Contractors fear retaliation if they try to recover shutdown costs

Contractors who sell to the federal government have certain rights to recoup costs inflicted by the federal shutdown, but will they dare to exercise them?

“After the DOGE actions to eviscerate USAID and pretty much punish many, many agencies and terminate thousands of contracts, I think the contractor community is tentative to actually enforce their rights,” David Dixon, an attorney at Pillsbury Winthrop Shaw Pittman, said Thursday as part of the law firm’s DC Disrupted webinar series.

Dixon said contractors are asking him a question that reveals the depth of their anxiety: Will the government retaliate for simply asking to be reimbursed for costs caused by the shutdown?

The processes for recovering costs are well-established; they include administrative means such as “requests for equitable adjustment.” Contractors use this process to seek compensation when government delays or changes increase their costs or extend timelines.

“These are regular administrative functions that every contractor should be aware of and should be able to process,” Dixon said. “Requesting an equitable adjustment should be a standard action that shouldn’t cause retaliation at all.”

But contractors are currently caught in a legal and operational vise created by the Anti-Deficiency Act, which prohibits agencies from spending money that hasn’t been allocated.

This means agency contracting officers cannot award new contracts, modify existing ones or exercise contract options.

Dixon shared a story of a company that completed work for a Federal Supply Schedule renewal on the eve of the shutdown. The company was negotiating large orders with customers.

But then the shutdown hit. The contracting officer could not exercise the option and the contract expired. The orders could not be awarded.

“What do they do with their employees now that they can’t get this contract?” Dixon said.

That is just one example of the mounting losses contractors face. Financial damage can accumulate in multiple ways:

• Idle labor costs.
• Storage expenses if deliverables stack up in warehouses.
• Engineering delays as teams wait for approvals.
• Contract termination risks because missed deadlines can trigger contract cancellations.

Contractors may have mechanisms to recovers some costs, but the Trump administration has created an atmosphere of fear.

“There was a belief among folks in the administration at the beginning of this shutdown that they could effectively create a little bit of pain for Democratic constituencies by canceling government funding, particularly grants,” said Craig Saperstein, another Pillsbury attorney.

The Office of Management and Budget made early moves to focus on “what we would think of as blue states or blue areas of states,” he said.

The tactic has brought little pressure on Democrats to come to the negotiating table. But Saperstein said the message to contractors is clear – the Trump administration is willing to use federal funding as a political weapon.

“A lot of times clients are finding they don’t want to rock the boat because the landscape’s just too uncertain,” said Aaron Ralph, a third Pillsbury attorney. “They have other awards they want to continue performing on.”

Despite the fear, contractors should not abandon their rights.

Dixon laid out three steps contractors should be taking:

1. Understand your contracts. Review the clauses that govern suspension of work, stop work orders, delay of work, and changes. Make sure your contract staff understand these clauses.
   
    
2. Document everything. Add memos to files noting what the government was supposed to do, when they did not do it and what the effect was. Accounting line items should track costs needed to be recovered.
   
    
3. Consider timing strategically. Contracts require that companies notify contracting officers within 30 days if they need to make a request for equitable adjustment. Companies should also keep in mind that the Contract Disputes Act gives contractors six years to submit claims from the date they accrue. As Dixon said, “it’s not the end of the world” if the customer does not negotiate.

“If you are fearful right now because of the uncertainty in this administration, you should make the request for equitable adjustment as soon as possible,” he said. “But you can wait it out a little bit if you need to.”