How Does the Government Shutdown Impact the U.S. Industrial Base?

On October 1, the government shut down after Congress failed to appropriate funds for FY 2026. While some essential services continue, many agencies have partially or fully suspended operations until additional funds are appropriated. This shutdown will have a substantial impact on the industrial base, which will intensify the longer it continues. Federal agencies have issued detailed guidance on continued operations throughout the shutdown’s duration, including the Department of Defense (DOD), the Department of Commerce, the Department of State, and the Small Business Administration.

Q1: How does the shutdown affect existing contracts?

A1: Work will continue on contracts that are already funded. If a contract (or contract option) was awarded before the lapse in appropriations, performance can continue regardless of whether the work supports an excepted activity or not. “Excepted activities” are those actions involving the protection of human life and property, and designated other activities identified under the Antideficiency Act. Thus, no new obligations of funds are permitted unless tied to an excepted activity. Performance on services contracts will continue only on those programs or functions directed by government policy. Some contracts may receive stop-work orders, such as office support contracts or those that require oversight and inspection by federal employees who have been furloughed.

Q2: How does the shutdown affect pending awards?

A2: There will be little to no contract awards during the shutdown. New awards, renewals, modifications, extensions, task orders, and contract options cannot be executed, and additional funding cannot be added to incrementally funded contracts or cover cost overruns. The exception to these rules applies only when a contractor is supporting an excepted activity. No new solicitations will be issued until Congress restores funding.

However, when determined necessary, the DOD may award new contracts or place task orders under existing ones to support excepted activities even during a shutdown. This authority is to be exercised only in cases of imminent risk to human life, protection of property, or serious threats to national security.

Q3: Can companies still engage with their government customers during the shutdown?

A3: It will depend on the specific government customer, what activity or priority the contract supports, and the type of contract. If the contract is a firm-fixed price with funds from the previous year’s appropriations and is connected to an exempted activity or agency priority, then there is potential for continued access to government customers. Still, the reality of what non-furloughed government staff can accomplish, especially in terms of ready communication, will be dictated by the number of tasks they need to carry out to keep the department functioning and the prioritization of those tasks.

For DOD operations during the shutdown, guidance is listed here. Page 12 of the DOD guidance outlines which exemptions pertain to acquisition and logistic support:

Excepted activities are up to the discretion of DOD leaders to ascertain whether they support these specific priorities: (1) securing the U.S. southern border, (2) operations in the Middle East, (3) plans for a Golden Dome for America, (4) depot maintenance, (5) shipbuilding initiatives, and (6) efforts supporting critical munitions. Such excepted activities also include national security activities, medical and dental care, and support functions for those activities.

Companies that provide a product or service in support of these priorities or activities might have better access to acquisition and logistics staff, in addition to companies with contracts funded from previous years or those that are authorized by the Feed and Forage Act. Any coordination related to the storage of purchases before the shutdown may also take place, but for each of these acquisition and logistics activities, the amount of DOD staff kept active may still be less than the amount needed to maintain levels of communication with companies, as was possible before the shutdown. Many federal workers will be furloughed. Those still working will likely be expected to cover a wider range or greater quantity of work, minimizing the time they can give to each contract and company.

Q4: How will the shutdown impact companies’ revenues from federal contracts?

A4: While contracts for prioritized or exempted activities and firm-fixed contracts with funding from previous years will technically be active, the government staff available and able to continue support functions for these contracts, including in submitting payments, might be restricted by time and workload. Smaller companies with less cash flow could face difficulty in maintaining staff and normal business operations. These include start-up companies with dual-use or cutting-edge technology products.

Q5: What does the shutdown mean for the Small Business Innovation Research Program (SBIR)?

A5: SBIR is a government program aiming to attract small and emerging businesses with innovative solutions to the U.S. defense ecosystem, but SBIR program required reauthorization by September 30, 2025. Regardless of the status of the shutdown, no new SBIR awards will be granted until the program is reauthorized. The U.S. Small Business Administration will not respond to requests during the shutdown, and requests pertaining to the SBIR program will need to be directed toward participating agencies, depending on each agency’s operating status. As SBIR is a program enabling a wider range of companies to access contracts, the lack of reauthorization of the program will limit new entrants to the U.S. industrial base, especially those with emerging or dual-use technology solutions.

Q6: What does the shutdown mean for the Defense Production Act (DPA)?

A6: Like SBIR, the DPA required reauthorization before the shutdown. The DPA was reauthorized by Congress in 2018 to last until September 20, 2025, and without reauthorization, most provisions under the DPA will expire, which could include certain contracts, investments, industrial base assessments, and other programs. New contracts will not be possible under the DPA without reauthorization, and existing contracts could face the same issues as other contracts subject to delays by a government shutdown. The DPA functions under three authorities. Title I is focused on “Priorities and Allocations,” an authority enabling the president to require people and companies to prioritize and take contracts for materials and services in pursuit of national defense. Title III is focused on the “Expansion of Productive Capacity and Supply,” empowering the president to incentivize the domestic U.S. industrial base through loans, purchases, and other measures to increase production and supply of necessary materials. Title VII, “General Provisions,” provides specific definitions and authorities to the DPA, enabling voluntary agreements with industry, the prevention of certain foreign corporate operations in the United States, and the creation of a volunteer pool of executives with experience in private industry that they can lend to government service.

Work by companies with federal contracts will be dependent on the type of contract, which year the funding came from, which activity or DOD priority the contract pertains to, and the real-time limits of work that can be completed by government staff left to maintain government functions during a shutdown. 

Further information can be found at the following government and industry links:

“Government Shutdown Guidelines,” National Defense Industrial Association

“2025 Federal Shutdown Industry Insights,” The Pulse of GovCon

“Frequently Asked Questions During a Lapse in Appropriations,” White House

“What to Know in the Event the Federal Government Shuts Down,” Associated General Contractors of America

“Guidance for Shutdown Furloughs,” U.S. Office of Personnel Management

“Here’s a look at federal agencies’ shutdown contingency plans,” Federal News Network

Letter to the Office of Management and Budget with recommendations, Aerospace Industries Association

Jerry McGinn is director of the Center for the Industrial Base and senior fellow with the Defense and Security Department at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Katy Buda is an associate director with the Center for the Industrial Base at CSIS. Audrey Aldisert is a research associate with the Center for the Industrial Base at CSIS.