Dec. 11 Funding Cliff: What a Second CR or a Lapse Means for Federal Contractors

Federal contractors face a Dec. 11 funding cliff, and the next six weeks will decide whether their contracts keep running on a stopgap or stall in a lapse. The Continuing Appropriations and Extensions Act, 2027 (Public Law 119-103), enacted Sept. 2, 2026, keeps agencies funded at fiscal 2026 rates only through Dec. 11, 2026, unless Congress passes full-year FY2027 spending first. Steptoe describes the FY2027 appropriations bills as unfinished, and lawmakers return from the midterm elections with only four session weeks before the deadline.

Whichever way Congress goes, a second continuing resolution or a lapse, contractors should plan now for both. The rules differ sharply, and the paperwork that protects a company in a shutdown has to be in place before contracting officers are furloughed.

What the Dec. 11 Stopgap Already Restricts

The current CR is not a blank check. Section 101 funds operations at the FY2026 rate, and Section 104 blocks new work outright: "Except as otherwise provided in section 102, no appropriation or funds made available or authority granted pursuant to section 101 shall be used to initiate or resume any project or activity for which appropriations, funds, or other authority were not available during fiscal year 2026."

Section 102 adds limits aimed at defense programs. The Pentagon cannot start production of items not funded for production in FY2026 or earlier, cannot raise production rates above those sustained with FY2026 funds, and cannot launch multiyear procurements that use advance procurement funding for economic order quantity unless Congress specifically appropriates for them later. Section 109 targets programs that would otherwise have high initial rates of operation, and Section 110 requires that "only the most limited funding action of that permitted in the Act shall be taken in order to provide for continuation of projects and activities."

For a contractor, those clauses translate into delayed new-start awards, stretched-out production lots and smaller incremental funding actions.

The CR also does something for grant-funded firms and subrecipients. Section 157 says a rule revising the Uniform Guidance, arising out of the proposed rule titled "Regulation for Federal Financial Assistance" published May 29, 2026, or a substantially similar rule, may not be issued or finalized through Dec. 11, and that any such rule issued earlier cannot take effect through that date. That protection expires with the CR unless Congress extends it.

Why a Second CR Looks Likelier Than 12 Bills

Steptoe's appropriations newsletter says the biggest obstacle may be agreement on overall discretionary spending and the balance between defense and non-defense funding, and that until the framework is settled, subcommittees face limits on resolving the details of their bills. The Steptoe appropriations newsletter notes, "With only four session weeks remaining before the funding deadline, they will need to act quickly."

Steptoe's forecast: "While enactment of all 12 bills, a full-year CR, or even a government shutdown remain possible, we think a hybrid outcome is most likely: a small minibus, potentially anchored by Military Construction-VA and other less controversial bills, followed by a CR extending consideration of the remaining bills into 2027." The firm describes one possible approach as beginning with minibuses where agreement is easier and leaving harder bills, such as Defense and Labor-HHS-Education, for later.

For defense contractors, that outlook matters most. If Defense is among the bills pushed into 2027, the Section 102 production and multiyear limits could stay in force well into the new calendar year.

How a Lapse Would Hit Awards, Invoices and Stop-Work Orders

The last lapse ran 43 days, from Oct. 1 to Nov. 12, 2025, which PilieroMazza called the longest government shutdown in U.S. history. Law firm PilieroMazza's January 2026 contractor alert, written ahead of a possible partial lapse, lays out what contractors should expect. "No new contracts or modifications will be issued, and there will be delays in the acquisition process for procurements," the firm wrote. On cash flow: "Invoices will not be paid during a shutdown and may be delayed after the shutdown is over." Statutory deadlines for claims and bid protests do not automatically pause.

Funding posture decides who keeps working. Citing OMB lapse guidance, ClearedJobs explains that contracts fully funded before a lapse can continue without a new notice to proceed. The Antideficiency Act, though, bars exercising options, issuing cost-raising modifications and making further obligations to incrementally funded cost-reimbursement contracts during a lapse. Even funded work can stall if furloughed government staff cannot accept deliverables, or if performance depends on closed government facilities, a common problem for cleared work in government SCIFs.

The FAR does not tell contracting officers what to do in a shutdown, so instructions vary contract by contract. Where FAR 52.242-15 applies, a contracting officer can halt work for 90 days, and the contractor gains a right to an equitable adjustment, which it commonly must assert within 30 days after the stoppage ends. PilieroMazza advises getting any stop-work direction in writing and not performing when told to stop, or when performance is impossible and instructions are unclear, because that work may never be reimbursed. Primes must make sure subcontractors stop when the government orders a stoppage, or risk owing subs money they cannot recover from the government.

No Back Pay Guarantee for Contractor Employees

Federal employees have a statutory backstop; contractor staff do not. The Government Employee Fair Treatment Act of 2019 covers employees of the U.S. government and the District of Columbia, not contractors. According to ClearedJobs, P.L. 119-37, the law that ended the 2025 lapse, restored federal pay and covered state and grantee staff but contains no contractor back-pay provision. H.R. 5657, which would have capped reimbursed contractor pay at $1,442 a week, sat at committee referral as of July 2026.

ClearedJobs puts it plainly: "If your contract stops, no statute makes you whole; your employer may choose to pay you, but nothing requires it." Idled contractor employees generally turn to regular state unemployment insurance.

What It Means for Contractors

Treat Dec. 11 as a hard date, even though Steptoe's most likely outcome is a small minibus followed by a second CR. Before then, PilieroMazza's advice calls for clearing open items, including deliverable approvals, pending invoices and modifications, while contracting staff are still at work. Review each contract's stop-work, excusable-delay and funding clauses, and check option exercise dates and incremental funding allotments that fall in December or January. Request written instructions from contracting officers now, brief subcontractors on how stop-work notices will flow down, and set up cost tracking that can support an equitable adjustment later.

Companies chasing new starts or DoD production increases should assume those awards slip until full-year bills pass, possibly not before 2027. Grant-funded firms should watch whether any new stopgap extends the Section 157 hold on the Uniform Guidance rewrite. And firms with cleared staff should decide, before a lapse, how they will handle pay for workers who cannot get into closed facilities.