Federal Funding Freeze: Key Insights for Contractors

Despite Court Orders, Agencies Continue to Withhold Funds, Leaving Contractors in Limbo

Uncertainty continues to cloud infrastructure and climate projects as federal agencies refuse to release funds despite court rulings against the Trump administration’s federal funding freeze. Contractors nationwide are facing stop work orders and terminated contracts as legal battles over Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) funds escalate.

President Donald Trump’s Jan. 20 executive order, “Unleashing American Energy,” directed federal agencies to pause funding disbursement under these programs. While courts blocked the directive, agencies continue to implement the freeze, citing the need for project compliance reviews under the new administration’s policies.

Agencies Continue to Withhold Funds Despite Court Rulings

The Washington State Department of Transportation (WSDOT) is one of many agencies impacted by the freeze, with funding halted for bridge work and court-mandated culvert replacements, according to the Washington State Standard.

One of the most high-profile funding holds involves the California High-Speed Rail Authority. Newly appointed Transportation Secretary Sean Duffy ordered a compliance review of the authority’s federal agreements, putting $4 billion in federal funding for the project at risk, Mass Transit reported.

Meanwhile, 22 state attorneys general have taken the battle to court, challenging the funding freeze. On Feb. 21, a federal judge heard arguments on whether to further block the Trump administration from halting trillions in federal grants, NPR reported.

Legal Experts: Contractors Should Take Action

Despite a temporary restraining order (TRO) issued on Jan. 29, agencies continue to enforce the freeze, arguing that the TRO has a limited scope, said Jackie Unger, partner and Government Contracts Group lead at PilieroMazza, during a Feb. 12 webinar.

“Agencies continue to freeze funds, they’ve refused to resume disbursement of appropriated funds and they’ve continued to issue stop work orders and terminate contracts,” Unger said.

After the Feb. 21 hearing, the judge clarified that his order prohibits all funding freezes based on Trump’s executive order.

“The clarification may give contractors the ability to challenge agency actions in response to the executive orders, if they’re seeing impacts from those,” Unger said.

Despite this, the government has appealed the TRO rulings to the First Circuit Court of Appeals, seeking to reinstate the funding freeze. However, courts have so far denied requests for an immediate stay, meaning the legal fight could stretch for months before a final resolution.

How Contractors Can Respond to Stop Work Orders

Contractors facing stop work orders should be aware of their rights and take proactive steps.

Under Federal Acquisition Regulation (FAR) 52.242-15, a federal contracting officer can issue a stop work order for up to 90 days. Extensions require reasonable justification and mutual agreement, meaning contractors can push back if necessary, said Lauren Brier, partner at PilieroMazza.

“Once a stop work order is issued, the contractor has an immediate duty to mitigate costs,” Brier said. “You can’t just have people sitting on your payroll for the 90-day period and expect the government to make that payment.”

Contractors can request standby costs, which cover expenses resulting directly from the stop work order, but they must also take action to reduce financial impact, such as:

• Furloughing employees
• Managing lease costs
• Demobilizing jobsites

Additionally, contractors can file a Request for Equitable Adjustment (REA) to recover legal fees, administrative expenses, and other costs. However, there is no regulatory requirement for the government to respond, Brier warned.

“Another thing that we are suggesting clients do is when they receive a stop work notice, that they reserve their right to challenge the high-level directive to stop work,” Brier said.

Best Practices for Contractors Handling Stop Work Orders

To navigate the situation, legal experts recommend the following steps:

1. Notify your contracting officer of your intent to file a Request for Equitable Adjustment (REA).
2. Take immediate action to mitigate costs and document all efforts.
3. Keep a detailed record of communications and steps taken in response to the stop work order.
4. Consider filing a formal claim instead of an REA to force a timely response from the government.
5. Challenge the legality of stop work orders tied to the funding freeze, as courts are increasingly ruling them unlawful.

With billions of dollars in federal funds at stake, the coming months will be critical for contractors caught in the crossfire. Staying informed, seeking legal counsel, and proactively managing contracts will be essential to navigating this turbulent period.

Originally reported by Julie Strupp in Construction Dive.