Government Contractors: You Need a Financial Action Plan 

For federal contractors, a single contract termination or stop-work order is typically a challenging yet manageable administrative burden; however, multiple contracts impacted simultaneously can trigger a full-scale operational crisis. The collapse of multiple (or all) contracts for an organization has far-reaching consequences extending beyond the prime contractor to include subcontractors, employees, and the entire supply chain. The ability to reassign employees to other contracts will be diminished, layoffs and furloughs are likely, and lower-tier subcontractors and suppliers will be forced to health work. The ripple effects will lead to financial instability across the contracting network.

Any business with ties to government contracts should prepare to be impacted. Create a financial action plan that can be immediately implemented if circumstances warrant it.

Step 1: Establish a cost service center for wind-down activities

Work stoppage carries it’s own cost, including the expenses associated with securing work, relocating employees, and overhead costs. Setting up a cost service center specifically for termination and stop-work activities can ensure that all costs related to winding down operations are properly tracked and allocated. Considerations include:

• Labor costs: employee severance, retention agreements, or relocation costs.
• Subcontractor and supplier claims: settling outstanding payments and ensuring documentation for potential recoverable costs.
• Lease obligations: contracts involving dedicated office space or facilities might require arrangements for subletting, breaking leases, or negotiating buyouts.
• Rate variances on cost-type contracts: unresolved indirect cost rate variances should be identified and included in Requests for Equitable Adjustments (REAs) or termination settlements.
• Legal and compliance costs: attorneys, accountants, and consultants engaged to support the settlement process may be considered allowable costs under the Federal Acquisition Regulations (FAR).

Step 2: Identify lagging costs that require inclusion

Even after a termination or stop-work order is issued, certain costs continue to accrue and must be factored into the final settlement. These include: 

• Pending invoices: Ensure that all costs incurred before the order are invoiced and accounted for.
• Demobilization costs: any expenses related to securing materials, shutting down job sites, and transitioning employees off projects should be tracked.
• Ongoing fringe and benefits costs: health insurance, retirement contributions, and accrued leave obligations may persist beyond termination dates and should be considered.
• Equipment and asset depreciation: if government property or contractor-acquired assets were used exclusively for a terminated contract, their disposal or continued cost burden must be evaluated. 

Step 3: Engage with legal and financial advisors

Government contractors’ ability to navigate work stoppages and maintain long-term financial stability will depend heavily on pristine documentation and thorough recordkeeping. Legal and financial advisors can help contractors establish recordkeeping best practices in compliance with contractual obligations and can assist with cost recovery efforts.

The bottom line 

Contractors must be proactive in their response to widespread contract terminations. Early engagement with the contracting officer, thorough cost tracking, and strategic workforce planning can make the difference between a manageable situation and a financial disaster. By considering all potential cost impacts and maintaining robust documentation, contractors can position themselves for a fair settlement while protecting their business interests.

Navigating terminations, claims, and settlement packages can be complex, but you don’t have to do it alone. Aprio’s Government Contracting and Nonprofit teams are here to guide you every step of the way. Whether you need support with claims work, termination settlements, or strategic planning, we’re ready to help. 

Connect with an Aprio team member.  

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