By Ken Larson
Nearing the end of a government fiscal year or under a government shutdown a contractor may find delays in funding reaching all the way to congress. This situation must be managed with the government contracting officer.
In the event of a government shutdown, the government reserves the right to order a cease work. Actions must be taken recognizing receipt of a stop work order and the relationship of the order to resumption of effort, funding constraints, contract terminations and associated business risk.
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LIMITATION OF FUNDS AND FUNDING EXPOSURE
Some contractors choose to operate on “risk,” continuing to perform on a contract while exceeding the incremental funding in booked cost and obligations. The government is under no obligation to reimburse the contractor for amounts exceeding incremental funding.
Many federal contracts are funded incrementally, usually based on the government fiscal year that runs from 1 October to 30 September. Although the government may negotiate dollar price ceilings for cost plus and time and materials contracts or firm, fixed total price arrangements, the contracts themselves may be incrementally funded, particularly if they extend over two or more government fiscal years. A contract may contain negotiated prices or a cost ceiling but also specify an incremental funding value.
The contractor is required to inform the government when actual costs incurred plus obligations to suppliers or payroll on a specific contract reach certain thresholds of the current incremental funding specified in the contract (usually 80%). The government is then obligated to further fund the contract. In the event the contract is not funded further, the contractor has the right to stop work before he exceeds the incremental funding. If a contract is not funded to continue and the contractor has performed to date in accordance with all required terms, the government retains the right to terminate the contract for the convenience of the government. This requires a special notification to the contractor from the government and usually occurs due to changes in government priorities. The contractor may then bill the government for all costs and obligations to date, plus any direct and indirect extraordinary costs associated with business disruption, termination administration, employee layoff cost and the like. Terminations for convenience are very expensive for the government. Nevertheless, limitation of funds and funding exposure must be carefully monitored by an astute small business. To properly manage incremental funding, the business system must be capable of accounting monthly for all direct and indirect costs on each contract, plus commitments to suppliers and employees in the form of open purchase orders and unpaid or unposted payroll.
YOUR RIGHTS AND OBLIGATIONS UNDER A GOVERNMENT CONTRACT STOP WORK ORDER
The purpose of a stop work order is to immediately bring to a halt the effort on a contract and any further performance and related cost against that contract.
A stop work order is to be taken literally. Under a stop work order the government makes no guarantees it will take any further deliveries whatsoever, regardless of the contract type. A stop work order means just that. Stop work and stop incurring cost. Upon receipt of a stop work order you have no guarantee of payment for any transaction date-stamped in your accounting system after the date of the stop work order (or the commencement date of a stop work order specified in a Contracting Officer’s Letter). I suggest clients receiving these orders close the charge numbers applicable until the stop work order is lifted with an order to resume effort and immediately notify any effected suppliers and subcontractors to do the same.
To the degree the government has made progress payments or has any other form of payment invested in the product to date it has ownership rights in the product. If that is the case treat the physical material work-in-process as government owned, store it as such without performing any more effort on it and await further disposition. To the degree the government has not paid anything on the contract or delivery order they have no ownership rights to the product and you are free to complete it and sell it to another customer (commercial or government) that has not stopped work. If the government recommences the order, quote a new price and delivery from ground zero. At the bottom line a stop work is blunt and to the point. Treat it as if you will never hear from this customer again to manage the risk. To the degree you do hear from the CO again and he or she has the funding to recommence work, be prepared to submit a proposal for what it will take to start the effort and a realistic delivery schedule to complete it, but do not build any retroactive costs incurred during the stop work period into your pricing and expect to bill them; that may not come to payment fruition.
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