OMB Publishes Last-Minute Guidance to Federal Agencies in Anticipation of a Government Shutdown

Yesterday, the Office of Management and Budget (“OMB”) sent a memorandum to the heads of executive departments and agencies addressing various procedures, legal issues, and policy matters to prepare for operations in the event of a lapse in government funding (i.e., a government shutdown). See Memorandum from J. Lew (April 7, 2011). At this hour, there is a real and imminent threat that Congress will not reach an agreement on continued funding when the current Continuing Resolution expires at Midnight tonight. Following is a brief summary of some of the more important points in the OMB memorandum.

The Antideficiency Act prohibits government agencies from incurring an obligation in advance of, or in excess of appropriated funds. As a general rule, agencies must cease all operations during a government shutdown. A limited number of exceptions to the general rule apply where a statute expressly authorizes the appropriation. For example, the Civil War-era Feed and Forage Act allows the DoD to contract for necessary “clothing, subsistence, forage, fuel, quarters, transportation or medical and hospital supplies” for the military. A statutory exemption also allows the Army to contract for fuel. Another exception allows an appropriation of funds in emergency circumstances–where there is a threat to the safety of human life or the protection of property. Government activities that are “necessarily implied” to carry out other funded or excepted activities are also allowed to continue in the event of a lapse in funding. For example, administrative activities to distribute social security benefits are allowed to continue because of the indefinite nature of the appropriation that provides funding for entitlement programs.

Government contractors should be aware of several important issues directly impacting their rights and obligations in the event of a lapse in funding.

First, an agency may not incur any new obligations (award new contracts, extend an existing contract, or renew an existing contract) where the funding source for the appropriation has lapsed. However, an agency may incur new obligations under one of the above-mentioned exceptions or where the agency has already obligated funds for the entire amount of a contract.

Second, where a contract has been previously awarded and performance is ongoing, any Federal employees who supervise or support the performance of the contract will likely be prevented from continuing such actions. This would include performance of routine oversight, inspection, and administration by contracting officers, technical representatives, and contract administration personnel. If such supervision or support is not necessary for the contractor’s continued performance (i.e., where funds have been obligated for the entire price of a good or service), the contractor may continue performance under the contract. However, if the agency makes a determination that continued performance would be wasteful, the agency may take contractual action to modify the terms or conditions of the contract. If this is the case, contractors should carefully review any proposed modifications and consult with legal counsel to ensure the contractor’s rights are preserved and protected.

Lastly, where payment is due under a previously awarded contract, the lapse of government funding usually prohibits the agency from making such payments. Even if interest penalties will be incurred by the government under the Prompt Payment Act or other law, invoices for work already performed will likely not be payed if submitted during the duration of the shutdown.

Also keep in mind that contractors who incur costs as a result of a government shutdown are not guaranteed to be reimbursed upon the enactment of an appropriation; therefore, contractors should carefully document all costs associated with bringing work to a halt and restarting operations. Upon the passage of an appropriation and the resumption of government functions, contractors should promptly seek reimbursement of their costs through an appropriate change to the contract.

For advice or assistance on protecting your rights in the event of a government shutdown, For help and guidance in navigating the murky waters surrounding the proper classification and declassification of Government information, contact the Government Contract attorneys at Eckland & Blando LLP.