In a periodic political standoff, the House of Representatives, the Senate and the President are in a debate about how to handle the rapidly approaching date when the U.S. Government will no longer have the ability to pay all of the debts previously incurred by the United States; it thus risks default on some or all of those prior debts because it could only make payments from cash it has on hand on any specific day. For federal contractors, this is a significant business risk with only limited actions that can be taken to reduce exposure.
The Federal Government has already hit the statutory $31.4 trillion debt ceiling. As a result, in January 2023, Treasury Secretary Yellin announced that Treasury started taking “extraordinary measures” to extend the time before the U.S. Government runs out of cash to make the payments as they become due. While this so-called “X” date was not expected to be reached before summer, updated February projections from the non-partisan Congressional Budget Office showed that the deficit gap – the difference between annual revenue and annual spending – increased significantly over the prior fiscal year, thus adding to the overall federal debt levels and likely shortening the time for reaching the “X” date.
For federal contractors, the debt ceiling presents a different set of challenges, and even fewer options, than a lapse in appropriations and any resulting government shutdown. Significantly, even with hitting the debt ceiling, the Federal Government remains open, will continue in operations, and can make new contract awards. Federal employees are not furloughed and contractor employees are not denied entry to government installations nor access to critical federal employees.
However, if the U.S. Government runs of out borrowing authority, government contractors risk not getting paid for work already performed. And one of the key tenants of federal contracting – that the U.S. Government always makes timely payment to contractors for work properly performed – is destroyed. As contractors know, federal bids are prohibited from including any contingencies for delayed payments and the cost principles prohibit charging the U.S. Government interest on borrowing to cover contracting work. In exchange, the federal “Prompt Payment Act” provides that the Federal Government will automatically pay interest on valid invoices that are not paid according to the terms of the contract and the government’s cash management practices. But recovering interest on amounts due for work already performed is a small consolation for not being paid the base amount.
What three actions should contractors take now?
First, check the status of all of your open accounts receivable from federal work. Stay on top of the contracting officers to be sure they acknowledge acceptance of the work. Stay on top of the payment offices to be sure they are processing your invoices. With the overwhelming number of payment invoices submitted and processed electronically, usually with no issues involved, you still want to be sure you are in the queue to be paid on time.
Second, be sure you are ready to immediately invoice for new work completed as soon as your contract allows. Don’t give the U.S. Government any greater grace period on payments due to you than they already get.
If you have non-segregable work that may not be able to be invoiced for some future period of time (typically after the completion of all work), check with your contracting officer to see if you can arrange for a partial earlier payment for work already completed. While this is not a common action for the government, program and contracting officers with long-term successful projects may be willing to take this action to ensure your continued cash flow.
Finally, now is a good time to have a discussion with your preferred financial institution. They are probably already aware of your invoicing and payment receipt record, and aware of your firm’s cash flow needs. Validating or increasing a stand-by line of credit, should it be needed, will minimize your short-term business risk if the political debate fails to achieve an acceptable and timely solution.
Nichols Liu attorneys have extensive experience in working with contractors on the policy and financial implications of payments, including under debt ceiling circumstances. Contact the author or any of the attorneys at Nichols Liu with whom you regularly work.
