Congress has not passed crucial funding bills for the start of Fiscal Year 2026.  If Congress fails to act by September 30, the government may be forced to shut down for lack of funding.  In anticipation of that possibility, agencies government-wide are preparing for a shutdown, and contractors and companies that work with the government should do so as well.  Our team is ready and available to help advise companies through the shutdown process.

I. What Is a Government Shutdown?

The federal government may only spend or promise to spend in the amounts, for the purpose, and subject to the conditions Congress sets out in its annual appropriations bills.  A government shutdown occurs when Congress fails to pass appropriations for a new fiscal year before the prior fiscal year expires on September 30. 

Simply put, without an appropriations law passed by Congress and signed by the President, the government generally has to stop spending money, meaning it must shut down operations, close offices, and send employees home.  There are a few notable exceptions: even in a shutdown, the government can continue activities involving the safety of human life or the protection of property; required to carry out constitutional functions; or funded through other means, such as irregular appropriations, user fees, working capital, or unexpired prior-year appropriations.

II. What Is Different About This Potential Shutdown?

The Office of Management and Budget (OMB), the central budget policy body for the executive branch of the federal government, reportedly released a memo to agencies directing them to take steps to end programs, projects and activities supported by “discretionary” funds that did not receive additional appropriations through the One Big Beautiful Bill Act, and that “are not consistent with the President’s priorities.”  The memo takes the position that a shutdown would essentially mean that those programs “are no longer statutorily required to be carried out” and agencies “are directed to use this opportunity to consider Reduction in Force (RIF) notices for all employees” supporting those programs, projects, and activities.

If the directions in the OMB Memo are carried out, it could have impacts beyond a government shutdown, including delaying agency restarts when the shutdown ends, and becoming a longer-term impediment to contract and grant administration.

III. Shutdown Impacts on Contractors and Grant Recipients 

The direct impact on any federal contractor or grant recipient will vary based upon the terms of their individual funding instruments, but there are a number of common questions all are likely to face:

• What is the Contracting or Awarding Agency’s Plan? Agencies across the government are issuing shutdown operating plans.  For example, the Department of Defense, Department of Homeland Security, Department of Health and Human Services (and its operating divisions), Department of State, Department of Veterans Affairs, Department of Transportation, Department of Energy,^[1]Small Business Administration,^[2]Environmental Protection Agency,^[3]and federal Judiciary have all issued shutdown guidance for a lapse in appropriations for FY2026.  The plans restate general rules that contractors and grant recipients should continue performing under contracts awarded and funded prior to the shutdown, but that agencies may not issue modifications or award new contracts, options, or grants, unless they are related to “excepted” activities.  The plans also reflect the probability of furloughs of large numbers of government personnel.  Contractors and grant recipients should review their contracting or awarding agency’s guidance to understand any agency-specific plans.
  • The Office of Personnel Management has issued guidance for agencies, but has not updated its own shutdown plan from 2023.
• What Happens if the Program, Project, or Activity My Agreement Supports Is Terminated in a Shutdown? As agencies implement OMB’s guidance, some agencies will identify programs, projects, or activities that are not supported by mandatory funds, did not receive supplemental appropriations in the One Big Beautiful Bill Act or another source of funding, and have been deemed not to support the President’s policy priorities.  Contractors and grant recipients should pay special attention to the sources of authorization and appropriation for their contracts and/or grants, and be aware of potential impacts.  
• What Happens if Performance Is Delayed or Disrupted? Due to the unavailability of appropriated funds, contractors and grant recipients may be unable to access closed government facilities or obtain timely approvals, directions or support from the government.  For example, a contractor that performs services in a federal facility may find that the facility is closed, so the contractor’s employees do not have access to their workplace.  In that situation, the contractor would need to consider employment law implications of its actions, discussed more below.  Contractors and grant recipients should track and document the cost and schedule impact of both the disrupted work and their employee relations actions so that a potential future modification can appropriately reflect any increases in their work associated with the shutdown. 
• Can My Contract Workload Increase? Some contractors may be approached by their government customer seeking to off-load, at least temporarily, work that cannot be performed by the government during the shutdown period.  If contract funding is available, the government may want to increase the scope of the contract in order to ensure that certain work is not disrupted or delayed.  Contractors should track and document any changes in workload to ensure that any increases in scope and associated cost or price adjustments are appropriately reflected in a contract modification.
• Can I Stop Performance? In extreme circumstances, contractors or grant recipients may have to question whether to continue performance in the face of potentially material government failures to pay.
  • A unilateral cessation of work involves considerable risk for a contractor, particularly considering the duty to proceed imposed by the FAR “Disputes” clause.  FAR 52.233-1 requires that “[t]he Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract.”  The “Alt. I” version of the Disputes clause extends that duty further to issues “relating to” the contract, which is generally understood to include government breach.  Failure to comply with the duty to proceed can be an independent basis for the government to terminate a contractor for default.  Contractors considering unilateral cessation of performance should first seek legal guidance based upon a detailed analysis of the relevant facts and law.
  • Grants often lack a provision allowing the government or the recipient to pause their work.  Grant recipients should review their agreements for specific terms regarding work stoppages and any duty to proceed.
• Where Is the Money? For incrementally funded awards, contractors and grant recipients will need to consider the implications of the various standard clauses (Limitation of Costs, Limitation of Funds, Limitation of Government Obligations) that may affect the government’s obligation to pay costs in excess of the amounts already obligated to their contracts or grants.  Of particular concern will be the standard provisions in those clauses that may limit the government’s liability for termination costs in the event that the contracts are eventually terminated without new funding.  But for contracts and grants that are fully funded or that have incremental funding sufficient to cover all anticipated costs, including termination costs, a shutdown would not normally create new funding risks.
• When Will I Be Paid?There may be delays in payment. As noted above, the government’s ultimate legal liability for payments due on contracts and grants that are already funded at the time of the shutdown is unlikely to be an issue, but if government employees who process contractor invoices and grant recipient drawdown requests are not at work, payments are likely to be delayed.  
• What Remedies Are Available?Agreement type and the availability of a remedy from the government for the consequences of a shutdown will also be important in the decision-making process. For contractors and grant recipients with cost-reimbursement contracts, reasonable costs associated with a shutdown should be recoverable, although there may be allocability and allowability issues on specific cost items.  On fixed-price contracts, any recovery from the government will likely depend on whether the contractor is entitled to an equitable adjustment. And, on time and materials contracts, there are likely to be contract-specific issues about whether the contractor is entitled to be paid under the contract for idle time or would need to make a claim for an equitable adjustment. Again, every situation should be assessed separately, based on specific facts. In general, however, contractors and grant recipients should take steps to ensure that any increased costs associated with the shutdown are recorded and itemized to support a claim or a request for equitable adjustment, if one becomes necessary.
• Can I Protest a Solicitation or Award During a Shutdown?  While agencies are unlikely to issue new solicitations or award new contracts during the shutdown, contractors may still have timely protest issues at the start of the shutdown period.  Contractors considering protest should note that the Government Accountability Office (“GAO”) is likely to be closed during the shutdown.  Historically, GAO has considered protests filed on days when the office is closed to be filed at 8:30 a.m. on the first day that GAO reopens.  If that is the case, protests filed during the shutdown may be considered untimely, but that untimeliness may be excused.  Protests in the Court of Federal Claims may continue until the judiciary’s funds expire, as noted above, although delays are possible given that Department of Justice attorneys may be furloughed.

IV. What Is the Impact on Workers Supporting Federal Contracts or Grants?

Two primary employment issues can arise in the shutdown: (1) jeopardized Fair Labor Standards Act (FLSA) and state-law corollary exemption status for employees who are “exempt” from minimum wage and overtime requirements; and (2) Worker Adjustment and Retraining Notification (WARN) Act obligations.

During a government shutdown, many government contractors implement unpaid furloughs of employees. FLSA exemption issues can arise when unpaid furlough periods reduce   the compensation level of exempt employees below the threshold required for them to maintain their exempt status under federal, state, or local law. For example, an exempt executive, administrative, or professional employee must be paid a salary of at least $684 per week to maintain their exemption under the FLSA and is entitled to be paid in full for any week in which they perform any work. Contractors implementing mid-week furloughs that do not pay exempt employees for the portion of the week they did not work jeopardize those employees’ exempt status by doing so.  These contractors also risk the exempt status of other employees in the same job classification working for the same supervisors.  If employees’ exempt status is lost, employers will be required to pay overtime to those employees who work over 40 hours in a workweek and for such other periods required under applicable state and local laws.

To avoid the loss of employees’ exempt status, contractors should ensure that exempt employees do not perform any work at all during weeks in which they are in an unpaid furlough status. Employers should be aware that work includes checking emails and work-related text messages, for example.  Employers should consider what steps are necessary to ensure that employees who are on unpaid furlough are not performing work.  This may include temporarily blocking access to company networks and clearly communicating expectations to affected workers.  Contractors may also consider requiring exempt employees to use accrued vacation pay or other paid time off during the furlough period to mitigate these risks, provided such a requirement complies with company leave policies and applicable law. 

Furloughs may also trigger federal or state-equivalent WARN requirements. The federal WARN Act and its state-law equivalents generally require that an employer implementing a mass layoff must provide affected employees with 60 days’ notice. While a layoff does not trigger the federal WARN Act until it exceeds six months (which is an unlikely duration for a shutdown), state WARN requirements may apply. For example, in California the state WARN Act does not specify the duration of a qualifying layoff, and at least one court has required California WARN notice for layoffs that lasted only three to five weeks. See Int’l Bhd. of Boilermakers v. Nassco Holdings Inc., 17 Cal.App.5th 1105, 1112 (Cal. Ct. App. 2017).

As a shutdown approaches, contractors should incorporate plans for addressing these employment issues into their contingency plans for a potential shutdown.