Contractors fear worst in debt debate outcome

Friday - 7/29/2011, 7:16am EDT

By Jack Moore
Federal News Radio

The list of those who could be affected by a failure to raise the debt ceiling and a possible U.S. default is growing.

Added to the question marks hanging over Social Security checks and federal pay is the uncertainty surrounding whether the government will be able to process contractors' invoices.

In a primetime White House speech earlier this week, President Barack Obama said if the government defaults, it would not have enough money to pay all of its bills, which includes "the government contracts we've signed with thousands of businesses," he said.

Alan Chvotkin, executive vice president and counsel at the Professional Services Council, an industry association, told Washington Technology that in the event of a default, contractors fear being being near the bottom of the list of those the government has to pay.

Chvotkin said a "first-in, first-out" approach - submitting invoices to the government sooner rather than later in advance of the Aug. 2 deadline - may help contractors get paid.

Contractors' possible financial woes are complicated by the fact that they often partner with other companies in sub-contracting deals and are responsible for those payments. "The worst place a contractor can be is not getting money from the government, but still having to pay partners for work they're doing under your contract," said Angela Styles, partner at Crowell & Moring LLP, in a Washington Business Journal article.

Elizabeth Ferrell, a partner with McKenna Long and Aldridge's government contracting practice, told Washington Technology that contractors should try to negotiate with federal contracting officers to see if work can be deferred or delayed in the event of nonpayment.

But in most cases, contractors are required to continue work even if they're not paid. While they could eventually receive interest payments for the time that their invoices went unprocessed, contractors have said that's a small consolation for companies that often don't carry large cash reserves.

The uncertainty over the failure to raise the debt limit and possible default has increasingly turned to pessimism for the contracting community.

As an example of just how bad it's gotten, The Washington Post reported that Moody's Investor Services has put the credit rating of Fairfax County in Northern Virginia, home of many contractors' headquarters, up for review. The area is thought to be "particularly vulnerable" to disruptions in federal funding, The Post reported.