The recent historic government shutdown was financially painful for many, but government contractors faced unique challenges. It was a hard lesson for those in the trenches, and a cautionary tale for small business owners interested in becoming government contractors.
What was learned?
Think Ahead
Proactively consider the clauses and contractual obligations that could kick in during a shutdown. Each agency is different, and many will release specific guidance in real time, but it’s important to understand what might trigger a stop-work order and how it will affect your business. And if the work isn’t required to stop, but is incrementally funded, or the inaccessibility of federal facilities or personnel might slow things down, what financial risks will you be taking on? Once a limitation of funds is reached, the government is not obligated to reimburse costs to contractors retroactively.
Document and Recover
The primary way government contractors can recover losses during a shutdown is not through the IRS but through Federal Acquisition Regulation (FAR) clauses, namely, a Suspension of Work Clause (FAR 52.242-14) or Government Delay of Work Clause (FAR 52.242-17). However, immediate compliance to minimize costs and meticulous documentation of delays and expenses are essential. So is speed. Government contractors requesting adjustments to their contract schedule or cost due to the shutdown must do so within 30 days of an order being lifted.
Rapidly Mitigate Costs & Consider Funding Sources
It’s imperative to communicate proactively with vendors, subcontractors, and employees, and to follow all contractual and labor laws that affect them when assessing where and how to mitigate costs. You may need to investigate funding sources to keep the business afloat in the meantime. A couple of bills were introduced during the recent shutdown – but they haven’t been passed. One, the Emergency Relief for Federal Contractors Act of 2025, permits penalty-free distributions (up to $30,000, inflation-indexed) from qualified retirement accounts for contractors who are on unpaid leave or working without pay due to a federal shutdown lasting 14 days or more, with a three-year payback period. Keep an eye on changing regulations, like potentially this one, that could help.
Look at Additional Deductions Due to Losses
The IRS generally allows deductions for business losses and expenses incurred in the course of regular operations, as long as the costs are not reimbursed or expected to be reimbursed later by the government. So, for whatever expenses the government does not cover through a FAR clause, talk to your tax advisor about additional strategies, such as carrying forward any remaining Net Operating Losses (NOLs) to future years.
This past shutdown was unprecedented, and that isn’t easy to plan for. But government contractors who have a basic understanding of the lessons learned above will increase their likelihood of cost recovery. Feel free to contact us with questions.