How the government shutdown affects construction contracts

This feature is part of ‘The Dotted Line’ series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.

When the government shuts down, so does the flow of cash from contractors to federal sites.

The the federal government shut down on October 1freezing activity in various construction sites. Advocates say the shutdowns serve as a stress test of how construction companies document and negotiate their federal contracts.

During funding lapses, even short ones, the line between continuing work and stopping work blurs. For some companies, this can mean unpaid weeks on site. For others, it’s a crash course in which clauses actually protect them when government operations stop.

Unclear funding

The most common surprise during a shutdown comes when contractors realize their agreements don’t guarantee payment for work already done or they have to keep working anyway, said Zack Rippeon, a partner in Adams & Reese’s Atlanta office.

“Some may find, for the first time, that they have to keep working even if they don’t get paid on time,” Rippeon told Construction Dive. “This discovery may force them to fund some or all of the work for extended periods of time.”

If funding for a project was appropriated before the start of the fiscal year, work can normally continuealbeit with slower payment cycles. But if the funds weren’t secured before the shutdown, “it’s going to go dark for the foreseeable future because there are no funds available during the shutdown,” Rippeon said.

This uncertainty often extends to subcontractors as well. Contractors who fail to get stop-work or standstill clauses on their submarines risk being squeezed between the government and their project partners, said Michael Barnicle, a partner at Atlanta-based Troutman Pepper Locke.

“Furthermore, do not assume that there is a one-size-fits-all answer for all contracts because there are a variety of exceptions that may apply to certain contracts,” Barnicle added.

A documentation manual

If a contractor’s government contact is already free, companies must still provide written notice of any work freezes or cost increases, said Aron Beezley, a partner at Birmingham, Ala.-based Bradley Arant Boult Cummings.

“Government contractors should maintain contemporaneous records of all communications, costs, delays and downtime,” Beezley told Construction Dive. “Contractors should also provide timely written notices to contracting officers under contract changes or stop-work clauses.”

Tracking costs separately is critical, added Scott Damiecki, construction industry practice leader at CohnReznick.

“[Contractors should] Stay in regular communication with the contracting officer and request written orders to stop work or suspend the project,” Damiecki told Construction Dive. “Track all costs related to the shutdown, such as demobilization, remobilization, downtime, storage, etc., as separate cost codes so you can quantify the impact.”

Proper documentation also extends downstream.

“Provide adequate notice to subcontractors to protect your own interests and preserve their rights,” Damiecki said. “Keep detailed records of specific disruptions, such as delays and stop-work orders. This should include information about the impact on employees, which may include terminations and layoffs.”

Navigate gray areas

Closures often create confusion about whether work should continue, especially for partially funded projects. The result is a gray area where contractors fear both stopping and continuing.

“The biggest vulnerability for government contractors is unclear funding and work stoppage authority,” Beezley told Construction Dive. “Government contractors often don’t have definitive guidance on whether work can continue or costs are reimbursable.”

Some contracts require continued performance regardless of payment status. This can force companies to self-finance operations until credits are restocked. Those who lack clarity risk disputes later, especially if outsourcing deals don’t fall through.

“For example, does the subcontract allow the contractor to require the subcontractor to continue working, or does it provide for work stoppages or delayed payments?” Rippeon said. “And what damages are subcontractors entitled to that the contractor is not entitled to in these cases?”

The long queue at a stop

Even after the reopening of the government, the effects can last for monthsDamiecki said.

“Contract payments could be delayed once the government reopens,” Damiecki told Construction Dive. “Contractors may be required to recover additional costs incurred through a change order or a request for adjustment or equitable claim.”

Barnicle added that the administrative backlog will be one of the biggest problems.

“Everything will be delayed by months,” Barnicle told Construction Dive. “Contractors need to be aware of how this can affect their cash flow.”

Rippeon agreed that resuming construction operations will take time. The closings also complicate workforce management, he added.

“Working out the impacts, both time and cost, of the shutdown won’t happen quickly after the government reopens. The paperwork and red tape will take time to process,” Rippeon said. “And if the project was stopped or suspended, where did the workers go and how quickly can they return?”

What matters most

These clauses and their download are the most important, lawyers say:

• Termination clauses.
• Terminations for convenience.
• Change of clauses.
• Equitable adjustment.
• Fund limitation clauses.

“Contractors working directly for a government agency should check for provisions that allow stoppages or suspensions of work through written notice with appropriate cost and time recovery mechanisms,” Rippeon told Construction Dive. “These provisions should match what contractors put in their subcontract agreements to ensure that contractors are not standing in the middle between the government owner and its downstream subcontractors and suppliers.”

Because these clauses are often non-negotiable in prime contracts, the only real control companies have is how they get them down. That will be important to avoid commercial claims, Barnicle said.

Conflicts and preparation

Each shutdown prompts a wave of claims, Damiecki said.

“Anytime a shutdown happens, there’s usually more disputes and claims from contractors,” Damiecki told Construction Dive. “Companies must maintain detailed records related to the shutdown, provide timely notifications, review contract clauses, track costs and be prepared to file claims to recover costs.”

Rippeon added that dispute deadlines remain active even during a government shutdown.

“Please note that any pending claims may still be subject to statutory deadlines that are not collected due to the shutdown,” Rippeon said. “So be sure to continue to monitor appeals deadlines.”

However, lawyers maintain the best mitigation though is preparation, not litigation.

“We expect to see more disputes, especially over delay and cost recovery,” Beezley told Construction Dive. “Government contractors can mitigate risk by improving documentation, updating shutdown contingency plans, negotiating clearer shutdown-related terms now, and consulting with experienced government contracting counsel.”

While previous stops have created a body of legal precedent, contractors shouldn’t assume that means easy wins, Barnicle added.

“The good news is that the legal precedent is much stronger than previous closures that provide contractors with more predictability,” Barnicle told Construction Dive. “The bad news is that legal precedent generally reveals that stoppage-related claims are difficult for contractors to win.”