Another Possible Blow for Contractors – -Implications of the Failure to Raise the Debt Ceiling

With the recent shutdown caused by failure to enact a Continuing Resolution funding the government for the start of FY2014, contractors are understandably wary of Congress’ ability to reach an agreement on raising the debt ceiling.  If the debt ceiling is not raised, and the US Treasury cannot meet all of the United States’ financial obligations when they become due, government contractors are likely to be among those adversely affected.  When the debt limit is reached, Treasury’s borrowing authority ends, so the Department cannot issue new debt to manage cash flow or to pay interest on the federal deficit.  As a result, the Government cannot pay its bills or invest surpluses which may accumulate in various trust funds as required by law.

A Government default on financial obligations resulting from a failure to raise the debt ceiling is different from a Government shutdown that results from the failure of Congress to pass appropriations legislation.  A shutdown occurs because the Government may not incur new financial obligations in the absence of appropriations without violating the Anti-Deficiency Act.  A default means that the Government cannot pay financial obligations that have already been incurred.  Raising the debt ceiling is not about the availability of funds; it is about managing cash flow.  If the debt ceiling is not raised and default occurs, the Department of the Treasury will prioritize and decide which outstanding financial obligations are paid and in what order.  Most experts believe that in this event, Treasury will use available funds to first pay interest on outstanding debt and entitlement obligations, and delay or defer payments to contractors – -including payments for invoices for work that has been completed or for delivered goods, progress payments, contract financing payments, and other payments, such as those for lease or settlement agreements.

Dentons Government Contracts Group

About Dentons Government Contracts Group

Operating at the intersection of law, business and government, the Dentons’ Government Contracts practice delivers creative, flexible and effective business and litigation solutions and strategies, relying not only on our breadth and depth of experience, but also on our proven history of succeeding in the most complex and difficult circumstances.

Full bio