How a Government Shutdown Could Affect Small Business Contracts

A government shutdown happens when Congress doesn’t approve funding in time. That doesn’t mean everything stops, instead many federal agencies have to pause or scale back operations. This typically means: 

• Essential services keep running, but often with fewer staff. Operations that protect life or property — like air traffic control, border protection, and certain law enforcement — continue, though often with longer wait times or reduced service levels.
• Mandatory benefit programs continue, but support slows. Social Security, Medicare, and Medicaid payments still go out, but administrative tasks may be delayed if staff are furloughed.
• The IRS operates at reduced capacity. The IRS continues some core functions like collecting taxes, but refunds and taxpayer services may slow or pause depending on the length of the shutdown.
• Nonessential services pause. Licensing, permitting, loans, and regulatory approvals are often slowed or suspended. Many applications are delayed, not denied, and typically resume once agencies reopen, though some deadlines may be affected.

For businesses with government contracts (or those who work downstream of companies that contract with the government), these disruptions can strain cash flow, force tough staffing decisions, and raise questions about whether you’re still obligated to fulfill your side of a paused contract. Even businesses without direct contracts may feel ripple effects — postponed events, unpaid subcontracting work, or reduced demand in industries like tourism and retail.

How Government Shutdowns Affect Small Business Contracts

For companies with federal contracts, shutdowns can create serious challenges:

• Payment delays. Work you’ve already finished may not be paid until funding returns.
• Work suspensions. In many cases, contracting officers issue written “stop work” or “suspension of work” notices during a shutdown. Only a contracting officer — not another agency employee — can do this. Without such notice, you are generally required to keep performing.
• Risk of breach. Nonpayment alone does not excuse performance — unless you receive written suspension or stop-work instructions from the contracting officer. If you stop without written approval from the contracting officer, you could be found in default.

These risks come from contract clauses that protect the government, such as Termination for Convenience, which lets the government end a contract at any time, and Availability of Funds, which makes payment dependent on approved funding. In both cases, contractors may recover some costs and limited profit — but not usually lost profits or future work. 

These clauses protect the government, not small businesses. You must keep performing unless told otherwise, and recovery is generally limited to costs already incurred.

Protections to Consider in Future Contracts

While you can’t avoid standard federal clauses, you can take steps to reduce your exposure:

• Review contracts carefully. Know what rights you have — and don’t have — under Termination for Convenience, Availability of Funds, and similar provisions.
• Request shorter (or clearer) payment terms. Shorter cycles or milestone-based payments can reduce the strain of delayed funding.
• Build cash flow buffers. Maintain reserves or a line of credit to help bridge payment gaps.
• Negotiate where possible. While FAR clauses are usually non-negotiable, you may be able to secure more favorable terms in other areas, like shorter payment schedules.

These steps don’t eliminate risk, but they give you more leverage and flexibility when disruptions happen.

Questions SMBs Should Be Asking About Government Shutdowns

Before you make any decisions, ask yourself:

• Will my government contract be put on hold during a shutdown? If so, how will I cover expenses while I wait for payment?
• If I can’t get paid, am I allowed to pause my work without being in breach? What does my contract say about nonpayment and payment delays?
• Do my contracts include protections like force majeure or “funding out” clauses? If not, should I negotiate them into future deals?
• How much of my business depends on government-related revenue, and do I need to diversify to reduce risk?

What to Do Next

1. Review your contracts. Look for payment terms, suspension clauses, and remedies in case of nonpayment.
2. Talk to your vendors, suppliers and clients. If they’re directly tied to government contracts or funding, ask how a shutdown might affect your contracts.
3. Plan for cash flow. Consider building a reserve or securing a line of credit to cover gaps.
4. Use Rocket Copilot to review your contracts, ask questions and connect to a Legal Pro for more help on how to survive a shutdown.

With preparation and the right contract protections, you can navigate a government shutdown with more confidence and keep your business steady—even when federal payments pause.