ALLEN FEDERAL BUSINESS PARTNERS

Although your federal customers do have to prepare as if there might be another partial shutdown, Allen Federal is placing the odds of such an event at well below 50-50.  That doesn’t mean that we’re predicting that all of the issues that led to the first shutdown will magically be addressed, but rather that there is little will in Congress, especially in the Senate, to go through another shutdown event for quite some time.  It is quite possible that Congress could vote to fund the agencies in play and decide separately on the President’s border wall initiative.  Another scenario is that Congress sends another CR to the President who then vetoes it, only to have that veto overridden.  Either way, agencies currently operating under a CR are likely to continue doing so for the foreseeable future.  That’s not the best news for contractors, but it does keep agencies open and provides an opportunity for discussions about future business when and if formal appropriations are made available.  One wild card to watch is what the President says tomorrow night in his State of the Union address.  That may provide clues as to whether a grand deal is achievable, potentially resulting in actual appropriations measures being passed in the short-term.  In the meantime, the government is open for business, albeit with morale and weather issues making it slow going.

Federal worker morale took an unprecedented hit during the 35 day partial shutdown.  One need look no further than the comments scrolling on the Federal News Network web page to get a glimpse of the feelings.  Contractors are well advised to show some empathy and understanding as current and potential clients shake off the cobwebs and get back to work.  Speaking of which, there is a lot of it that has accumulated since the shutdown.  The need for government work to do be done doesn’t stop because no one is there to do it.  Your customers face a daunting backlog of existing project management, planning for new projects, and training.  It will take some time to work itself out.  Add to this the prospect of another closure (despite the rhetoric, even experienced Washington hands are uncertain over whether this could happen) and a picture emerges that there will nothing resembling “business as usual” for perhaps a month and maybe more.  It should be noted, however, that “wait and see” is not really a good approach, either.  Allen Federal is hearing from companies, and government agencies, that business is getting done.  Larger projects that may not be executed until warmer weather (!) are, indeed, being planned.  The best advice is to know your customer.  Some are ramping up quickly, while others may have much other work to get to before they feel they can speak with industry.  Don’t take it personally. 

It is an established government contract rule that small businesses cannot have a large business perform more than 50% of the work on non-construction government contracts.  Congress and the SBA have been quite clear that they want bona fide small firms to benefit from the award of a contract and not act as a pass-through.  What about small businesses, though, that subcontract with other small businesses?  Up until now there has been substantial confusion over whether a small subcontracting with the same type of small counts against the 50% limit.  A proposed rule would eliminate the ambiguity and make it clear that, for example, a HUBZone small business can subcontract with another HUBZone small business and not have that subcontract count against the limitation on subcontracting rule.  The FAR Council issued the proposed rule December 4^th, with the comment period closing at COB today.   Upon finalization, the rule will allow small businesses to subcontract with other similarly situated small businesses without having those subcontracts count against limitation calculations.   Rather, the work would be counted as if it were performed by the prime contractor.  It is important to note that this rule change does NOT impact large businesses working with a small business on a set-aside contract.  Passing through more than 50% of the business on such a contract is outside the rules

Apparently the specter of planes falling from the skies was enough to convince the White House and Congressional leaders to forge an agreement to re-open agencies that had been shuttered for 36 days.  The President has signed a Continuing Resolution passed by Congress that will re-open agencies such as DHS, Transportation, State, Agriculture and others that had been shuttered through February 15^th.  As a practical matter, however, it is highly unlikely that another shutdown is in the works after that time given the substantial impact on the people and programs essential to issues like national security and transportation safety.  A CR will allow agencies to continue doing what they had been doing in FY’18, at approximately the same dollar levels.  It will also allow past-due invoices to be paid.  About the only thing that a CR will not allow is the start of new projects that need CR money to fund them.  That still requires an official FY’19 appropriation. 

Keep in mind, though, that new projects are being worked on, and never really stopped, in DOD, HHS, the VA and other agencies that account for 70% of discretionary spending.  Business was being conducted during the shut-down.  DISA moved forward on its planned massive DEOS cloud buy, GSA edged closer to issuing ATO’s to EIS contractors, and HHS continued to make innovative use of technology in acquisition.  There is definitely business to be had in these agencies and contractors would be wise to focus on the dollars that are definitely available.

Prospects for appropriations for agencies operating under a CR are unclear at this time, but may become clearer as the next three weeks unfold.  Stay tuned.

One piece of good news coming from the end of the partial government shutdown is that contractors may be able to recover certain costs incurred that are associated with the closure.Several regulatory clauses, such as the FAR’s Suspension of Work, allow for contractors to be compensated.  Companies will have to move quickly once the agency that owes them money re-opens, though, as most of the clauses offer a short timeframe in which incurred costs can be covered.  Another best practice is for contractors to set up specialized charge codes for closure-incurred costs.  That way, it is clearly visible to both the contractor and its client that specific costs were associated with the shutdown, separate and apart from costs incurred in the course of normal business operations.  Contractors may even be able to collect interest on overdue payments as well.  Guidelines issued by the previous White House during the 2013 shutdown provided for interest to be paid under certain conditions.  This has been pointed to by some in government now as a precedent that could allow for payment this time.  It is essential for contractors to check their specific contracts to ensure that the proper clauses are included, whether for cost plus or time and material work.  Also, be prepared to move quickly so that you don’t lose any more money than you have to as a result of the partial closure.