Government May Fail to Pay Contractors

Can you survive on a government “I owe you”?

Contractors may be hit very hard if the debt ceiling problem does not get solved by Congress. According to the Washington Business Journal, if Congress fails to raise the debt ceiling, the federal treasury will have to start prioritizing who it pays off. Invoices from companies contracted to do work with government would be pushed down the list, making payment delayed for several months.

“The real questions then for contractors is when will their invoices get paid, and are they prepared to handle a delay?” said Angela Styles, partner at Crowell & Moring LLP. “Can you make your payroll? Do you have a clause with vendors and subcontractors that says if you don’t get paid by government, they don’t get paid by you? 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.”

Contractors are required to complete contracted work, payment or no payment. This could be a major problem, because without cash flow, businesses will shrivel fast. Smaller businesses will be much more sensitive to the looming shortages in capitol, because usually small businesses do not have a large reserve of cash to fall back onto. Contractors who experience delayed payment from the government would receive interest on the payment for the delay. However, interest doesn’t help anyone until the payment is made. Can you survive long enough on your own resources to receive your due payment? For many, the answer might be no.