As the federal government shutdown continues, contractors are left to grapple with growing uncertainty regarding whether certain costs are recoverable or whether certain work can be performed. Previous client alerts emphasized that maintaining open and consistent lines of communication with your contracting officers (CO) is critical. Although some COs may be furloughed and unavailable, it is imperative to establish a record of your decisions, and why you believe those decisions to be reasonable under the circumstances. This client alert: (1) provides actionable advice for contractors who received a stop-work order and need to ensure compliance with contractual requirements—such as the ability to restart work as soon as the shutdown ends—while also maximizing recovery of standby costs and (2) helps contractors navigate scenarios in which no stop-work order was issued. For more comprehensive information on considerations for government contractors during a shutdown, please read our client alert “September 2025: Reducing the Negative Impacts of a Government Shutdown for Federal Contractors.”
1. Your Contracting Officer Issued a Stop-Work Order
Contractors likely received stop-work orders on the first day of the shutdown. What actions will maximize your chance of recovering costs associated with complying with a stop-work order? Document all costs incurred in connection with a shutdown, including wind-down, ramp-up, or acceleration of work, as well as labor costs, consulting, and attorneys’ fees. You should also document all communications with contracting officers, employees, teaming partners, and vendors, including all shutdown-related actions. Generally, expenses incurred as a result of a shutdown should be recoverable, with the exception of backpay and consequential damages, which are not generally recoverable. Both the “Stop-Work Order” and the “Changes” FAR clauses, to the extent incorporated into your contract, may provide a vehicle for recovering your costs. However, the ability to recover will be affected by advance preparation, the level of reasonable mitigation, and documentation of your costs.
More specifically, the biggest question on many contractors’ minds is whether they need to begin furloughing or laying off employees. As the government shutdown continues, the reasonableness of keeping employees on standby becomes more difficult to support. However, if your contract requires highly specialized employees, such as key personnel for which the labor market is extremely limited, those with advanced degrees or certifications, or top-secret cleared personnel, you may be able to justify retaining certain personnel in order to ensure your ability to swiftly return to normal operations once the shutdown concludes. For example, in a case before the Armed Services Board of Contract Appeals, the Board found that the appellant’s decision to retain its employees during the stop-work order period was a reasonable cost because neither it nor its subcontractors would be able to attract and retain qualified personnel if they furloughed the employees without pay in these circumstances, especially given the contract’s emphasis on employee retention and staffing levels.[1] However, a mere claim of specialization is insufficient without a contractual basis, such as contract-specific education or experience requirements, key personnel clauses, or security clearance requirements.
Now that we have established how to determine the reasonableness of retaining certain personnel during a stop-work period, what costs associated with those retained personnel are recoverable? Fringe costs, to include health benefits, are more likely recoverable during a stop-work period if these costs are required by law, employer-employee agreement, or established contractor policy, and meet standard allocability and reasonableness requirements.[2] The recovery of these fringe costs is determined on a case-by-case basis and will be dependent on the level of detail in the supporting information submitted to the contracting officer.[3]
Even if there is a contractual basis to retain highly specialized personnel, contractors still possess a duty to mitigate costs to the government. This duty to mitigate means that contractors must assess all available options, such as temporarily assigning personnel to different projects, or shifting personnel to efforts that are not directly chargeable to a contract, such as ethics compliance or skills trainings, or performing work on bids and proposals.
Bear in mind that there may be additional costs associated with layoffs or furloughs. Following a furlough, FLSA exempt employees must be paid their full salary in any workweek in which they perform any work. Failing to do so risks compromising their exempt status (and thereby making them eligible for overtime). Many states also require that employers pay out a terminated employee’s final pay sooner than the next regularly scheduled pay date. Other states require employers to pay out unused, accrued vacation upon termination of employment, or where furloughs extend beyond a few days. It is important to stay up to date on any pay obligations applicable in your state, as well as WARN Act notice obligations that can apply to mass layoffs. Depending on the circumstances, these costs may also be recoverable.
2. Your Contracting Officer Did Not Issue a Stop-Work Order
a. Your Contract is Funded or Exempted
If your contract is fully-funded and/or exempted from the shutdown (i.e., the government has documented a determination that your performance is essential to life, property, or national security and should continue during a lapse in appropriations), the general rule is that you should keep performing under your contract during the shutdown or else you risk a termination for default. Even if the circumstances of your contract are such that you will operate under this general rule, it is a best practice to confirm in writing with the CO that you will continue performance during a lapse in appropriations. If you were unable to confer with your CO before they were furloughed, it is worth reaching out to other points of contact at the agency who may be able to assist—in particular, supervisors and heads of contracting may still be working, and active-duty military personnel are working.
That said, there are some exceptions to this where a contractor who would otherwise need to continue performing may cease performance during a shutdown. It is critical to seek legal counsel before making that judgment call. For instance, you may be able to stop performance if the contract contains the FAR 52.232-20: Limitation of Cost or 52.232-22: Limitation of Funds and performing further work would cause you to incur costs above those limits. You also may be able to stop performance if your work requires government resources you cannot access during a shutdown—the classic example being a contract that requires access to a government facility that is closed during the shutdown.
Assuming these exceptions do not apply, contractors who are continuing to perform during the shutdown should document their performance as usual. Should any shutdown-related costs arise, contact legal counsel right away for advice on mitigating, documenting, and recovering those costs.
b. Your Contract is Not Funded or Exempted
If your contract is not funded, continuing to work during the shutdown means you will be doing so at risk. Except for the limited exemption described in the section above, the government is generally prohibited by the Anti-Deficiency Act from obligating funds to pay for contract performance when those funds have yet to be approved by Congress. This means that if your contract is not funded or documented as having an exemption such that it can continue during a shutdown, regardless of funding, you are working at risk. Even if government personnel instruct you to continue working, there is risk that the government will not pay for the work performed during the shutdown. The calculus for how to proceed in this scenario is fact- and contact-specific, so you should contact legal counsel right away to determine the best way forward for your particular situation.
If you are reading this after the shutdown ends, having already performed work at risk during the shutdown (particularly if the work was to the government’s benefit or performed at the instruction of your contracting officer), you still have the option to seek equitable adjustment from the government pursuant to the Contract Disputes Act (CDA). PilieroMazza’s REAs, Claims, and Appeals practice group recently addressed the basics of the CDA in its blog series about the Board of Contract Appeals, as well as in its blog regarding the shutdown’s impact on new and pending federal contract disputes.
PilieroMazza is committed to helping government contractors navigate the challenges and uncertainty they’re facing at present and on the horizon. Please contact Sarah Nash , Lauren Brier, Abby Finan, Josie Farinelli, or another member of our Government Contracts, Labor & Employment, or REAs, Claims, and Appeals practice groups if you have any questions or need assistance.
____________________
If you’re seeking practical insights to gain a competitive edge by understanding the government’s compliance requirements, tune into PilieroMazza’s podcasts: GovCon Live!, Clocking in with PilieroMazza, and Ex Rel. Radio.
[1] Dynamics Research Corp., ASBCA No. 53788, 04-2 B.C.A. (CCH) ¶ 32,747 (Armed Serv. B.C.A. 2004).
[2] Labat-Anderson, Inc. v. U.S., 42 Fed. Cl. 806 (1999) (citing FAR 31.205-6(m)).
[3] Chapman Law Firm, LPA v. United States, 113 Fed. Cl. 555 (2013).
