Congress is once again approaching a critical deadline, one that could lead to a national government shutdown at 12:01 AM on Sunday, October 1, 2023. 

With congressional gridlock preventing the passage of even a continuing resolution, the prospect of a federal government shutdown, the third in five years, is looming large. While this political standoff impacts many sectors, the construction industry, a key player in infrastructure projects and development as well as job creation, is not immune to its effects.

In today's complex project funding landscape, even construction projects with partial federal funding could face disruptions. The consequences of a government shutdown extend beyond the immediately noticed surface, often overshadowing the federal contractors who support day-today government operations.

So, what would a government shutdown mean for the construction industry if it should happen later this week? Now is a key time for contractors to ensure they are taking the right steps to weather this impending storm. In this article, we will delve into both the short-term and long-term effects a shutdown could have on our industry, along with strategies to manage this uncertainty. 

Project Delays
One of the most immediate effects of a government shutdown would be immediate project delays, affecting infrastructure projects that rely on federal funding or permits. Key federal agencies, including the U.S. Department of Transportation (DOT), would not be fully operational. This means new federal projects may not begin, awards could be suspended, and ongoing projects could be put on hold. Clear communication with Contracting Officers (CO) is crucial during this period, as guidance on which activities can continue would be essential.

Some vital government functions are exempt, but most federal agencies would be curtailed. Key federal agencies, such as the U.S. Department of Transportation (DOT), would not be fully operational, meaning new federal projects would not break ground, awards would be suspended, and current projects would be put on hold. Federal agencies would also be unable to issue new guidance as to how funds should be used.

Clear communication with your Contracting Officers (CO) is crucial during a period like this. Ask for clear direction on which activities, if any, should continue during a shutdown. The Office of Management and Budget (OMB) is responsible for issuing instructions to federal agencies, including as to which employees and/or activities can be continued. Agencies develop internal plans based on those instructions, and COs should in turn instruct contractors based on their agencies’ plans. These instructions should also address whether government personnel will work during the shutdown, as well as which services will continue under individual contracts. 

Permitting and Regulatory Delays
Shutdowns disrupt the workflow of construction projects requiring federal permits or approvals. Understaffed agencies may struggle to process applications promptly, leading to uncertainty and project timeline delays.

It's also highly likely agencies like the Environmental Protection Agency (EPA) and the Department of the Interior (DOI) will see furloughed employees, preventing the issuance of necessary project documents, permits, and environmental reviews.  

One the positive side of the coin, the Federal Highway Administration could stay open and construction should be able to continue without interruption for current projects underway since they use highway trust fund money.

But, on the other side of the same coin, rail and transit projects face different obstacles. Federal transit employees would be furloughed, meaning local transit and rail agencies would need to use their own funds to pay contractors or shut down altogether. Airport construction will also sees shutdowns, depending on how the project funding came in.

Contract Disruptions
Contractors working on government projects may encounter payment delays, contract modifications, and stop-work orders. It's important to remember that a "shutdown" does not necessarily close everything down: a shutdown may halt performance under some contracts but not others.

Many contracts are "fully funded" --- i.e., funds have already been obligated to cover the price of a fixed-price contract or the estimated cost of a cost-reimbursable contract. Of course, complications can arise if performance depends on government employees who are furloughed, government facilities that are closed, or other government contracts that require additional funding during the lapse. For these reasons, and others, the government may stop work even on contracts that are already funded.

Similarly, a shutdown may affect funded contracts if performance is expected to exceed the estimated cost due to changes, delays, or other events for which a cost adjustment may be needed.

Infrastructure Deficiency
Delayed government-funded infrastructure projects can result in long-term deficiencies, impacting economic development and competitiveness. The Federal Emergency Management Agency’s Disaster Relief Fund, for instance, could face running out of funds, delaying disaster response and recovery efforts.

Investor Uncertainty
Prolonged government shutdowns can create market uncertainty, causing investors to pause and rethink committing to long-term projects, hindering industry growth.

State Departments of Transportation (DOTs) might hesitate to authorize new construction projects due to concerns about reimbursement (this is what happened during the 34-day shutdown in 2019). This could particularly affect new programs like those under the Infrastructure Investment and Jobs Act (IIJA). Many of these programs are new and agencies don't have a historical precedent to use in guiding how they'll be reimbursed during this type of project pause.

Private Sector Impact
The private sector is indirectly affected as well. Private projects that rely on government support, such as financing or loan guarantees, may face delays or increased costs.

Labor Force Challenges
As if the construction industry didn't already face enough challenges when it comes to its labor and workforce, a prolonged government shutdown could lead skilled workers to seek employment in other industries, posing challenges for retaining talent. 

Contractors are sometimes asked to renew a contract without funding because their work is considered “excepted,” and that could apply to more and more functions as a shutdown drags on. In any case, companies may want to ask what breathing room they do have and what they should do with their workers affected by a funding gap, whether that’s putting them on paid leave, setting them up with on-the-job training, furloughing them, or redirecting them to non-billable tasks not considered their primary duty.

Economic Impact
The construction industry is a significant contributor to the national economy, and a shutdown can lead to economic downturns, including job losses, reduced economic growth, and decreased consumer confidence.

In 2019, the five-week shutdown led to nearly 800,000 furloughed federal workers (or they continued to work but without pay) and an untold number of contractor employees were affected. It is estimated that 10,000 companies with government contracts were affected at the time, per reporting by the Washington Post. 

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Is there a way to lessen the impacts of a government shutdown now or in the future? There are several strategies to consider:

1.) Diversify Funding Sources
Contractors can consider diversifying their funding sources, such as seeking private investments or state-level funding, instead of relying completely on federal funding. This can help in making projects less vulnerable to government shutdowns when they occur.

2.) Contractual Protections
Contractors can incorporate clauses in their contracts that address the possibility of government shutdowns, allowing for negotiations and adjustments in case of disruptions.

Despite contract awards being delayed, government officials furloughed, and government facilities closed, the safest approach is to assume all deadlines remain unchanged until officially notified —especially deadlines for submitting proposals, filing bid protests, and appealing CO final decisions. Plan on meeting all solicitation deadlines for bid and proposal submissions and get further instructions from the contracting agency.

3.) Document Everything
In the days leading up to and during a shutdown, document all communications with your CO. This should include instructions or guidance provided by the government about the availability of government personnel, facilities, and other resources that you need to perform your contracts.

Keep detailed records of all work your employees perform under all your contracts as well as the impacts on the schedule for performance. It is also important to document your efforts to minimize any costs incurred due to the shutdown.

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National government shutdowns present significant challenges to the construction industry both in the short-term and long-term. By being proactive, contractors can take steps to minimize a shutdown's impact. Stay informed, adaptable, communicate clearly, and be prepared; together, we can navigate these uncertain times and continue contributing to infrastructure development and job creation.

Information regarding details of a possible government shutdown within this blog post were sourced from this Federal Times article written by Moly Weisner published on September 19, 2023; this Wiley Law article published on September 25, 2023; and; this Construction Dive article written by Julie Strupp published on September 26, 2023.