly if the shutdown is prolonged.
Contracting by Budget Crisis is Bad Policy
While contracting and the privatization of government functions is a phenomenon that needs to be reined in, government shutdowns and sequester cuts are bad policies. Contractors often perform valuable functions – the government’s relationship with them or with federal workers should not be based on manufactured budget crises.