A flurry of presidential directives, agency communications, and court orders has left federal contract and grant recipients with operational disruptions and in a state of confusion. As we write, it has been difficult to follow which contracts, grants, and other forms of federal spending have been paused or canceled, and the situation is likely to continue changing over the coming days and weeks.
On January 28, an Office of Management and Budget (OMB) memorandum directed federal agencies to immediately halt disbursements for grants, loans, and other assistance programs. A federal judge temporarily blocked that policy on the same day. The White House then rescinded the memorandum on January 29.
Prior to the OMB memorandum, the President, in separate Executive Orders, put on hold pending review federal infrastructure and energy-related contracts and grants under the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, and suspended nearly all federal financial assistance (grants, loans, and cooperative agreements) issued by USAID and the Department of State. Also suspended are contracts and grants that agencies have identified as related to diversity, equity, and inclusion. The OMB memorandum led agencies to further pause an array of contracts and federal assistance, including NIH grants and certain SBA loans. A contract freeze at the General Services Administration was put in place, and the Army posted online that it would halt contract awards, only to say later that announcement was a mistake.
While the situation remains in flux, contractors and recipients of grants and other forms of federal financial assistance should prepare for disruptions. Below, we provide greater detail on what to expect and the actions that contractors and grant recipients can take in response to the evolving situation.
Disruptions Generally
Among other possibilities, contractors might face a temporary stop-work order, a failure to add necessary additional funding, a termination for convenience, or a decision by their contracting agency not to exercise options. Recipients of grants or other federal assistance might see suspension of their agreements, termination, or a pause in funding disbursements.
It is important to keep in mind that an Executive Order or memo from the White House or OMB does not directly suspend or terminate a contract with a federal agency; rather, properly authorized officials must implement the directives from higher authorities on a contract‑by‑contract basis. Only certain officials—typically contracting officers or grants administrators—can suspend or terminate contracts and financial assistance agreements. Contractors and grant recipients should remember that they have rights under their agreements with the government. Individual contracts and grants may have particularized processes for suspension, stop work, or terminations and, more broadly, there are limitations on the ability of the government to quit duly authorized agreements. However, the government has greater rights to terminate contracts or agreements than private parties receive under most commercial contracts, and federal contractors might have different or limited remedies. Contractors, grantees, and other funding recipients thus should seek guidance specifically tailored to their contracts or agreements with the government.
Contracts
Government contracting officers can cancel or pause contracts in several ways.
Stop Work Orders
Contractors who receive stop-work orders should take reasonable measures to reduce the impact of the delay but should also be eligible for schedule adjustments when the contract resumes (if needed) and may be entitled to a price adjustment.
The government may contend a stop-work order was issued pursuant to a sovereign act, in which case costs would be non-compensable. The sovereign acts doctrine holds that the government will not be liable to the contractor where it acts in its sovereign or regulatory capacity, rather than in its capacity as party to a contract. Such an argument seems unlikely to succeed where (1) Congress has appropriated sufficient funds but the administration chooses to delay performance, (2) the government’s decision is targeted primarily (or even exclusively) toward its own contractual obligations, and/or (3) the government customer takes an affirmative step (e.g., the stop-work order) to halt performance.
There are a number of important steps a contractor should take to protect its ability to receive compensation for stopping work:
- Review the scope of the stop‑work order to determine which parts of the contract are affected, and ask your contracting officer (or prime, for subcontractors) for any necessary clarifications;
- Stop all work covered by the order and notify all affected subcontractors to do the same;
- Take reasonable steps to mitigate costs and document why any ongoing costs were not reasonably avoidable;
- Notify affected personnel, keeping in mind potential WARN Act or related obligations under governing labor and employment law, which may differ from place to place;
- Identify and quantify impacts on schedules, employees, and subcontractors;
- Review potential insurance coverage;
- Notify your contracting officer (or prime, for subcontractors) of the expected impact of the work stoppage;
- Preserve work product, appropriately safeguard any government property in your custody, and maintain records of already completed work;
- Document costs incurred and schedule impacts during the stoppage; and
- Be ready to restart the stopped work if and when the government lifts the stop‑work order.
When the time comes to prepare a request for an equitable adjustment or a claim, showing that you took these steps will help substantiate your request.
Cessation of Funding
Even in the absence of a formal order, a failure to add necessary funding to a cost-type contract effectively functions as a stop-work order, and a contractor should follow the steps outlined above. A contractor proceeds at its own risk if it continues to work even though necessary funding has not been added. If the contractor continues work during a lapse in funding, the government will not be required to add funds retroactively to cover that work (although it may do so in its discretion, if funds are available). On the other hand, the government cannot require continued performance after funding limits have been reached.
Termination for Convenience
Terminations for convenience generally give the government a broad right to end contracts, but that right is not completely unfettered. Part 49 of the Federal Acquisition Regulation (FAR) and established precedent regulate the government’s ability to terminate for convenience and the contractor’s right to recovery. Although challenging a termination for convenience is extremely difficult, the government cannot invoke its termination rights in bad faith. Documented evidence of political pressure or a desire to curry personal favor with senior officials might satisfy the demanding “well-nigh irrefragable proof” standard required to establish bad faith. A contractor might also attempt to argue that, even without evidence of bad faith, the government failed to act in accordance with its duty of good faith and fair dealing, which is a different and less demanding legal standard.
Assuming a termination for convenience was proper, the FAR provides different guidelines on contractor recovery for fixed-price and cost-type contracts. For fixed-price contracts, FAR 49.201 provides that a termination settlement should compensate the contractor fairly for the work it performed and the unavoidable costs of the preparations it made for the terminated portions of the contract, plus a reasonable allowance for profit. For cost-type contracts, FAR 49.301 holds that a termination settlement should compensate the contractor for all costs it incurred and cannot avoid, and for its fee on the portion of the work it performed. Under FAR 49.206-1 and 49.303-1, the contractor will need to prepare and submit a termination settlement proposal for either type of contract.
Failure to Exercise Options
A contractor likewise has limited rights if the government chooses not to exercise an option. Again, absent extraordinary circumstances such as bad faith, a contractor generally cannot force the government to exercise an option. Assuming the non-exercise was within the government’s discretion, the contractor’s cost recovery is very limited—essentially the same as its right (if any) to recover close-out costs at the expiration of the contract’s term. The extent of this recovery (if any) is generally even narrower than that available after a termination for convenience.
In all scenarios, prudent steps include confirming the extent of the halted work (i.e., a total or partial halt); documenting unavoidable costs or costs resulting from the halt; tracking efforts to minimize those costs; and communicating promptly with both the government customer and your subcontractors and suppliers.
Grants and Other Forms of Federal Financial Assistance
As noted above, agreement officers across the federal government have begun to suspend (and in some cases terminate) grants, loans, cooperative agreements, cooperative research, and assistance agreements (CRADAs) and Other Transaction Agreements (OTAs). Grants and cooperative agreements are subject to the OMB regulations in 2 CFR Part 200. These have a process for termination, but not a generally applicable stop-work or suspension provision. Individual agency supplements to 2 CFR may have suspension provisions (for example, USAID has a process for suspension of funding). The ability of the government to terminate and suspend such agreements after they become effective thus varies more than for traditional procurement contracts, and organizations should review the applicable terms and conditions for each affected award to determine their rights. Nevertheless, federal financial assistance recipients should have some rights involving termination and cost recovery, given that they have binding agreements with the government.
We would advise any grantee or federal funding recipient, or party to a government contract that is not subject to the FAR, to take the following approach in the face of a suspension or termination notice or some other indicia that funding is not available (for example, a funding portal is not operational):
- Carefully review the suspension or termination notice and consider the potential availability of a waiver, if applicable;
- Review the relevant underlying grant, loan, or other agreement for any provisions related to suspension or termination;
- Mitigate costs and cease operations to the extent practicable, including through consideration of temporary furloughs;
- Consideration of funding sources outside of government may also be appropriate.
- If the suspension directive is unclear, or no directive has been issued, ask the cognizant Agreement Officer how legitimate costs are best handled during the pause, including the preservation of physical space, employees, and the need to comply with local labor laws;
- In this regard, it is notable that many agencies have put in place communication pauses, which may result in a lack of response to questions. If this is the case, document the organization’s actions and remain in communication with the government nonetheless.
- Maintain full and complete records of the costs mitigated and incurred because of the suspension;
- Notify subrecipients and subcontractors of the suspension or termination notice and instruct them to stop or terminate work as appropriate, and to mitigate costs during any suspension period; and
- Collect and submit allowable costs incurred prior to the suspension or termination notice when the opportunity to seek reimbursement under the funding agreement resumes.
Takeaways
The sheer magnitude of agency stop-work and suspension activity is unprecedented. Uncertainty remains about who will review programs to enable them to restart and how long those reviews may take. In the meantime, contractors and grant recipients should take active steps to respond to the current situation and, as best as possible, prepare for the bumpy road to come.
*Ethan Sterenfeld, a law clerk in our Washington, D.C., office, contributed to the writing of this article.
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