Shutdown Woes: Key Legal Considerations and Guidance for Government Contractors

We are not even through January 2026, and a lapse in federal appropriations appears increasingly possible, raising the prospect of a partial government shutdown. Multiple funding bills – including for the Department of Defense, the Department of Homeland Security, and the Department of Health and Human Services – remain stalled. And while government shutdowns are nothing new, they can be confusing to navigate and present contractors, both large and small, with meaningful legal, operational, and financial risk.

This article provides a top-level overview of how a shutdown can impact federal contracting. It highlights several key legal considerations and outlines practical guidance that contractors should heed to mitigate risk and preserve contractual rights.

The Backdrop: The Anti-Deficiency Act

At the center of any government shutdown is the Anti-Deficiency Act (“ADA”), 31 U.S.C. § 1341 et seq. The ADA generally prohibits procuring agencies from: (1) incurring obligations or making expenditures in excess or in advance of available federal appropriations, and (2) accepting voluntary services, except in limited circumstances involving emergencies related to the safety of human life or the protection of property. For contractors, this means:

• Agencies lack authority to obligate funds during a lapse in appropriations unless the work is supported by available appropriations (e.g., no-year or multi-year funds) or qualifies as an “excepted” activity.

• Agency personnel may be prohibited from directing or authorizing contract performance during a shutdown, and many officials – including contracting officers – may be furloughed.

• Unauthorized commitments are difficult to ratify after the fact, particularly where the ADA is implicated. Contractors that perform work without proper authorization risk nonpayment.

Because ADA violations can result in significant administrative and disciplinary consequences for government officials, agencies typically act conservatively during shutdowns. Contractors should likewise do the same.

Which Contracts May Continue During a Shutdown?

Whether contract performance may continue depends primarily on the source of funding and the nature of the work. For example, during a shutdown, contractors should expect that the government will not issue any new contract awards (or grants), modifications, or option exercises that depend on future appropriations. Contractors also should consider that:

• Fully funded contracts, including those supported by no-year or multi-year appropriations, may continue, subject to agency direction.

• Incrementally funded contracts may be affected once available funds are exhausted. Relevant clauses include FAR 52.232-18 (Availability of Funds) and FAR 52.232-19 (Availability of Funds for the Next Fiscal Year).

• Excepted activities – those necessary to protect life or property – may continue during a shutdown, but agencies make these determinations unilaterally and often narrowly.

Contractors should not assume that performance may continue simply because work continued during prior shutdowns or because funds were previously obligated. Each shutdown is fact-specific, and agency guidance may change quickly as circumstances evolve.

Given that the impact of a government shutdown can vary widely, contractors should carefully review official communications, confirm funding status, and seek written direction from contracting officers before proceeding with any work.

Stop-Work Orders and Suspensions of Work

Agencies commonly rely on various FAR-based contractual mechanisms to pause contract performance during a government shutdown. These contractual provisions include, for example:

• Stop-Work Orders may be issued under FAR 52.242-15 (Stop-Work Order), authorizing the government to require the contractor to stop all or part of the work for up to 90 days.

• Suspension of Work may occur under FAR 52.242-14 (Suspension of Work), particularly in construction and architect-engineer contracts.

• In some circumstances, agencies may ultimately pursue termination for convenience under FAR Part 49 if funding is not restored.

Under the FAR, stop-work orders should include: (1) a description of the work to be suspended; (2) instructions concerning the contractor’s issuance of further orders for materials or services; (3) guidance on actions to be taken for any subcontracts; and (4) suggestions for minimizing costs. FAR 42.1303.

Contractors must remember to strictly comply with any government stop-work or suspension directives. Continuing to perform after receipt of such an order may jeopardize cost recovery and create performance risk.

Cost Recovery 

Where the government issues a stop-work order or suspends contract performance, government contractors may be entitled to an equitable adjustment for allowable costs to the extent those costs result from the government’s action. See FAR 52.242-15(b); FAR 52.242-14(b). Recoverable costs may include, for example, certain idle labor and reasonable demobilization and remobilization expenses. Contractors generally may not recover lost profits, and costs incurred without authorization or “at risk” are unlikely to be recoverable.

Delayed Payments and Cash-Flow Risk

Even where contract performance continues, shutdowns frequently disrupt invoice review and payment processing due to furloughs of contracting, program, and finance personnel. The Prompt Payment Act, 31 U.S.C. § 3901 et seq., remains in effect, but practical delays are common. Contractors should therefore assess cash-flow exposure and plan accordingly.

Preserving Claims and Contractual Rights

Contractors should be mindful of notice requirements and the distinction between requests for equitable adjustment and claims (including certified claims) under the Contract Disputes Act ("CDA"), 41 U.S.C. §§ 7101–7109. Careful and contemporaneous documentation of shutdown-related impacts will be critical to supporting recovery efforts once normal government operations resume.

Proposal Activity

During a shutdown, many procurement activities slow or pause due to furloughs and government office closures. Proposal submission deadlines may be extended, amended, or remain unchanged (albeit less common). Contractors should continue to monitor SAM.gov and other solicitation portals closely and comply with any revised instructions issued by the contracting officer. Absent written confirmation, contractors should not assume that deadlines are automatically tolled.

Practical Steps Contractors Should Take Now

1. Review Contracts and Funding Status. Identify which contracts, task orders, and CLINs are fully funded, incrementally funded, or dependent on annual appropriations. Review applicable clauses, including funding, stop-work, suspension, changes (e.g., FAR 52.243-1), and termination provisions.

2. Seek Clear, Written Direction. Contractors should request written guidance from the contracting officer regarding whether performance should continue during a shutdown. Only contracting officers (or properly authorized officials) may direct changes to performance. Oral guidance should be documented contemporaneously.

3. Avoid “Working at Risk.” Continuing performance without funding or authorization presents substantial nonpayment risk. The ADA significantly limits the government’s ability to ratify unauthorized commitments after the fact.

4. Contemporaneously Track Shutdown-Related Costs . If performance is stopped or suspended, contractors should segregate and carefully document shutdown-related costs to support potential equitable adjustment requests.

5. Manage Workforce and Subcontractors. Contractors should plan for workforce impacts, including potential furloughs or reassignments, consistent with labor and employment obligations. Prime contractors should communicate promptly with subcontractors and ensure compliance with flow-down requirements and government direction.

6. Monitor Agency-Specific Guidance. Agencies typically issue shutdown contingency plans identifying excepted activities and points of contact. Contractors should monitor agency communications closely, recognizing that guidance may change quickly.

7. Prepare for Restart. Shutdowns often end with little notice. Contractors should plan for rapid resumption of performance, including re-mobilizing personnel, coordinating with subcontractors, and addressing schedule impacts.

Conclusion

Government shutdowns are disruptive but nevertheless can be managed effectively by contractors that understand the legal issues – and constraints – governing agency operations and contracts. Successfully navigating a shutdown requires a disciplined, well-documented approach to performance, as well as careful attention to both government communications and the applicable legal frameworks. Advance planning, conservative decision-making, and clear communication are essential to protecting contractual rights, minimizing disruption, and reducing overall risk.

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