Realities of Cost Recovery in the Wake of the Federal Shutdown

Shuttering of the government (or parts of the government) following appropriations lapses has become an increasingly common phenomenon in recent years. Funding lapses interrupt the usual predictability of government operations, which is often to the detriment of both agencies and federal contractors that are left in proverbial limbo with stop work orders.

Unfortunately, unlike many other topics, the FAR does not substantively address procedures for contractors during or following a government shutdown. As such, recovering expenses incurred as a consequence of government shutdowns can be challenging.

Here are some pointers.

The counter-intuitive reality of federal shutdowns is that they are expensive. For example, according to a report published by the White House Office of Management and Budget (“OMB”), the 2013 shutdown was estimated to reduce Gross Domestic Product growth by between $2 and $6 billion. With respect to the federal contractor workforce, the report summarized as follows:

The shutdown resulted in over 10,000 stop work orders for contracts and numerous temporary layoffs among the federal contractor community. Federal acquisition regulations allow contractors to request equitable adjustments for certain cost impacts associated with having to put operations on hold (e.g., costs of maintaining idle facilities, unabsorbed overhead). There could be thousands of requests from contractors seeking to be reimbursed for costs incurred as a result of these suspensions.

As the OMB report explained, Federal contractors are frequently given stop work orders for the duration of the shutdown, yet those same contractors usually must stand ready to resume work as soon as the federal government reopens its doors. Consequently, contractors typically will be incurring costs despite not performing work to ensure their staff and equipment is ready to go back to work at any time.

The state of near immediate readiness begs the question: Can contractors be reimbursed for expenses incurred during a government shutdown? The answer: It depends.

The FAR is uncharacteristically silent with respect to procedures during and after federal government shutdowns. As such, FAR clauses addressing delays and funding limitations have been pressed into service to provide some guidance for how agencies and federal contractors can proceed following a shutdown. These provisions, however, were not originally designed to address funding lapse issues, and sometimes offer imperfect solutions.

Due to the lack of FAR guidance, it has largely been up to the courts and administrative bodies to apply the FAR’s current provisions to address costs associated with a shutdown.

In a 1978 case, S.A. Healy Co. v. United States, 216 Ct. Cl. 172 (1978), a contractor claimed it was entitled to an equitable adjustment following a funding lapse related to the construction of tunnels for an aqueduct in Utah. That funding lapse was due, in part, to the agency failing to seek appropriate funds for the program. The government countered that it was insulated from liability due to a clause in the Reclamation Project Act of 1939, which allowed the Secretary of the agency to enter into contracts, but limited government liability to the extent of available appropriations.

The Court of Claims concluded the Agency’s interpretation of Reclamation Project Act of 1939 was overly broad and would place all risk of Congressional non-appropriation on the shoulders of contractors. Clearly unimpressed, the Court stated, “[i]f defendant wants construction contractors who have studied in the school of Machiavelli, it should so state in its invitations for bids.” As such, the funding lapse was treated as work suspension, which was compensable under the contract’s equitable adjustment clauses.

While the handling of appropriations lapses has evolved since S.A. Healy, the case nevertheless appears to have set the tone for subsequent federal procurement lapses. Thus, it is relatively settled law that federal contractors will be able to recover some costs during the shutdown; however, extent of those costs depends on the specific terms of the underlying contract.

In one example, a contractor was able to obtain compensation following the most recent shutdown. In Amaratek, ASBCA No. 59149, 51-1 BCA ¶ 35,808, the Army obtained laboratory services for the Yuma Proving Ground. In terms of payment, the contract divided the period of performance into 12 service units of one month each. Due to the 2013 government shutdown, the contractor only performed for 6 days during the month of October. Consequently, the Army proportionally reduced payment for the month of October.

On appeal, the ASCBA agreed with the contractor that it was entitled to full compensation for the month of October despite only performing 6 days of work. In its decision, the ASBCA distinguished the unique circumstances of Amaratek from other cases where the performance was measured in discrete units, which could be directly accounted for during the shutdown. These cases were completely unlike Amaratek’s case because the performance unit was months. As such, the fact that the Army received any work during October 2013 obligated it to pay the full contract price for that month.

As a more general matter, contractors may typically claim the direct costs associated with remaining prepared to return to work; however, lost profits typically are not compensable. For example, in L&L Excavating & Land Clearing, LLC v. Dept. of Agric., CBCA 3911, 14-1 BCA ¶ 35,723, a contractor was not entitled to recover lost profits or income attributable to government shutdown delays because the contract included provisions that would allow the government to extend the term of performance for “acts of the Government which interrupt the purchaser in active operations for ten or more consecutive days during a normal operating season.”

Under this provision, however, the contractor was expressly precluded from recovering expectancy damages or anticipated profits. Consequently, when the contractor attempted to recovered these costs in connection with the 2013 shutdown, the claim was denied.

Notably, the ASBCA similarly found research and development termination costs separately claimed in Amaratek to constitute lost profits, which were not compensable.

As with most things related to the government shutdown, there are few generally applicable rules regarding cost recovery. While there appears to be consensus that lost profits will not be compensable, the recovery of other costs will depend on the specific terms of the contract.

The lack of clarity in this regard is undoubtedly a further aggravation for government contractors, many of whom will incur additional expenses consulting with counsel to determine where particular shutdown costs could be claimed. As noted at the outset of this blog, shutdowns are expensive, and the winter 2018-19 shutdown will likely be no different.