Oversight Gaps: The Perfect Storm for Fraud

During a shutdown, many federal employees—including contracting officers, inspectors, and auditors—are furloughed. This creates a vacuum in oversight and accountability that can lead to:

• Unauthorized Work: Contractors may continue to work without proper funding or direction, potentially causing violations and risking non-payment.
• Improper Billing: With fewer eyes on invoices and performance reports, the risk of inflated or fraudulent billing increases.
• Fictitious Vendors: Shutdowns can cause a rise in fraudulent vendor schemes, where payments are diverted to fake entities due to weakened controls.

Loss of oversight has ripple effects beyond just the time period the government is shut down. Once underway, halting fraud, waste, and abuse can be akin to stopping a moving train —a time- and resource-consuming process. In FY2023 alone, the federal government reported $236 billion in improper payments across all government programs, and shutdowns only exacerbate these vulnerabilities.

Compliance Risks: Payroll, Labor Laws, and Contractual Exposure

Contractors face a minefield of compliance challenges during shutdowns, including:

• Certified Payroll Disruptions: Shutdowns can interrupt payroll systems and reporting, increasing the risk of Davis-Bacon Act violations on federally funded construction projects. These lapses may increase prevailing wage fraud, potentially violating the False Claims Act.
• FLSA Violations: Employers must ensure exempt employees are paid for weeks they perform work. Missteps here can lead to costly wage claims.
• WARN Act Triggers: Contractor’s extended furloughs or layoffs may require advance notice under federal or state Worker Adjustment and Retraining Notification laws.

Lessons from the 2018–2019 Shutdown

The longest shutdown in U.S. history (35 days) revealed the depth of these risks:

• Project Delays: Construction projects stalled for months, well beyond the duration of the shutdown, due to unavailable federal personnel and frozen approvals.
• Access Denied: Contractors were locked out of federal facilities, halting performance even on funded contracts.
• Audit Vulnerability: Post-shutdown audits revealed billing irregularities and compliance failures that had gone undetected during the lapse.

The Congressional Budget Office estimated that the last shutdown had an $11 billion economic impact, with $3 billion permanently lost—a portion of which stemmed from disrupted federal contracting.

Mitigation Strategies for Agencies and Contractors

To navigate shutdowns safely, contractors should:

1. Confirm Funding and Authority: Never proceed with work without written confirmation of funding and scope.
2. Strengthen Internal Controls: Monitor billing, payroll, and procurement systems closely.
3. Document Everything: Maintain detailed records of communications, costs, and disruptions.
4. Prepare for Post-Shutdown Scrutiny: Expect audits and investigations once agencies resume operations.
5. Report Suspected Fraud: Use alternative channels if Inspector General offices are inaccessible.

Conclusion

Shutdowns are more than political standoffs—they’re operational stress tests for federal contractors. By learning from past lapses and proactively managing fraud and compliance risks, contractors can protect their businesses and uphold the integrity of federal construction programs.

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If you have any questions or would like to discuss this topic please reach out to Paul Ryan.

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