As Yogi Berra famously quipped, “It’s like Déjà vu all over again!”  In that spirit, Congress has again signaled that it will pass a continuing resolution to fund the Government through spring—despite vocal opposition from the Pentagon. As a result of this short term funding mechanism, contractors face a number of potential pitfalls:  contract options are at risk, the next round of incremental funding is unlikely to arrive, and new contract awards and program approvals will be scarce.  These pitfalls, however, can be mitigated—and even exploited—by diligent contractors.

BACKGROUND

Continuing resolutions (“CRs”) are appropriation acts that provide budget authority for federal agencies to continue operations when Congress and the President have not passed regular appropriations acts by the beginning of the fiscal year.  Typically, CRs allocate funding for a short duration in proportionate amounts from the time period of the preceding year, with the additional limitation that the rate of expenditure cannot exceed the previous year’s rate.  This means agencies are not only limited to the total funds from the prior year, but so too by the rate of spending from the prior year.^[1]  These limitations pose some obvious problems for contractors: options are at risk and incrementally funded contracts may face funding gaps.

POTENTIAL PITFALLS AND OPPORTUNITIES

Contractors anticipating new contracts or program starts are likely to be disappointed because any such new contract or new program that requires “new” money is generally barred. Programs and contracts preparing to enter a new phase requiring additional funding may find themselves without adequate additional funding.  Similarly, a contractor awaiting an option to be exercised faces uncertainty—an option generally cannot be exercised if it requires “new money” or its performance will extend beyond the period of the CR.[2]  In most cases, an option expires if it is not exercised by the start of the new fiscal year.  This means the government loses the ability to exercise the option in the future without a bilateral modification.  As such, this may present an opportunity to renegotiate the option if it is no longer in the contractor’s best interest.

CRs also may cause “funding gaps” in incrementally funded or partially funded contracts (or contracts otherwise subject to the limitation of cost/limitation of funds/limitation of government obligation clauses). If the CR does not provide sufficient funding, the government’s ability to fund the additional increment of work expires.  As with options, the work would need to be renegotiated or (as is more often the case) continued with mutual consent after funding is restored.  Again, this presents the opportunity to renegotiate unfavorable terms or conditions.

In most such cases, contractors want to continue work and undertake performance and, historically, most contractors do, in fact, continue performance (whether at the insistence of the agency or due to fear of losing the contract) without incident — despite the fact that the government is prohibited from accepting work not covered by obligated funds. See FAR 32.703-2(c).  In many of these cases, however, the contractor has undertaken this gamble without fully appreciating that despite past practice, the government is under no obligation to later fund an expired funding provision.

Funding gaps can cause other problems as well. They can create a production break in contracts requiring the production of deliverables.  If so, the contractor may be entitled to equitable adjustment in some cases.  A funding gap can impact “support elements” of the contract (i.e., government furnished equipment, property or information; or inspection, audit, engineering, transportation services).  In such a case, the government may be in material breach of its contractual obligations entitling the contractor to damages or, at a minimum, it may amount to a compensable change.  In any event, the contractor must track its own costs for providing these necessary functions to meet its burden on damages and may be obligated to mitigate damages.

CONCLUSION

Although federal funding issues have become routine occurrences, the consequences for an unprepared contractor can be significant. On the other hand, an aware contractor can use the Government’s funding problems for its benefit.  To ensure the best possible outcome, contractors should pay close attention to the manner of funding for their contracts, communication with the contracting officer about funding issues, and closely document all schedule or other adverse impacts caused by any such funding issues.

^{[1]  For more background about continuing resolutions, see the Congressional Research Service’s recent report, “FY2017 Defense Spending Under an Interim Continuing Resolution (CR): In Brief.”}

^{[2]  Courts have recognized the Government’s ability to exercise options without current funding if the options are subject to the availability of funds clauses. See, e.g., Am. Contract Srvs., Inc., ASBCA No. 46788, 94-2 BCA ¶ 26,855 aff’d on recons., 94-3 BCA ¶ 27,025 aff’d Am. Contract Srvs., Inc. v. Widnall, 53 F.3d 348 (Fed. Cir. 1995).  This, of course, makes little sense because the clause itself prohibits the exercise.}