By Shiva Hamidinia

July 7, 2020

Construction and many other contractors who cannot telework may be receiving stop-work orders or facing other unique challenges on their government contracts in the face of COVID-19.  Impacts may be exacerbated for personnel working in the field who may not be receiving guidance from the government due to unavailability of their Contracting Officers (CO) or Contracting Officer Representatives (COR).

An Associated General Contractors of America Association’s (AGC) survey found that although the Paycheck Protection Program (PPP) has allowed construction firms to add and retain employees despite cancelation of projects, the loan program “will cover only a limited part of company expenses and is not enough to offset the huge drop in projects.”  ENR recently reported that of 817 AGC members surveyed, sixty-seven percent had at least one project canceled or delayed.  https://www.enr.com/articles/49375-agc-procore-provide-insights-about-loss-of-975000-construction-jobs-northeast-hardest-hit

There are several avenues of relief in the FAR that contractors and subcontractors (if these clauses have been flowed down) can look to for relief:

• Suspension of Work Clause (FAR 52.242-14)
• Stop-Work Order Clause (FAR 52.242-15)
• Changes Clause (FAR Parts 52.243)
• Excusable Delay/Force Majeure type Clauses (FAR 52.249-14(a), FAR 52.212-4(f), FAR 52.249-8, FAR 52.249-9)

The Suspension of Work Clause:

The Suspension of Work Clause is a mandatory FAR clauses required for fixed-price construction and architect-engineer contracts.  So, if your construction or architect-engineer contract doesn’t expressly include this clause, it may be read into your contract pursuant to the Christian doctrine (G. L. Christian & Associates v. United States, 312 F.2d 418 (Ct. Cl. 1963)). This clause also may apply to subcontracts that have flowed down or incorporated in full the prime contract requirements.  A contractor may invoke the clause even if the government has not issued a formal “suspension order.”  In cases where a contractor is forced to cease work or interrupt their work as a result of the government’s actions or inactions, that conduct may be treated as a “constructive suspension,” affording the contractor the same rights under the clause.  The four-part test for recovery under the Suspension of Work Clause is:

• the resulting delay was for an unreasonable period of time;
• the delay was proximately caused by the government’s actions;
• the delay resulted in some injury to the contractor; and
• there is no delay concurrent with the suspension that is the fault of the contractor.

Notice is required for both constructive and directed suspensions.  For directed suspensions, a claim, in a sum certain, must be asserted in writing “as soon as practicable” after the suspension, delay, or interruption, but not later than the date of final payment under the contract.  In the case of a constructive suspension, the notice requirement has a quicker turn-around time.  A contractor must submit its notice in writing of its claim for added costs incurred within 20 days from the date that the work is suspended, delayed, or interrupted for an unreasonable period of time.  Constructive suspensions can only claim damages for suspensions, delays, or interruptions that were prolonged for an “unreasonable period of time.”  The Suspension of Work Clause specifically excludes profit; therefore, profit cannot be claimed as a part of the contractor’s damages.

The Stop-Work Order Clause:

Unlike the Suspension of Work clause, the Stop-Work Order Clause is discretionary and will not be read into a prime contract that does not expressly state it.  The Stop-Work Order Clause also requires written notice of any claim to be submitted to the CO within 30 days of the work stoppage.  The Stop-Work Order clause requires the CO to make an equitable adjustment in the delivery schedule or contract price, or both, if the stop-work order results in an increase in the time or costs of the contractor’s performance the contract.

Profit is not excluded under the Stop-Work Order Clause and can be included as a part of the contractor’s damages.

Changes Clause:

FAR 52.243-1(b) requires the Contracting Officer to make an equitable adjustment in the contract price and modify the contract when a change causes an increase or decrease in the cost of, or the time required for, performance of any part of the work under the contract. FAR 52.243-1(c) requires written notice to the CO of entitlement to a price adjustment under this clause within 30 days from the date of receipt of a written/directed order.  The government’s order may come to the contractor formally, through a proposed or unilateral modification to the contract, or informally, through actions or directions that constructively change the contract.  Contractors should make their best effort to document in writing their communications with the CO and furnish notice of a claim to adjust the contract price or time by no later than 30 days from when they learn of the change.

Excusable Delay/Force Majeure Clauses:

FAR 52.249-14(a) excuses a contractor, except for defaults of subcontractors, for failing to perform if the failure “arises from causes beyond the control and without the fault or negligence of the Contractor.”  Included in the clause are specific examples, including “acts of God”; “acts of the Government in either its sovereign or contractual capacity”; “epidemics”; “quarantine restrictions”; and “freight embargoes.”  A contractor cannot be terminated for default if it is failing to meet its performance deliverables or deadlines as a result of excusable delays.  The contractor should notify their CO within 30 days of the need to extend its performance period or deliverable deadlines, or contract price, as a result of excusable delays per the changes clause, FAR 52.243.  FAR 52.212-4(f) also provides similar force majeure exceptions to contract performance deadlines.  A contractor is required to notify their CO in writing “as soon as it is reasonably possible” after the commencement of any excusable delay, detailing the delay and must try to remedy the delay with “all reasonable dispatch.” Once the delay-causing occurrence has ceased, the contractor then must “promptly” give written notice to the contracting officer of the cessation.

Conclusion

Contractors are advised to review their contracts to see which clauses are incorporated and provide prompt notice to their COs of any price or time impacts to their contracts as a result of COVID-19. Only the CO is authorized to make contract modifications. Therefore, changes requested by other government officials should be promptly reported to the CO, with a request for direction in writing.  Contractors should track all supporting costs and documentation of changes.  The best practice is to open new cost accounting codes assigned to track the actual costs incurred as a result of contract modifications.  This will make it easier to later quantify costs to support requests for equitable adjustment or claims.

COs should be encouraged to issue a modification to the contract reflecting the negotiated adjustment in contract price (or new CLIN) to pay the contractor’s employees to remain on standby during COVID-19 restrictions to the worksite.  Invoicing to the government should continue on a regular basis, including invoicing the agreed rates for the “standby” workforce while work is suspended during COVID-19.  Efforts to mitigate losses, including reassigning employees to other projects, where possible, should be documented, filed, and furnished to the CO to support the contractor’s claim.  To the extent that any other relief, including tax relief under the Paycheck Protection Program, overlaps, a Contractor should offset those amounts gained from the total amount claimed from the government.

 

By Robert Nichols and David Bodenheimer

May 8, 2020

By Adrian Wigston and Robert Nichols

April 9, 2020

On April 8, 2020, the Office of the Under Secretary of Defense (OSD) issued an important class deviation to guide contracting officers’ (CO) implementation of CARES Act Section 3610 and to ensure an appropriate balance between flexibilities and limitations.  The document recognizes the imperative to support affected contractors using available acquisition tools to maintain a healthy, resilient, and responsive total force including government contractors.  It also highlights the importance of the CO’s role to ensure good stewardship of taxpayer funds while supporting contractor resiliency.  Agencies are instructed to use DFARS 231.205-79, CARES Act Section 3610 Implementation, for this purpose.

For contractors, there are six takeaways:

1. Duplicative payments are not allowable. Contractors may be receiving compensation from other provisions in the CARES Act, such as tax credits and Paycheck Protection Program (PPP) loans that are forgivable. For example, small businesses that are sheltering in place could use the PPP loan to pay its employees and then have the loan forgiven.  In such a case, the business should not also seek reimbursement for payment from DoD to cover costs of those idle employees with paid administrative leave under the provisions of Section 3610.
2. Contractors will likely have to certify other forms of COVID-19 relief claimed or received. Contractors are responsible for supporting any claimed costs, including claimed leave costs for their employees, with appropriate documentation and for identifying credits that may reduce reimbursement under Section 3610.  The class deviation instructs CO’s to receive certifications from contractors regarding forms of other Federal relief claimed or received stemming from COVID-19, including an affirmation that the contractor has not or will not pursue reimbursement for the same costs under Section 3610.
3. Section 3610 is applicable to any contract type. Our interpretation of Section 3610 is that its provisions apply to all contract types.  OSD’s guidance confirms this interpretation.
4. Paid leave for issues not related to COVID-19 remain subject to normal regulations. The costs covered by Section 3610 are limited to those incurred for leave due to the COVID-19 national emergency. Costs of paid leave unrelated to the COVID-19 national emergency remain subject to applicable provisions of FAR subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7.
5. Paid leave under Section 3610 has two key limitations. OSD reminds us that coverage is limited to leave taken by employees who otherwise would be performing work, but cannot perform due to facility closures, inaccessibility, or inoperability, and where the employee is unable to telework because work cannot be performed remotely.
6. This guidance puts contractors on notice that paid leave may be disallowed even just because contractors are eligible to receive benefits elsewhere. This class deviation remains in effect until rescinded and OSD anticipates the need for additional guidance.  Here, we see ambiguities that hopefully will be improved.  Under 231.205-79(b)(6), costs made allowable by Section 3610 are to be reduced by the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with the COVID-19 public health emergency.  This apparently could result in a cost disallowance for contractors that were eligible to receive benefits under a different provision, even if the contractor has not actually received that benefit.  We hope to see additional guidance that clarifies this ambiguity.  For now, we suggest that contractors explore all options to receive benefits for paid leave necessary because of COVID-19 and to clearly document those efforts.

By Robert Nichols,Terri G. O’Brien, and Adrian Wigston

April 3, 2020

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, the U.S. Small Business Administration (SBA) will manage the Paycheck-Protection Program loans for qualifying organizations with fewer than 500 employees.  The loan amounts are the lesser of 2.5 times average monthly payroll costs or $10 million.  Application for these loans starts on April 3.

Paycheck-protection loans can be applied to qualifying expenses incurred in an eight-week period between Feb. 15 and June 30.  Qualifying expenses consist of payroll costs, health care premiums, rent, the interest portion of mortgage payments, utilities, and other business debts entered into prior to February 15, 2020.  More guidance is expected from the SBA within 30 days.

In a recent article, we discussed the likelihood of increased audits and investigations in the wake of COVID-19.  We expect these loans to be no exception; use of the SBA funds must be tracked carefully and contractors should consult expert advice to ensure the most important risks, exceptions, and caveats are known in advance.  We’re writing this article together with KWC Certified Public Accountants, a firm with extensive experience in SBA loans.  KWC recently deployed a new program in lightspeed to assist clients with CARES Act financial planning.

Although banks will provide the primary administrative push of getting loans submitted and approved, the government contracting community should consider several key points when evaluating strategy for utilizing these funds.

1. The SBA has not finalized guidance and standards completely, but plans to do so within 30 days. This presents a clear timing risk. For example, the SBA is “anticipating” that some portions of the loan used for costs other than payroll will not be forgiven.
2. There are interpretation conflicts between Treasury, the SBA, and the CARES Act. Treasury has stated the loan is due within 2 years, with payment deferral options, while the act allows for payment across 10 years.
3. Contractors must certify that current economic uncertainty makes the loan necessary. This might expose some contractors to risk or possible fraud allegations if they obtain the loan but do not lose any contract revenue or they actually increase contract revenue through new awards to fight COVID-19.
4. By receiving the paycheck protection loan, you lose eligibility for two helpful provisions in the CARES Act: the employee retention credit ( 2301) and deferred payment of employer payroll taxes (§ 2302).
5. We anticipate a significant administrative workload for loan recipients to accurately calculate and support the amount of the loan eligible for forgiveness. Planning in advance to prepare systems and processes could help track these costs more efficiently. For example, we recommend depositing loan proceeds to a separate account such as a payroll account to clearly document how funds are spent.
6. KWC CPA can assist with other technical points such as requirements and definitions for full-time equivalents, restrictions on the use of loan proceeds for sick leave and FMLA leave, etc.

Nichols Law is tracking all of the developments, guidelines, and regulations relating to the CARES Act, and will continue to post updates on our blog.  We are available to discuss any needs or questions you may have.

KWC Certified Public Accountants is providing services related to the tax and financial issues clients face during the COVID 19 outbreak.  KWC’s website includes a COVID-19 resource and updates page with relevant information on the SBA loan and application process.  For more details please contact:

Terri G. O’Brien, CPA
Principal
terri.obrien@kwccpa.com

By Robert Nichols and Andrew Victor

March 31, 2020

On March 30, 2020, the Department of Defense published a memorandum addressing how agencies should handle contractor Requests for Equitable Adjustment (REAs) and other performance issues in response to the COVID-19 crisis.

DOD’s guidance addressed ways to provide relief to contractors, such as through the Excusable Delays clause at Federal Acquisition Regulation (FAR) 52.249-14.  DOD also directed contracting officials to consider REAs in light of Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which the President signed into law on March 27, 2020.

Section 3610 provides agencies the discretion to use “funds made available to the agency” by Congress to modify any contract or other agreement to reimburse contractors for workers’ lost time up to September 30, 2020, if the contractor provides leave to its employees or subcontractors “to protect the life and safety of Government and contractor personnel.”

In its guidance, DOD highlighted Section 3610 as providing discretion for agencies to modify contracts to reimburse paid leave where contractor employees could not access work sites or telework, but actions were needed to keep such employees in a ready state.  DOD explained that Defense Pricing & Contracting within the Office of the Secretary of Defense would provide implementing guidance for Section 3610 as soon as practicable.

DOD also reiterated that contracting officers are empowered to make difficult decisions on adjusting contracts appropriately.  For example, when reviewing REAs, contracting officers should consider whether the requested costs would be allowable, allocable, and reasonable to protect the health and safety of contract employees as part of the performance of the contract.  Moreover, contract adjustments or reliance on an excusable delay should not negatively affect contractor performance ratings.  Contracting officers must work closely with contractors to ensure continuity of operations and protection of the Defense Industrial Base.

Contractors can cite this memorandum to their government points of contact and contracting officers when discussing COVID-19 impacts on their contracts.  Contractors should also be mindful of further guidance to be issued by Defense Pricing & Contracting.

By Robert Nichols, Andrew Victor, and Adrian Wigston 

March 30, 2020

Recognizing the challenges coronavirus COVID-19 presents to contractors and the U.S. Government, the Office of Management and Budget (OMB) recently issued a memorandum to executive agencies addressing federal contract performance issues.

In the memorandum, OMB strongly encourages agencies to maximize opportunities for contractors to telework and to amend contracts that do not provide for it; if telework is not feasible, agencies should be flexible on delivery dates.  OMB directs agencies to emergency procurement authorities that haven been made available by the President’s declaration of a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), such as increases to the micro-purchase and simplified acquisition thresholds that streamline procurements.  OMB also provides 12 Frequently Asked Questions (FAQs) related to mitigating the impact of COVID-19 on contractors through teleworking, requests for equitable adjustment (REAs), use of the streamlined procurement authorities under the Stafford Act, and tracking contract spending related to COVID-19.

Notably, FAQ 3 addresses REAs submitted by contractors for costs associated with increased safety measures to protect their employees from COVID-19.  OMB instructs agencies to take a case-by-case approach.  Agencies should use their existing practices, taking into account, among other factors, whether the requested costs would be allowable and reasonable to protect the health and safety of contract employees as part of the performance of the contract.  OMB directs agencies to Federal Acquisition Regulation (FAR) § 31.201-3, which provides the standard for what is “reasonable” in the prevailing circumstances, i.e. “what a prudent person would do under the circumstances prevailing at the time the decision was made to incur the cost.”

For example, agencies should consider whether the contractor took actions consistent with Center for Disease Control guidance and whether the contractor reached out to the contracting officer to discuss appropriate actions.  OMB urges agencies to consider REAs for keeping “skilled professionals or key personnel in a mobile ready state for activities the agency deems critical to national security or other high priorities (e.g., national security professionals, skilled scientists).”

Finally, OMB highlights a number of contract clauses that may be helpful in managing COVID-19 issues as they arise.  These contract clauses include the changes clauses (see FAR clauses 52.243-1 through 52.243-3 or clause 52.212-4(c)) or suspending or stopping performance through clause 52.242-14, Suspension of Work, and clause 52.242-15, Stop Work Order.

By issuing the memorandum, OMB has provided guidance to contracting officers and contractors.  In urging agencies to maximize telework, contractors should be able to continue performance and potentially mitigate the need for extensions or REAs.

For contractors that work with multiple agencies, OMB’s guidance should standardize the responses by federal agencies to COVID-19 performance problems.  Moreover, contractors can use the memorandum as evidence that COVID-19 impact on contracts should be borne by the agencies, not contractors.  Indeed, the memorandum encourages agencies to consider granting REAs if the costs are allowable and reasonable.  Contractors are well advised to provide a copy of the memorandum to their government points of contact and contracting officers when discussing COVID-19 impacts on their contracts.