Navigating the Government Shutdown: What Startups Need to Know

by Julia van der Colff

The United States Government is on track to shut down this Sunday, October 1, unless Congress strikes an unlikely last-minute agreement to pass the twelve appropriations bills that fund government operations before the start of the new fiscal year. During a shutdown, the government is only authorized to spend money on essential services, such as those related to law enforcement and public safety. The government will define employees as essential or non-essential, with essential employees continuing to work without pay, and non-essential employees being furloughed. Members of the military and federal law enforcement will continue working; however, all civilian personnel working for the Department of Defense will be furloughed.

A shutdown will have widespread effects across federal services and operations. For companies with government contracts and grant funding, new contracts and modifications will not be issued, and option periods will not be exercised. Processing of the Small Business Administration loans and grants will be delayed.

Companies will be required to stop working on prime contracts and subcontracts that are not funded for fiscal year 2024. Invoices will not be paid, and for contracts that are funded, performance may be impacted as government employees will be furloughed and not able to respond. In preparation, here are steps for companies to take:

Review Contracts and Subcontracts

• Review your contracts and subcontracts to determine if they are after September 30, 2023.
• For contracts that are not funded after September 30, anticipate instructions to stop working on the contract.
• If your contracts are funded and you can continue working, determine which “essential” Government employees will be your contacts for all communications in the interim.
• For companies with SBIR funding, check if your contracts have only civilian POCs and if so, ask for a backup military POC in the event of the shutdown.
• Note that E-Verify, the employment system that Government contractors are required to utilize to confirm the employment eligibility of their new hires and current employees, has historically been unavailable during government shutdowns.
• Check for shutdown plan guidance from relevant agencies for information on the operations and Government employees that will be considered essential.
• Department of Defense Shutdown Plan HERE.
• Department of Energy Shutdown Plan HERE.

Communications with Contracting Officers

• Reach out to your contracting officers and prime contracts this week to see if they have a plan for the shutdown, if you will be receiving a stop work notice, and who the “essential” Government contacts will be for your contracts.
• Try to settle any outstanding matters before the shutdown, such as submitting invoices for payment, obtaining approval for deliverables, making modifications, following up on unpaid invoices, etc.
• Keep track of all communications.

If Notified to Stop Working…

• Stop working immediately upon receiving a stop work notice (you will not be paid for any work done).
• Track all expenses incurred as a result of the shutdown, such as time spent trying to reach Government employees, costs associated with production halts, attorney fees, etc.
• Some expenses may be recoverable, even for fixed-price contracts; your ability to recover these expenses will be based on how well you document them.
• For employees on stopped contracts, develop a plan on how to best reallocate work.
• When the shutdown ends, the Government will expect work to resume almost immediately, so create a re-deployment plan.

Manage Subcontractors

• If you have subcontractors, review your subcontracts for any clauses that allow you to stop your subcontractors’ work.
• If issued a stop work order, notify subcontractors as soon as possible. If your prime contract is issued a stop work order and you do not stop your subcontractors from working, you may owe the subcontractor for amounts that are not recoverable from the government.

How Long Will the Shutdown Last?

Data: U.S. House of Representatives; Note: Shutdowns are attributed to the year in which they started; Chart: Erin Davis/Axios Visuals

While it is impossible to predict how long the shutdown will last, the most recent (and longest) shutdown, from 2018–2019, lasted 34 days. The previous longest shutdown in 1995–1996 lasted 21 days. As of Thursday morning, the U.S. government began notifying federal workers that a shutdown appears imminent.

Companies should prepare for the shutdown to last at least several weeks.