A CB&H Webinar Series for Government Contractors
It is highly possible that the U.S. Government will shutdown at midnight, Friday, April 8th. Will you be prepared? What should you do?
Due to popular demand, Cherry, Bekaert and Holland’s Government Contractor Services Group will be hosting two webinars in the week ahead to help you minimize the financial impact of a federal shutdown on your organization.
This program is designed for Owners, CEOs, COOs, CFOs, and Controllers of government contractors only. There is no fee associated with registration for either webinar.
Shutdown Planning – Are You Prepared?
Wednesday, April 6, 2011 | 11:00 am – 12:00 noon EST
It has been over 15 years since the federal government last went through a “hard” shutdown, when primarily federal workers were furloughed and agencies closed for 27 days. The impact on contractors at that time was significant, but nothing like it will be this year because the government’s dependence on contractors has changed the dynamics of the situation.
Join us this Wednesday as we discuss:
- Communication with your Contracting Officers to establish what he might be able to do to mitigate the financial impact on your organization and allow you to keep working
- Communication with your employees and subcontractors to establish a game plan for handling the possible impacts resulting from a shutdown
- Determining which contracts are exempt from a shutdown and which ones are affected
- What your banker can do for you if your cash flow is impacted and the need for valid and accurate cash flow forecasting
How to Minimize the Impact of a Federal Shutdown
Monday, April 11, 2011 | 10:00 am – 11:00 am EST
In the event of a shutdown, we will be presenting a webinar next Monday morning to define what you should do to lessen the financial impact on your organization.
Join us as we discuss the following:
- Determining the financial impact of the resulting delays and disruptions and the importance of being issued a Stop Work Order or a Termination for Convenience
- Preparations for the submission of a Request for Equitable Adjustment (REA) or Termination Proposal
- Likelihood of cost recovery in today’s economic and political environment
- Where will DCAA be during this whole process
If there is good news and the shutdown is averted, we will notify you via email on the morning of April 11th that there will be no webinar.
Click here for more information. Read More…
The Senate voted today to accept a Continuing Resolution (H.J.RES.44) approved yesterday by the House of Representatives as part of an effort to avoid a possible shutdown of the federal government. This temporary two-week extension grants lawmakers an additional 14 days (through March 18, 2011) to resolve budgetary differences. The extension should allow contractors the opportunity to invoice costs through the end of February and expedite recovery.
Background
It has been over 15 years since the federal government last went through a “hard” shutdown, when primarily federal workers were furloughed and agencies physically closed for 27 days. The impact on contractors at that time was significant, but nothing like it will be this year if the Congress fails to pass a spending bill to keep the government funded past March 18th. The government’s dependence on contractors has changed the dynamics of the situation.
Government employees that will continue to work during a government shutdown are those designated as “essential”: those employees involved in national security and the protection of life and property, including law enforcement officers, disaster assistance personnel, air traffic controllers and transportation safety workers, coastal and border patrol, and those in public health and medical functions. The USPS, since it is not taxpayer supported, Social Security offices, and those related to Medicare and Medicaid services would likely remain open as well.
Contractor employees essential to the operation of these functions and offices would likely continue to work as well. All other activities need to be shut down in an orderly and deliberate fashion. A “hard” shut down will result in the furlough of non-essential government employees. Non-essential government and contractor personnel will be blocked from entering buildings and facilities, and will be prohibited by law from volunteering services during the shutdown period.
Contract and Operations Planning
How will contracts be impacted in the event of a shutdown? Fixed-price contracts that can be performed at a company-site vs. a government-site will be least impacted since they are typically funded at award and your employees won’t be locked out. Cost-type contracts, which contain the Limitation of Funds clause (FAR 52.232-22), and time-and-material contracts would not be funded if there were a shutdown. ID/IQ contracts continue in effect, but no new task orders could be placed. Options for existing contracts cannot be exercised, which could be very detrimental if these is a deadline by which the option must be exercised – try to get an extension before the shutdown.
So what should a contractor do in preparation for a shutdown on March 19th? Planning actions should start immediately.
- COLLECT YOUR GOVERNMENT RECEIVABLES before March 18th if possible!
- COMMUNICATE – Contact the Contracting Officers of each of your contracts that will be affected and ask for his or her guidance as to what facilities will be impacted and who has been designated as essential and should continue working. Determine if access will be denied to government records required in the performance of essential contracts or fixed-price programs. Do NOT fall for a request by the CO to “just keep working we will work it out later”. If appropriate ask for a written Stop Work Order. (In rare cases a Termination for Convenience may be issued. If so, it allows for recovery of costs under the changes clauses in your contracts.) Inform the CO that the shutdown will financially impact your operations and that you will be requesting recovery of these expenses through exercise of the changes or termination clauses in your contracts (i.e., a request for equitable adjustment). You are not waiving your rights to cost recovery. You cannot be forced to work “at risk” or to volunteer your services. Remember, many of today’s Contracting Officers were not in the CO position 15 years ago. They are learning as well. Work with them.
- MITIGATE – Do all you can to mitigate the cost impact to the government. Rather than furloughing employees, send them to training or have them take vacation. Having them charge idle time is non-productive so keep it to a minimum. Have them work on other non-government programs or government programs that are exempted from shutdown.
- DOCUMENT – Immediately establish cost collection points (general ledger accounts, job orders, etc.) to tabulate all cost incurred as a result of the government shutdown. Be sure to accumulate both direct and indirect costs. The shutdown of the government is not a contractual activity and should be recoverable outside of your current contract vehicles. Segregate labor costs, accumulate supplier/subcontractor costs, save all correspondence both hard copy and electronic. There is no such thing as too much documentation. You may want to go back to the beginning of the government’s fiscal year for potential impact documentation.
You need to be proactive to protect your interests. The federal government may try to deny you recovery of cost impacts due to their “sovereign act.” No recovery can be made without showing attempts to mitigate the costs incurred and without extensive documentation.
Cash Flow Planning
The possibility of a government shutdown also creates potential cash flow issues for government contractors that must be dealt with in a very short timeframe. The last government shutdown occurred in 1995, and there are few bankers in the business today who have any experience dating back to the last shutdown.
Contractors should know that if a shutdown occurs, it is probable that there will be NO payments made from any of the government payment offices. Even if contractors have received proper authorization from their contracting officers to keep working, it is highly unlikely that they will be paid for the work until sometime after the shutdown ends. After the 1995 shutdown ended, it took another 30-60 days before payment offices got caught up on paying invoices.
Contractors should give consideration to the following when considering the cash flow impact of a shutdown:
- How much cash does it take to continue operating the business during a shutdown?
- If certain employees will be furloughed and others will continue working, what will the ongoing payroll requirements look like? It is probably best to assume that payroll will remain the same.
- Which subcontractors and vendors need to be paid and which ones can be postponed for payment?
- No one knows how long a shutdown might last, but it is probably safe to assume that the cash impact will last for at least 30 days. Once cash requirements have been determined, the business needs to consider how to meet those cash requirements.
- Contractors who rarely borrow and work off cash reserves need to measure whether their cash reserves will cover 30 days (or more) of cash requirements. If cash reserves are not adequate, it is time to look at whether an existing line of credit provides enough extra cushion. If existing lines of credit do not provide enough cushion, then it is time to talk with the bank about an increased line of credit.
- Contractors who are constant borrowers of working capital need to consider how quickly their bank borrowings may grow. Contractors who are typically borrowing to cover 30-45 days of expenses already while waiting for government invoices to be paid will now find that their borrowing needs may double or more. It is important to discuss this potential with the bank quickly and gauge how fast the bank can provide an increased line of credit.
- Contractors who borrow from their bank on a borrowing base formula need to consider a few other items. Will any current receivables that are close to reaching the bank’s limit of remaining in the borrowing base (usually 90 or 120 days from invoice date) drop out of the borrowing base if a shutdown persists? Will the bank allow the contractor to borrow against new invoices created after a shutdown even if the government will not allow those invoices to be submitted until the shutdown ends? Will the borrowing base be affected by the contractor’s ability to submit invoices through WAWF or other electronic sites if those sites are taken down during a shutdown? Is the bank willing to relax certain financial covenants to account for rapid growth in leverage or contractor receivable balances during a shutdown?
Every business wants to feel that it has a good working relationship with its bank. Those relationships are usually put to the test during difficult or trying times. The possibility of a government shutdown is a time to strengthen your banking relationship.
For more information, please contact your CB&H Government Contractor Services Group:
John Carpenter | bio
757.456.2400
jthcarpenter@cbh.com
Samuel G. Davidson | bio
703.506.4440
sdavidson@cbh.com
It has been over 15 years since the federal government went through a “hard” shutdown (when for 27 days primarily federal workers were furloughed and agencies physically closed).
The impact on contractors at that time was significant, but nothing like it will be this year if the Congress fails to pass a spending bill to keep the government funded past March 4th. The government’s dependence on contractors has changed the dynamics of the situation.
Government employees that will continue to work during a government shutdown are those designated as “essential”: those employees involved in national security and the protection of life and property, including law enforcement officers, disaster assistance personnel, air traffic controllers and transportation safety workers, coastal and border patrol, and those in public health and medical functions. The USPS, since it is not taxpayer supported, Social Security offices, and those related to Medicare and Medicaid services would likely remain open as well. Read More…
