Managing Risk During a Government Shutdown: What Contractors Should Know

Quick Hits

• Identifying Impacted Contracts: Review contract terms and engage your contracting officer to determine if contracts are affected by the shutdown.
• Responding to Stop-Work Orders: Stop-work orders typically require immediate compliance. When complying, be sure to document all related communications and actions.
• Proactive Communication: If no stop-work order is issued, seek written confirmation from your contracting officer on whether to continue work.
• Mitigation Strategies: Manage financial exposure, communicate with employees, and explore legal remedies to recover costs or schedule delays.

A government shutdown occurs when Congress and the president fail to pass and sign a funding bill before the deadline, resulting in a lapse in appropriations and the cessation of nonessential federal operations. The current fiscal year appropriations measure that passed on November 12, 2026, will expire at the end of this month. For contractors, this can mean significant disruptions to ongoing programs and potential financial risks from incurring unrecoverable costs or lost performance time.

To determine whether contracts will be impacted by a government shutdown, first review the terms and conditions of the contracts to verify when the currently obligated funds will expire (typically referred to as the “funded” amount in the contract or most recent modification). Contracts funded by annual appropriations are most likely to be affected. (A general rule of thumb: if a contract was disrupted during last year’s shutdown, it likely will be impacted again in another shutdown.) Additionally, and perhaps most importantly, consult with your contracting officer (CO) to understand the specific implications for the work. Maintaining clear communications with the CO in the run-up to a funding lapse is critical to obtaining an accurate understanding of when funding for the work would expire and what would happen when it does.

There are several steps that contractors can take to mitigate risk related to contracts affected by a shutdown:

• Stop-Work Orders: Contractors receiving stop-work orders are encouraged to comply immediately and ensure any subcontractors or suppliers comply as well. Consider documenting all communications with the CO and actions taken in response to the order. This documentation will be crucial for any future equitable adjustments to recover extra costs incurred from complying with the stop-work order or gaining an extension of time to the delivery schedule.
• When No Stop-Work Order Has Been Issued: If no stop-work order has been issued, but funding has lapsed, communicate proactively with the CO and seek written confirmation on whether to continue work or to cease operations. Continuing work without funding authorization—i.e., “working at risk”—can result in nonpayment of incurred costs. With very limited exceptions, a contractor cannot be required to continue to work after a lapse in funding.
• Financial Management: Assessing the financial exposure and taking steps to manage cash flow are critical. This may include negotiating with subcontractors and suppliers to delay payments or reduce costs temporarily. Review payment terms with subcontractors and suppliers for “pay when paid” conditions or how interest for late payment could be owed.
• Employee Management: Communicate with the workforce about the potential impacts of the shutdown. Consider implementing temporary furloughs or reduced work hours to manage labor costs while ensuring compliance with labor laws and contract requirements.
• Legal and Contractual Remedies: Exploring the available legal and contractual remedies is advisable. This may include submitting requests for equitable adjustments when the shutdown ends due to delays or increased costs resulting from the shutdown.

Next Steps

By taking these proactive steps, contractors can better manage the risks associated with government shutdowns and ensure they are prepared to navigate the complexities of federal contracting during periods of funding uncertainty.

Ogletree Deakins’ Government Contracting and Reporting Practice Group and Workforce Analytics and Compliance Practice Group will monitor developments and provide updates on the Government Contracting and Reporting and Workforce Analytics and Compliance blogs as additional information becomes available.

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