SBA Revamps Mentor-Protégé and Joint Venture Program Rules  

By Shiva Hamidinia

October 22, 2020

The benefits of large and small business collaboration are visible in the federal marketplace.  While encouraging small business growth and development, Federal agencies understandably want the highest qualified companies performing their projects.  Evaluations for federal construction and other procurements are increasingly moving from “Low-Price Technically Acceptable” to “Best-Value.”  To reduce administrative costs, agencies are also bundling mixed construction, supply, and services requirements with long-term multiple-award contract vehicles.

The SBA’s Joint Venture Mentor-Protégé program is an indispensable tool for small business contractors seeking the competitive edge of an established firm’s backing, while continuing to pursue set-aside opportunities.  Under the SBA’s program, a protégé firm cannot be considered affiliated with its mentor based solely on assistance received by the protégé under the mentor-protégé agreement.   

This month, the SBA published a new rule, effective November 16, 2020, which consolidates the SBA’s mentor-protégé programs, simplifies procedures, and provides much-needed clarity to the requirements for program participation.

The following are the key changes with the SBA’s final rule:

1. Consolidation of the 8(a) Business Development Mentor-Protégé Program with the SBA’s All-Small Mentor-Protégé Program

The SBA’s new rule revises § 124.520 to eliminate the 8(a) Mentor-Protégé Program, consolidating it with the SBA’s All-Small Mentor-Protégé Program, which the SBA launched in 2016. 8(a) Business Development Program participant applications will be streamlined with Historically Underutilized Business Zones (HUBZone) Program, Service-Disabled Veteran-Owned Small Business Concern Program, and Women-Owned Small Business Program applicants.    With this consolidation 8(a) joint ventures no longer need to submit and receive the SBA’s pre-approval of their joint venture agreements to qualify for 8(a) awards, unless seeking an 8(a) sole-source award.

2. Elimination of the 3-in-2 Rule

The SBA’s program requires that a mentor-protégé joint venture be formed for a limited purpose with a limited duration. Previously, joint ventures could not be awarded more than three contracts over a two-year period.  Under the new rule, an unlimited number of contracts can be awarded to the joint venture, so long as the joint-venture’s offers were submitted within two-years of the date of the joint-venture’s first award.

3. Clarifications on Joint Venture Members Graduating from Size or Socio-Economic Status

The new rule clarifies that a joint venture offeror’s size is determined on the date of their offer and does not change if an individual member of the joint venture grows to be other than small during the performance of the contract.  The rule draws an exception for set-aside task orders awarded under a full and open Multiple Award Contract.  Under such task order competitions, the joint venture is ineligible as a small business for the order if it has grown to be other than small as of the date of task-order proposal. The same is true if the protégé firm’s socio-economic status changes for specific order-level set-asides.

4. Clarification on Contracts Requiring the Prime Contractor to Hold a Facility Security Clearance

The SBA’s new rule clarifies that a joint venture may be awarded a contract requiring a facility security clearance, even without the joint venture entity carrying its own separate facility security clearance.  The lead small business partner to the joint venture must carry the required facility security clearance and be committed to keep at its cleared facility all records relating to the contract awarded to the joint venture.  The new rule provides an exception for facility security clearance requirements that are “ancillary” to the principal purpose of the procurement.  If that is established, then the non-lead partner to the joint venture (which may include a large business mentor) can carry the facility security clearance.

5. Protégé Firm Must Perform 40% of Work

A protégé partner must perform at least 40% of the prime contract work.  The SBA clarifies that the 40% performance requirement is measured by the percentage of the value of the total prime contract (after deducting material costs), not by labor hours.  The new rule also clarifies that the protégé firm cannot meet the 40% requirement by subcontracting to similarly situated entities (i.e., other subcontractors that have the same socioeconomic status as the prime contractor and that are small businesses for the NAICS code assigned to the subcontract).

The SBA also implemented several Executive Orders and makes other changes to the SBA regulations in the new rule.

If you have questions regarding the SBA’s final rule on Mentor-Protégé Joint Ventures please contact Shiva Hamidnia at shamidinia@nicholsliu.com or 202-846-9829.

About the author:

Shiva helps government contractors win, keep, and successfully perform projects.  Intimately familiar with the pitfalls of federal contract documents and jobsite realities, Shiva provides concise business-minded legal advice to help contractors mitigate risks and increase opportunities.

Disclaimer

The information provided in this blog does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.  Information on this website may not constitute the most up-to-date legal or other information.  Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter. 

 

New Executive Order Establishes Boundaries for Federal Grantees’ and Contractors’ Workplace Diversity Training

By Andy Liu, Jeremiah Centrella, and Andrew Victor

September 28, 2020

On September 22, 2020, President Trump issued an Executive Order (“EO”) titled “Combating Race and Sex Stereotyping” that imposes restrictions on the content of workplace diversity and inclusion trainings provided by federal contractors and grantees.  The EO follows the Office of Management and Budget’s September 4, 2020, memorandum to agencies to “cease and desist from using taxpayer dollars to fund these divisive, un-American propaganda training sessions,” and to identify any such agency spending relating to trainings on critical race theory and concepts such as “white privilege.”  In short, organizations should be aware that many, if not most, current trainings that focus on anti-bias/anti-racism issues  could fall within the EO’s broad prohibition against “divisive concepts.”

For Contractors.  For most contractors, the EO directs agencies to insert into contracts a clause prohibiting training “that inculcates in its employees any form of race or sex stereotyping or any form of race or sex scapegoating.”  According to the EO, such stereotyping or scapegoating is in training that contains “divisive concepts.”  The EO includes an illustrative list of such concepts, such as that “the United States is fundamentally racist or sexist”; that “an individual, by virtue of his or her race or sex, is inherently racist, sexist, or oppressive, whether consciously or unconsciously”; and “any individual should feel discomfort, guilt, anguish, or any other form of psychological distress on account of his or her race or sex.”

Prime contractors must also flow down the clause to subcontractors and take other actions, such as notifying their unions of the restrictions.  The EO directs the Office of Federal Contract Compliance Programs (OFCCP) to set up a hotline for complaints and provides that agencies can terminate or debar contractors for noncompliance.

The prohibition is not limited to training provided under or paid for by federal contract.

For GranteesThe EO directs agencies to identify which of its grant programs it may require grantees, as a condition of receiving a grant, to certify that they will not use federal funds to “promote divisive concepts.”  While the EO outlines “divisive concepts,” as noted above, it does not define “promote.”  As phrased, “promote” is broad and encompasses a variety of conduct, not just providing training.  The EO requires agency heads to submit a list of all such grant programs to the Office of Management and Budget (OMB) by November 21, 2020.

The Upshot.  Parties are sure to challenge the EO in court as unconstitutional or in conflict with existing civil rights laws.  Further, this year’s elections could impact the EO; if there is a change in administration, the EO may be rescinded or otherwise modified.

In the interim, organizations should review their training programs.  While the EO does not instruct organizations to cease providing diversity training, the broadly defined terms of “divisive concepts” signals potential scrutiny of diversity training upon which some organizations place a high value.

Grantees should also bear in mind that they can use non-federal funds for training.  Yet, the EO’s use of the undefined term “promotion” carries some risk.  For example, if a grantee’s staff, indirectly funded by a federal grant, contributes to running a training that contains “divisive concepts,” this may be viewed as “promoting” them.

Nichols Liu has extensive experience with the implementation of new regulations, with providing diversity and inclusion training, and is ready to assist contractors and grantees develop strategies to be compliant while also considering the range of imminent developments.

The Course of Dealing Doctrine in Government Contracts: The ASBCA Applies Years of Contract Performance to Resolve Ambiguity in Favor of Contractor

By Sam Van Kopp and Andy Liu

July 27, 2020

In Appeals of Raytheon Company, decided June 24th, 2020, the Armed Services Board of Contract Appeals (ASBCA) looked beyond the somewhat ambiguous text of two contract clauses to award an equitable adjustment for work executed in accordance with years of contract performance. The decision represents a victory for non-textualist conceptions of contract interpretation.

The contract clauses at issue concerned the Statement of Content (SOC) – analogous to a ‘Statement of Work’ – governing the production of AMRAAM air-to-air missiles.  Section 2.a of the SOC required Raytheon to “manufacture, test, integrate, and deliver” a number of missiles over a three-year period and included “all the activities necessary to produce” those missiles.  Section 2.b of the SOC required Raytheon to “support future missile production and sustainment of fielded missiles” over a one-year period.  Since 1997, the Systems Engineering/Program Management (SEPM) support work identified in Section 2.b involved both the sustainment of missiles manufactured under previous contracts and the production of new missiles under Section 2.a.

In 2013, the Air Force Contracting Officer (CO) sought to distinguish SEPM support work involved in missile production from SEPM support work involved in missile sustainment.  Noting that Section 2.a included “all activities necessary to produce” missiles, the CO concluded that Section 2.a obligated Raytheon to provide three years of SEPM production support, independent of the one year SEPM support requirements of SOC 2.b.  As a consequence, the CO then directed Raytheon to continue performing SEPM production support work even after the conclusion of the one-year period for work under Section 2.b.

In deciding Raytheon’s subsequent appeal, the ASBCA found that Sections 2.a and 2.b were ambiguous since it was reasonable to read both clauses as covering the production SEPM.  In order to resolve the ambiguity, the ASBCA turned to the large body of evidence regarding the parties’ course of dealing to determine which of the two Sections governed production SEPM. After assessing testimony from many government officials and evidence of prior contract negotiations that proposed moving production SEPM from Section 2.b to  2.a, the ASBCA concluded that both Raytheon and the Air Force had “a common basis of understanding that SOC 2.b covered production SEPM.”  Because Section 2.a did not require Raytheon to provide production SEPM, the ASBCA held that the CO’s demand for three years of production support constituted a constructive change entitling Raytheon to its requested equitable adjustment.

Notably, the ASBCA chose not to characterize the ambiguity as latent or patent, or to examine whether Raytheon had a responsibility to clarify the ambiguity before bidding on the contract, as sometimes precludes contractor recovery where ambiguities are patent. See Triax Pac., Inc. v. West, 130 F.3d 1469 (Fed. Cir. 1997). Instead, the ASBCA’s decision, in dicta, observed that evidence of a course of dealing may establish an enforceable contract term even absent an ambiguity.  If, as the ASBCA noted, a course of dealing involves the same parties and “essentially the same contract provision,” it may evidence waiver of even explicit contract language.  This non sequitur followed pages of background facts suggesting that all parties except the CO understood Section 2.a not to require production SEPM in the current or previous iterations of the contract.  The CO himself acknowledged that his position was “slightly ‘unfair’” but “concluded that the plain language of the SOCs compelled the conclusion that SOC 2.a covered production SEPM.” The juxtaposition of such strong course of performance evidence with a superfluous paragraph about the power of course of performance evidence to override the text of a contract may signal that the ASBCA considered the CO’s purely textual position to be unreasonable.  In rejecting the CO’s purely textualist argument, Appeals of Raytheon illustrates the limits of textual revisionism in altering the parties’ course of dealing in long running government contracts.

Smart Steps for Contractors Facing Federal Suspensions, Stopped Work, Delays or Disruptions

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:

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.

 

The audits are coming!  The audits are coming!

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.

In Response to COVID-19, International Development Firms Join Forces to Request Additional Funding for Global Operations

By Adrian Wigston and Annie Kim

April 28, 2020

Last week, many of the world’s leading international development firms and NGOs sent letters to Congress requesting that any further emergency appropriations bill include at least $12 billion to fund America’s support in addressing the needs of developing countries’ response to the COVID-19 global health pandemic, including emergency economic relief, humanitarian assistance, and ongoing frontline operations.  The NGOs will likely be tasked with development of new vaccines, diagnostics, and treatments in vulnerable communities.  These organizations have prior experience with epidemics and understand how global pandemics can devastate already fragile health systems, weaken governance and educational systems, and exacerbate already struggling economies.  As a whole, the 35 for-profit firms and 104 NGOs that made these requests work in the United States and internationally, supporting the U.S. State Department, the U.S. Agency for International Development, and other federal agencies.

The NGOs are members and partners of InterAction, an alliance of U.S.-based NGOs, while the for-profit development firms are united through the Professional Service Council’s (PSC’s) Council of International Development Companies (CIDC).  Both of these coalitions recognize the nexus between our national security and the global response to COVID-19 and the disruptions it is causing.  As noted by the PSC, the pandemic has caused disruptions to the health and livelihoods of billions around the globe, including many developing countries that are key allies and trading partners of the United States.

On Friday April 24th, the President signed House Resolution 266 increasing authorized spending under the CARES Act.  Congress did not approve additional funding for foreign aid as part of the bill, but InterAction and the CIDC will likely continue to voice this need.

Click below to view the letters sent by each organization:

InterAction Letter to Congress from 104 NGOs

CIDC Letter to Congress from 35 International Development Firms

 

COVID-19 Warrants USAID Adjusting or Removing Indirect Rate Ceilings

By Robert Nichols and Adrian Wigston of Nichols Liu LLP and Mary Karen Wills of Berkeley Research Group

April 27, 2020

COVID-19 crisis is a “once in a lifetime” event that is having an enormous impact on USAID’s implementing partners (IPs).  This article describes how USAID’s Office of Acquisition and Assistance (OAA) can – and should – revise or remove ceilings on Negotiated Indirect Cost Rate Agreements (NICRAs) to ensure continuity of IP operations to support the agency’s mission.  These concepts apply equally for contracts, grants, and cooperative agreements.

Many IPs are seeing their direct billings decrease because of COVID-19 disruptions.  At the same time, their indirect costs are increasing due to workforce readiness issues, cost tracking initiatives, the need for additional oversight, monitoring, compliance with regulations, submission of REAs, etc.  The result is a dramatic increase in indirect rates.

USAID is paying COVID-19 costs for most cost-type awards.  However, those awards that contain rate ceilings leave much of these costs unpaid, risking the readiness of the IPs.  Certainly these events and costs were unforeseen and unforeseeable when the parties agreed to ceilings.

Fortunately, OAA can look to existing law, regulation, and guidance for support in relieving IPs from ceilings that will impede their ability to continue performing contracts – for the good of USAID’s mission.  Here are five such authorities on point.

  1. On March 20, 2020, the Office of Management and Budget (OMB) issued a memorandum to the heads of executive departments and agencies advising them to be “flexible” in dealing with contracting issues associated with COVID-19.  The memo included this Q&A:

How should agencies address requests for equitable adjustment associated with costs related to safety measures taken by contractors to protect their employees from COVID-19[?]

Requests for equitable adjustment should be considered on a case-by-case basis in accordance with existing agency 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.  The standard for what is “reasonable,” according to FAR § 31.201-3, is what a prudent person would do under the circumstances prevailing at the time the decision was made to incur the cost . . . .

  1. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted by Congress and signed by the President on March 27, 2020.  Section 3610 of the CARES Act authorizes Government agencies to provide equitable adjustments to fixed-price contracts to compensate the contractor for maintaining a “ready” workforce.  This provision applies “without consideration,” so the contractor does not need to concede something of value in exchange for the reimbursement.
  2. On April 8, 2020, the Department of Defense (DoD) released a class deviation implementing Section 3610 of the CARES Act.  DoD emphasized the importance that its contractor workforces kept intact so they can be activated once the pandemic sufficiently passes.  DoD underscored this point: “[i]t is imperative that we support affected contractors, using the acquisition tools available to us, to ensure that, together, we remain a healthy, resilient, and responsive total force.”  In response to frequently asked questions (FAQ) to the class deviation, DOD defined this “ready state”  as a contractor’s ability to mobilize and resume performance in a timely manner.
  3. On April 24, 2020, USAID issued COVID-19 Implementing Partner Guidance Frequently Asked Questions.  One of the questions noted that COVID-19 is likely to disrupt contract performance unless ceiling rates are adjusted to deal with the new reality of COVID-19.  USAID responded, “[g]iven that ceiling rates are established on a case-by-case basis, any adjustments to such ceiling rates will also have to be made on a case-by-case basis by the CO/AO. USAID has established a COVID19_IndirectCosts@usaid.gov email box where partners can send NICRA-related questions and requests for adjustments to provisional rates within any ceilings.”
  4. Finally, while these first four authorities relate specifically to COVID-19, providing relief from contract provisions due to changed circumstances is hardly new.  FAR 15.407-3 allows Contracting Officers to revise forward pricing agreements such as ceilings when a changed condition invalidates the basis for the agreement.

These directives and guidance provide more than enough support for OAA to lift indirect rate ceilings for IPs due to impacts from COVID-19.  And there is support that such relief should apply “without consideration,” so contractors and NGOs do not need to concede something of value in exchange for the cap relief.  On this basis, we recommend that contractors and NGOs begin submitting requests for equitable adjustments to remove or revise indirect rate caps in their Federal awards.

OSD Class Deviation Tightens Agencies’ Implementation of CARES Act Section 3610

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.