Shutdown Fallout: Where Federal Contracting Is Frozen, and How SMBs Can Pivot Now
The 2025 government shutdown is now several weeks in, and small government contractors are feeling the squeeze. With entire agencies going dark, contracting offices shuttered, and invoices stuck in limbo, it’s no longer a question of “if” this will hit your bottom line. The real question is, what do you do next?
Let’s break down which federal agencies have hit the brakes hardest on procurement, where there’s still movement, and how small businesses can protect revenue and reallocate resources fast.
Who's Hit Hardest, and Who’s Still Buying
Agencies funded mostly by discretionary appropriations, think science, space, education, and environmental programs, have slowed to a crawl. According to the latest impact brief:
NASA furloughed 83% of its workforce, halting new tech contracts and R&D projects. Only “life/safety” operations continue.
NOAA and EPA are in near-total freeze mode, with over 89% of staff furloughed and environmental program spending paused.
The Department of Education has ceased awarding new grants or contracts. Contractors may still work on loan-related services, but they won’t get paid until this ends.
Contrast that with agencies funded through mandatory or fee-based budgets:
VA and DHS are operating at 95%+ capacity. Medical centers, FEMA, TSA, and border agencies are still actively buying.
DOT continues trust-funded work like highway and airport operations, though new discretionary grant solicitations are delayed.
Why This Matters for Small Businesses
If your revenue depends on active task orders, milestone payments, or pipeline opportunities at affected agencies, your forecast just took a hit. Contractors targeting paused agencies may see solicitations vanish, COs go offline, and invoices pile up.
For example:
Companies holding 8a contracts services or SBIR Grant Assistance from NASA, DoE, or Education will face stalled modifications and payments.
Women owned small business certification awardees expecting new grant-funded work may be frozen out until Congress acts.
Government Contract Proposal Writing teams are reporting RFP pipelines from EPA and Interior have collapsed.
And even if you're technically “allowed” to keep working, as with some DoD or FSA contracts, you may not see cash flow until after the shutdown.
How to Pivot: Tactics You Can Use Today
Smart SMBs are already shifting into survival and diversification mode. Here's how to do the same:
Target state and local buyers (SLED): Many state DOTs, health departments, and school districts still have active procurements. Co-op purchasing pools like Sourcewell, HGACBuy, and NASPO have open bids right now for virtual health products, public safety equipment, and ed-tech.
Leverage your federal contracting certifications in other sectors: If you’ve got women business certification, disabled veteran small business certification, or SBA 8a certification, highlight it in bids to local governments. Many are looking to meet DEI goals.
Reweight your NAICS strategy: If your contractor NAICS code aligns with sectors like cybersecurity (still active at DHS/CISA), lab equipment (still moving at universities and public health departments), or DOT highway work, prioritize those.
Bill fast, document thoroughly: If you’re mid-performance on a contract and still able to invoice, do it now. Then document everything. FAR 52.242-15 (Stop-Work Order) and 52.242-14 (Suspension of Work) give you a path to recover costs, if you file within 30 days of resumption.
Follow the money: Agencies like USDA are reopening field offices to disburse $3B in farm aid, contractors in ag-tech, data management, or logistics should explore these active channels.
Find subcontracting lanes: Larger primes with still-funded IDIQs (e.g., DHS EAGLE or SEWP V for tech purchases) are viable targets for subcontracting outreach during the freeze.
What to Watch Next
This situation is fluid. Keep an eye out for:
Continuing Resolutions (CRs) or agency-specific funding bills, these can restart contract flow overnight.
Agency memos adjusting what’s “excepted” (allowed during shutdown) could suddenly reopen procurement.
State emergency spending triggers, hurricanes, floods, or other declared emergencies often release fast-turn funding.
Also, check if your NAICS code for government contractors maps to disaster response, lab services, or infrastructure. These categories are proving resilient.
The Bigger Picture
This shutdown isn’t hitting everyone equally. Geography, political dynamics, and contract type are all influencing who’s still working and who’s furloughed. But one thing’s clear: sitting still isn’t an option.
Whether you’re in the SBA 8a certification services pipeline, exploring Grant Writing for Nonprofits, or trying to win disabled veteran government contracts, the most resilient firms are rebalancing now. The best government contracting business leaders are shifting toward funded buyers, prepping REA claims, and mining new certification leverage.
Stay nimble. Track developments daily. And make sure your 30-day playbook includes state and local targets, updated BD messaging, and aggressive follow-ups on payments and pipeline.
Looking for guidance on the safest agencies and sectors for small contractors right now? Read our related blog post: “When the Government Shuts Down, Smart Contractors Team Up” for a breakdown of active opportunities and certifications that still count.
If you aren't a Squared Compass partner, what are you waiting for? From getting your business set up with specific government set aside programs at both the State and Federal level, to being empowered by a Fractional Capture team to win government contracts, to receiving tailored government contract opportunities Squared Compass delivers immense value which helps propel our partners to success. Schedule a chat withour team today.
