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Implications of the Debt Ceiling for Government Contractors


Husch Blackwell LLP

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The ongoing debt ceiling negotiations are approaching the “X Date” with little certainty of a resolution. The X Date, the date on which the U.S. Government runs out of money to pay all of its bills, is estimated to be June 1. Failing to raise the debt ceiling by that date would be unprecedented and, by most accounts, would have dire consequences for the economy.

The current brinkmanship related to the debt ceiling is reminiscent of prior talks leading up to government shutdowns. The scenarios are different, but the impacts (and preparations) for government contractors likely will be similar. Here’s a breakdown of the differences and how government contractors can prepare for the possibility of reaching the X Date without a resolution on the debt ceiling.

Debt Ceiling v. Shutdown 

A government shutdown results from a quirk of appropriations law—the government cannot spend money that Congress has not yet authorized/appropriated. The government still has the means to pay the commitments, but the commitments have not yet been authorized, so agencies have to go into a holding pattern. Without an approved budget, the government lacks the legal authority to spend money, resulting in a shutdown. Agencies cease operations except for essential activities to protect life and property and other specific exceptions. Contractors are issued stop work orders and/or have to give notice that they will stop work because their contracts are subject to limitation of funds or limitation of costs clauses.

The debt ceiling is unrelated to appropriations. The government has authorized the commitments and the Government could legally pay them, but it cannot do so practically. It does not have sufficient funds and cannot borrow any additional money. But reaching the debt ceiling does not immediately result in a government shutdown. Agencies can still use money that they have (until it runs out), but there is uncertainty around how agencies will use that money and what happens after the funds are exhausted.

Although the causes of the funding shortfall are different in the debt ceiling context, the result likely is the same. Contractors may need to be prepared to stop work and seek to recover any impacts from the disruption after the debt ceiling issue is resolved.  

The Right to Stop Work

Failing to raise the debt ceiling by the X Date may have limited immediate impact, particularly for contracts that are fully funded. In theory, the funds necessary to pay the contractor for the work were already authorized and appropriated and are allocated to the contract in the agency’s account. If those funds are sitting in the agency’s account, the debt ceiling should not prevent payment of funds that are already available. 

Of course, the agency might decide to reallocate its funds (where possible) and move funding from one purpose to another. The agency would issue revised Funds schedules and/or stop work orders, and contractors’ ability to recover additional costs in that situation should be similar to any other stop work situation. But if the Government does not issue a stop work order, or simply runs out of money to pay its obligations, there are two potentially important considerations. 

First, the contractor is not required to keep working without payment. The CBCA’s 2014 decision in Kiewit-Turner addresses this point. There, the agency was attempting to force the contractor to construct a building that was estimated to cost more than the amount that had been appropriated. The contractor repeatedly advised the agency of this fact and requested design changes to bring the cost in line with the available funding. The agency refused to adopt the design changes and the contractor stopped work. The CBCA upheld that decision because the contractor could not be forced to perform without any expectation of payment. The same rationale extends to the debt ceiling context. If an agency runs out of money (or diverts available funds to other causes), the contractor could (and probably should) stop work.

The second important consideration is that a lack of funds is not an excuse to the Government’s payment obligation. That was the ruling in the Supreme Court’s decision in Salazar v. Ramah Navajo Chapter back in 2012. In that case, the agency had issued multiple support contracts and had enough money to cover any one contractor’s costs, but not enough to pay them all. The agency paid costs on a pro-rata basis and then argued it was excused from further payment when the funds were exhausted. The Court rejected that argument because contractors cannot be charged with knowing how the agency internally allocates the funds appropriated to it. If there is enough money in an appropriation to cover your contract, you are not required to monitor whether the agency is using those funds to pay someone else. This principle applies with equal force to the debt ceiling. The agency should not avoid paying for costs incurred by a contractor simply because money ran tight and the agency prioritized who to pay first. 

Sovereign Acts

Another consideration is whether the failure to raise the debt ceiling is a sovereign act that excuses the government’s failure to pay its obligations. Assessing that risk, particularly in light of the numerous new justices appointed to the Supreme Court, requires more than a blog article. But the Court previously held in United States v. Winstar Corp., 518 U.S. 839 (1996), that government agencies accept certain risks that they cannot control when they enter into contracts with private parties. There, the government sought to be relieved of its contractual obligations after Congress changed a regulatory scheme that impacted numerous government contracts. The Court held that the agencies assumed the risk of regulatory change and were not excused from their obligations:

The mere fact that the Government’s contracting agencies . . . could not themselves preclude Congress from changing the regulatory rules does not, of course, stand in the way of concluding that those agencies assumed the risk of such change, for determining the consequences of legal change was the point of the agreements. It is, after all, not uncommon for a contracting party to assume the risk of an event he cannot control, even when that party is an agent of the Government.

 In the context of the debt ceiling, the rationale above would support the notion that the government agencies assumed the risk of the X Date and Congress’s failure to authorize additional borrowing should not be an excuse for contractors to go unpaid if they incur additional costs from the debt ceiling brinkmanship and resulting uncertainty.

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