Contractors: Recouping Losses Caused By the Government Shutdown

With the dust settling from the recent government shutdown, many contractors are faced with the challenge of trying to get back to business as usual.  The big question is:  will this be possible?

In the wake of the 16-day government shutdown, many contractors are still assessing the damage, as well as revising their schedules, getting a sense of whether potential contracts that were on hold will be released, and determining the best way to reconnect with government customers.

One of the biggest concerns of contractors is the ability to recoup losses from the shutdown. Donald Walsh from the law firm Offit Kurman recently authored a Baltimore Business Journal op-ed that provided some key insights that will help contractors as they try to regain stability after the shutdown.

Whether or not contractors can recoup losses depends on how the work stoppage from government originated.  For example, according to Walsh, a stop work order due to the shutdown is different than work being halted as a result of a new contract year, which was not yet funded or an option not exercised.

As the article highlights, in both cases, the contractor might be entitled to an equitable adjustment as compensation for the government’s unilateral decision to stop work.  According to Walsh, requests for equitable adjustment should be submitted within 30 days of the date work on the contract resumes.

Demonstrating entitlement to loses can be very challenging and is often considered outside the ordinary scope of performance.  However, by tracking the following, it is possible to recoup some of these losses that Walsh highlighted:

  • Idle time for employees working the project
  • Management costs that can be segregated to implement an orderly business approach to the stop-work order internally and in coordination with the government
  • Any severance pay triggered by the layoffs and/or increases in unemployment taxation rates by virtue of the complying with the order
  • Idle facility costs
  • The costs of publishing any WARN notices or other publications
  • Remobilization costs once the stop-work order is lifted
  • Any overtime which is necessitated by the remobilization
  • Costs for any further recruitment efforts should staff not be in a position to return
  • Any necessary inflation adjustments should performance period overlap with increase periods
  • A calculation of any unabsorbed overhead which was not borne by other contracts during the stop work period
  • Any costs of preparing, submitting and negotiating the equitable adjustment, including costs of outside accountants, consultants and/or counsel
  • Profit on the above items (but not profit on the work not performed during the stop work order)

2014 will clearly be another challenging year for government contractors.  As such, it is vital for contractors to mitigate any revenue loss from the shutdown.  It also signals a time where contractors will have to continue seeking opportunities in adjacent markets and continually provide value – while competing for fewer dollars – for the government.