Considerations for Federal Contractors as Government Shutdown Continues

As the government shutdown enters its fifth week, federal contractors face increasing uncertainty regarding the continuation of work and payment obligations. While agencies are bound by the Antideficiency Act (31 U.S.C. 1341-1342, 1511-1519), which restricts obligations in the absence of appropriations, certain exceptions may still permit limited activity. However, the prolonged duration of the shutdown intensifies the need to evaluate whether contract and grant performance should continue, be postponed, or cease altogether. Contractors should remain alert to evolving legal and operational considerations—especially as previously obligated funds are exhausted and agencies reassess the necessity of ongoing activities.

In light of these challenges, it is essential for contractors to understand the legal framework governing federal obligations during a lapse in appropriations. Operating under the constraints of the Antideficiency Act, agencies are generally prohibited from incurring new financial obligations without enacted appropriations. However, four specific exceptions may allow agencies to continue obligating funds during a shutdown. Familiarity with these exceptions is critical for contractors seeking to determine whether their work may legally proceed:

1. Statutory Authorization: where a statute explicitly permits an agency to obligate funds in advance of appropriations.
2. Emergency Circumstances: where halting a function would imminently threaten human life or property.
3. Presidential Duties: where the function is essential to the President’s constitutional responsibilities.
4. Necessarily Implied Continuation: where the function must continue because it is necessarily implied by other authorized activities (often defense contractors will fall under this exception).

Even when the obligation of funds is permitted under these exceptions, payments to contractors cannot be made until appropriations are enacted.

Understanding the legal exceptions to the Antideficiency Act is only the first step for federal contractors navigating a government shutdown. The practical implications of these exceptions—and how they apply to specific contract and grant activities—require careful analysis. Agencies and contractors alike must assess not only whether work may legally continue, but also whether it should proceed in light of operational constraints, funding availability, and potential risks. The following section outlines key considerations for contractors evaluating whether and how to maintain performance during a lapse in appropriations.

Implications for Federal Contractors

Contractors may continue work during a lapse if:

• Funds were fully obligated before the lapse.
• Continued performance is “necessarily implied” which happens in the following instances:
• Conducting an orderly shutdown.
• Supporting excepted activities (e.g., emergency services).
• Preventing significant damage to a funded function.
• If grant funds are still available, and delaying a required approval during a funding lapse would seriously disrupt the program, then the grant administrator’s review and approval may be allowed as a “necessarily implied” activity—even though the funding for grant administration has lapsed.
• The key factor is whether the funded program would be significantly harmed without the unfunded action.

However, if obligated funds have expired, continued federal supervision or support is not automatically justified. Therefore, agencies must assess whether:

• Another exception applies.
• The contractor or grantee can proceed independently.
• Statutory authority implies continued performance is necessary.

In cases where supervision is not critical, contractors or grantees may proceed with their work without federal involvement if they had already been allotted the funds and have not received a stop-work order or other communication from the government to pause or stop work on the contract.

If a contractor is unable to continue their work and does not fall into one of these exceptions then they need to ensure that they are documenting and saving all documents and communications about any costs incurred that will result in an increase in price as well as salaries of employees who were essential to keep working. Normally when this happens the government will issue a stop-work order, and contractors should ensure they follow all instructions and document all expenses for when the contract is either allowed to continue or cancelled.  We have written about these best practices in a prior Client Alert.

Evaluating Continuation of Federal Activities During a Funding Lapse

While contractors must assess their own ability to continue performance under existing obligations and applicable exceptions, agencies likewise bear responsibility for evaluating whether federal activities should proceed during a lapse. The following section outlines the key factors agencies consider in determining the legal and operational viability of continued performance.

When federal appropriations lapse, agencies must carefully assess whether federal employee activities (such as making payments) and contractor performance should continue. Now that the government shutdown approaches its second month, some of the following factors become increasingly important in determining which contract and grant activities may continue. Agencies must consider not only the nature of the activity but also whether it can be postponed, whether previously obligated funds remain available, and whether continued performance is legally and operationally justified.

The following factors are key to that evaluation:

• Postponement Feasibility: Agencies should determine whether the activity or performance can be delayed until appropriations are enacted.
• Impact of Duration:
• Some activities may not qualify for continuation during a short lapse but may become necessary if the lapse extends.
• Conversely, activities that were justified at the outset of the shutdown—such as initial shutdown procedures or one-time approvals—may now be considered discharged or redundant. Agencies will reassess these activities to determine whether they remain necessary as the lapse continues and contractors should be prepared.
• Funding Exhaustion: As the shutdown continues, agencies must now more frequently confront situations where previously obligated funds have been exhausted. In such cases, continued contractor or grantee performance may require new obligations—raising legal and operational concerns under the Antideficiency Act.
• Legal and Operational Analysis: With the shutdown entering its fifth week, agencies must intensify their legal and operational analysis to determine whether continued performance is still justified. Prolonged lapses may alter priorities, rendering previously necessary activities wasteful or impractical.
• Clear Communication: Agencies should proactively communicate with contractors and grantees to avoid misunderstandings about funding status and performance expectations.

As the shutdown continues, contractors must remain attentive to both legal constraints and operational realities. Timely documentation, clear communication, and a firm grasp of applicable exceptions are essential to managing risk and preserving rights. Members of Butzel’s Aerospace and Defense Industry Team are available to advise you. We encourage you to reach out to the authors of this Client Alert or your Butzel attorney for further information.

Derek Mullins
313.983.6944
mullins@butzel.com

Kristina Pedersen
734.213.3601
pedersen@butzel.com