As of October 1, 2025, a federal government shutdown is in effect, creating disruption across industries that rely on federal funding. For government contractors, the potential impacts are immediate and wide-ranging: contracting officers may be furloughed, invoices delayed, and project approvals frozen — all of which can put significant pressure on cash flow, operations, and workforce planning.

While the length of the shutdown is unknown, contractors can take steps now to reduce risks and prepare to rebound quickly when operations resume.

This guide outlines the potential impacts this shutdown will have on Government Contractors and provide actionable steps you can take to protect your business.

What the Shutdown Means for Contractors

Shutdowns ripple through the GovCon industry in several ways:

• Payments are delayed, creating cash flow strain
• New contracts, modifications, and approvals are suspended
• Contracting officers are unavailable for direction or oversight
• Filing deadlines continue to apply without extensions

The result is an environment where uncertainty grows while obligations — from payroll to subcontractor agreements — continue.

What Specifically Shuts Down

The federal government halts most discretionary operations during a shutdown.

For contractors, this means:

• Paused or delayed contracts: Work tied to current-year appropriations cannot move forward without government direction.
• System slowdowns: Agency approvals, modifications, and reimbursements stall until funding is restored.
• Secondary delays: Administrative processes like audits or protests continue, but without the same level of agency support.

What Remains Open

Not all government activity stops during a shutdown. Key areas that continue include:

• Essential services: Contractors supporting defense, intelligence, or other essential federal missions are often expected to keep working during a shutdown. Payments may still be delayed if contracting officers are furloughed, but the work itself usually continues because national security is exempt from shutdown freezes.
• Contracts funded by prior-year appropriations: If a contract was already fully funded in a prior fiscal year, contractors can usually keep working under that existing authority. For contractors, the challenge is determining which of their projects fall under prior-year funds and which require current appropriations (which are halted).
• Programs with separate funding (disaster response, critical infrastructure, etc.): For GovCon firms are involved in disaster recovery, infrastructure, or health-related programs funded through supplemental or mandatory appropriations. Those can remain active during a shutdown. However, many contractors in traditional IT services, staffing, construction, or professional services won’t benefit from these carve-outs.

Understanding whether your contract is funded by prior-year money, falls under an exception, or requires new appropriations is critical.

Practical Steps Contractors Can Take Now

While much is outside of contractors’ control, the following steps can make a difference:

1. Understand Contract Funding
Know whether your contracts are backed by prior-year appropriations, current appropriations, or special funding sources. This determines whether work may continue during a shutdown or must pause.

2. Secure Written Instructions
 If told to pause work, insist on a stop-work order in writing. Review FAR clauses and funding provisions to understand your rights.

3. Stay Connected with Subcontractors
 Communicate openly to ensure subs do not continue unauthorized work that cannot be reimbursed.

4. Review Cash Flow Early
 Cash flow is the first pressure point in a shutdown. Connect with your banker to review expenses, financing options, and strategies to remain stable until payments resume.

5. Document Costs Meticulously
 Track labor, ramp-down and ramp-up time, consultant fees, and additional communications. Complete documentation supports cost recovery later.

6. Double-Check Compliance
 Shutdown disruptions can lead to billing errors or workforce missteps. Ensure your processes remain compliant and defensible.

7. Stay Alert for Fraud
 Scammers target GovCon firms during shutdowns. Watch for phishing emails, suspicious phone calls, or fake portals mimicking government websites. Always verify before responding.

Moving Forward With Confidence

Government shutdowns create challenges, but contractors don’t have to navigate them blindly. The businesses that come out strongest are the ones that stay proactive—protecting cash flow, documenting costs, maintaining communication, and keeping an eye out for fraudulent activity.

At Capital Bank, we partner with government contractors to navigate these challenges. Our GovCon team understands the unique pressures of this industry and stands ready to support you with the resources, insight, and financial solutions you need to stay resilient.

If you have questions or want to discuss your strategy, connect with your banker today.