Contractors Filing Bankruptcy

It's not often that a Government contractor files for bankruptcy. It is probably a less frequent occurrence among Government contractors than in the general population. First of all, prospective Government contractors must endure pre-award surveys which include a financial responsibility determination. If a contractor cannot satisfy the Government that it has the financial resources to complete the contract (or can acquire the financial resources), it will be disqualified from the selection process. And then there is the matter of contract financing. With the ability to to earn progress payments and/or obtain monthly reimbursements of cost, contractors need only two to three months of working capital before the cash pipeline begins flowing.

Nevertheless, contractors sometimes file bankruptcy for various reasons, usually catching the Government completely unaware of their going concern issues. Included in every Government contract (that exceeds the simplified acquisition threshold) is a notification clause (see FAR 52.242-13). The clause reads:

In the event the contractor enters into proceedings relating to bankruptcy, whether voluntary or involuntary, the contractor agrees to furnish, by certified mail or electronic commerce method authorized by the contract, written notification of the bankruptcy to the contracting officer responsible for administering the contract. This notification shall be furnished within five days of the initiation of the proceedings relating to bankruptcy filing. This notification shall include the date on which the bankruptcy petition was filed, the identity of the court in which the bankruptcy petition was filed, and a listing of government contract numbers and contracting offices for all government contracts against which final payment has not been made. This obligation remains in effect until final payment under the contract.

After receipt of this letter and forwarding it to legal counsel and anyone else that might be interested, the contracting officer must do two things (see FAR 42.9).

1. Determine the amount of the Government's potential claim against the contractor.
2. Take actions necessary to protect the Government's financial interests and safeguard Government property.

This is where a bankrupt contractor can help the contracting officer and ensure that having a contract terminated doesn't exacerbate the situation. A bankrupt contractor needs to quickly and efficiently ensure contracting officers that continued performance on its contracts are not in jeopardy. This is especially true of a Chapter 13 bankruptcy proceeding. At the time of filing, cash flow is perilous and to disrupt the cash flow that comes through progress payments (fixed price contracts) and claims for reimbursement (cost-type contracts), would not serve the contractor's (or the Government's) interest.