By Robert Nichols, Shiva Hamidinia, and Sam Van Kopp

Originally published in the August 2020 Briefing Papers by Thomson Reuters.

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, Andy Liu, and David Bodenheimer

May 8, 2020

By Andy Liu and Adrian Wigston

April 30, 2020

On Wednesday, Treasury Secretary Steven Mnuchin and Small Business Administrator Jovita Carranza jointly announced that the SBA will review all PPP loans in excess of $2 million to ensure that the recipient was an “eligible” borrower.  These audits will occur “following the lender’s submission of the borrower’s loan forgiveness application,” they said.  Loans below $2 million and those for which forgiveness was not requested are still subject to audit.

There is no question that the SBA should conduct audits to identify any fraudulently obtained PPP loans.  However, the eligibility criteria is not only ambiguous – it has been constantly evolving.  Here, we list just a few of examples.

• What do “uncertainty” and “necessary” mean? The CARES Act requires that the PPP loan applicant certify, in good faith, that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”  This, of course, does not require a pre-determination that the pandemic would necessitate an influx of additional funds– it requires only a good faith assessment that the “uncertainty” of economic conditions in light of the pandemic makes such an influx potentially necessary.  More troubling, however, is that neither the statute nor SBA’s early guidance shed any light on what “necessary” means.  Nor is it clear whether the SBA will eventually construe “support” in a way that imposes not-yet-contemplated limitations on eligibility.
• Evolving meaning of “necessary.” Few, if any, early commentators focused on the ambiguity of what “necessary” meant.  Indeed, nowhere in the SBA’s initial Interim Final Rule did it address the meaning of this term.  In the wake of negative publicity about Shake Shack and other otherwise well-funded companies obtaining PPP loans, however, the SBA and Treasury seized on this term to carve out such companies from PPP eligibility.  On April 23, nearly a month after the CARES Act was passed, the SBA suggested for the first time in its evolving FAQs that “ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business” is material to the determination of necessity.  Not only is this an arguably new requirement, it only further exacerbates the lack of clarity regarding eligibility.  Does the SBA’s new guidance mean, then, that any company with an untapped Line of Credit is ineligible for the PPP loan?  Or that owners of privately held businesses must turn to their personal savings for cash infusions into the business?
• How are “tangible net worth” and “net income” calculated? The SBA’s FAQs provided that, even if a borrower has more than 500 employees and does not meet the SBA employee-based and revenue-based size standard corresponding to its primary industry, it may nonetheless be eligible for a PPP loan if it qualifies under the SBA’s “alternative size standard,” based on maximum tangible net worth and average net income after Federal income taxes.  But these terms aren’t defined in any statute, regulation or informal guidance.  Are they calculated based on financial statements or tax accounting, for example?  Or by some other method?

In addition to these interpretation issues, eligibility is often further convoluted by the need to determine what other businesses are considered “affiliates” such that their employee-counts and revenues must be combined.  The tests for affiliation are based on concepts of “control” which are at times subjective and fact-based.

The SBA seemingly recognized that the rules would be evolving.  This was included in the early FAQs issued by SBA:

       Question:  I filed or approved a loan application based on the version of the PPP Interim Final Rule published on April 2, 2020.  Do I need to take any action based on the updated guidance in these FAQs? 

       Answer:  No.  Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application.  However, borrowers whose previously submitted loan applications have not yet processed may revise their applications based on clarifications reflected in these FAQs.

This early FAQ suggests that any loan application approved before new or conflicting guidance was issued would be safe harbored.  That, however, is not the case.  SBA’s guidance now provides that borrowers who believe that the new guidance no longer makes them eligible for the PPP loan have until May 7, 2020 to repay the loan in full in order to be “deemed by SBA to have made the required certification in good faith,” and presumably not subject to any penalties.

Given the continuing uncertainty around eligibility criteria, contractors in the immense gray area are faced with a dilemma – repay the funds that are much needed, or risk a later allegation that they made a false certification of eligibility.   Nichols Liu has helped numerous clients assess eligibility and, as appropriate, to take steps to mitigate the associated risks of taking or keeping PPP loans.

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.