Small Business, Big Problems: Navigating the Government Shutdown as a Small Business Contractor

01/17/19

By Cara A. Wulf

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By now, we have all read the horror stories of federal employees who are either furloughed or forced to work without pay during this historic shutdown. Less well-known, however, is the impact this shutdown has had on small business contractors who rely on federal government contracts for much – if not all ‒ of their revenue. Whereas large government contractors may have ample cash reserves for a situation like this, small businesses are likely less fortunate. In fact, many small businesses hire highly skilled, in-demand personnel specifically in support of their government contracts. Unfortunately, with much of the government shuttered and its coffers empty, these highly skilled personnel, and the companies for which they work, find themselves emptyhanded and operating in the red. Absent a stream of revenue, small businesses cannot pay the employees they specifically hired for the contracts that are now unfunded. While many small business contractors have been able to weather the first few weeks of this shutdown by either diverting these employees to other projects or using vacation or sick leave, many thousands of contractors are now facing grim choices as the shutdown enters its fourth week. Simply stated, these companies are in real danger not only of losing those employees hired to support existing contracts, but of losing the opportunity to leverage those employees to compete for future contracts. To make matters worse, unlike federal employees who will likely receive back pay, most if not all contractors will not be reimbursed for the revenue lost during this time of political chicken.

The effects of the shutdown on small businesses are compounded by the sudden disappearance of federal government assistance upon which many small businesses rely. For example, the plans of many small businesses to obtain loans ‒ either to expand or to keep the doors open – have been derailed because the Small Business Administration (SBA) stopped processing new loans on December 22, 2018, and pending applications will not be processed until the government reopens. Moreover, during the shutdown the SBA is also unable to guarantee back loans, meaning that small businesses are unable to increase the amount of a loan approved by the SBA before the shutdown. In fact, even once the government reopens, it will likely take months to get through the backlog. When the process begins, lenders will need to work quickly, meaning that many deserving applicants may be denied in the mad dash to catch up. It was reported that during 2013’s 16-day shutdown, small business loan approval rates dropped almost 6% for smaller lenders, and nearly 20% for large banks. To the extent that a small business has loan-related questions, it is imperative that it contact its lender and review the guidance for contractors provided by the National Association of Government Guaranteed Lenders (NAAGL).

Another less-well-publicized impact of the shutdown is its effect on subcontractors, and small business subcontractors in particular. At first blush, it may appear that the subcontractor is doubly disadvantaged – at the mercy not only of a mercurial government, but also of the caprices of a prime contractor that may be trying to cope with the effects of the shutdown by diverting its resources away from its subcontractors and toward its own internal objectives. Fear not, small business subcontractors – you are not powerless. Under FAR 52.242-5, Payments to Small Business Subcontractors, prime contractors are required to notify the contracting officer within 14 days of any late or reduced payment to its small business subcontractors. Failure to make timely payment or to make the required disclosure to the contracting officer is a breach of contract – even during a shutdown. Faced with a situation in which payments are not being timely received, small business subcontractors would do well to remind their primes of this obligation and document any instances where their primes fall short.

In an effort to alleviate some of the pain felt by small business contractors, on January 8, 2019, Delegate Eleanor Holmes Norton (D-D.C.) introduced a bill that would grant back pay to low-wage federally contracted retail, food, custodial and security service workers who are furloughed during the shutdown, but it remains to be seen whether this bill will gain any traction. Similar legislation was introduced in the Senate on January 16, 2019, and over 30 senators have already called on the Office of Management and Budget to use existing authority to partner with federal contracting officers and modify contracts so employees can receive lost wages. While legislative relief would be welcome, and we have previously provided general guidance to all federal contractors here, small business contractors would be well-served by taking the following proactive steps to protect their cash flow and minimize their losses during the shutdown:

  1. Do not stop work until and unless expressly told to do so by your contracting officer, unless (a) it requires engagement with a government official for the work to be done or (b) the government actually denies contractors appropriate physical access to facilities.
  2. Once directed to stop work, do not work at risk. Instead, consider deploying employees toward other corporate objectives, as appropriate.

  3. Document everything – including every attempt to communicate with the government during the shutdown and any actions that had to be taken when/if the contracting officer was unavailable.

  4. Remember, unforeseen costs incurred because of the shutdown and/or the government’s actions or inactions may be reimbursable through an equitable adjustment or a contract claim.

  5. If you have any questions regarding your shutdown-related obligations, the clauses in your contract, the status of your employees or the allowability of costs you may be incurring during the shutdown, consult with legal counsel immediately.

The shutdown is a no-win situation, but you are not alone – your Government Contracts and Export Controls counsel at McCarter & English is here to help. Contact us to discuss these and other steps you can take now to mitigate the impact to your business and receive that to which you are entitled once the government turns the lights back on.