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COVID-19 (Coronavirus) Pandemic – Government Contracts Advisory2020-04-08T10:42:33-04:00

At a Glance

Amid daily news about COVID-19, government contractors are seeking advice on preparing their businesses and leading through coronavirus-related implications.

Nichols Liu’s multi-disciplinary COVID-19 Toolkit provides ongoing insights, updates and analysis as the virus and its aftermath unfold.

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FAQs

Following are Frequently Asked Questions and answers on COVID-19 issues facing government contractors.  Nichols Liu LLP has provided these FAQs as a pro bono service to the community.  This information is not a substitute for obtaining legal advice.  Please contact Robert Nichols ([email protected]) or Andy Liu ([email protected]) with any questions.

Topics

Defense Production Act
Public Health
Terminations
Audits and Investigations
Cybersecurity Risks
The CARES Act
Performance Delays
Indirect Rates
Indemnification
Contract Changes
Suspensions
Claims Dispute
Employee Layoffs

Defense Production Act

On March 18, 2020, President Trump issued an Executive order invoking the DPA and alerting contractors that the Government is preparing to exercise its special purchasing powers under the regulations that implement the Act.  The DPA authorizes the Federal government to issue “rated orders,” which require the contractor (and, sometimes, subcontractors) to prioritize sales to the government over any conflicting obligations to consumer or commercial customers.  Severe remedies are available to the government for violating these requirements.

Contractors should review their contracts for related clauses, such as FAR § 52.211-14, FAR § 52.211-15. Contract terms may indicate requirements to comply with DPA rated orders, and contract headings may also indicate if the order is rated and the order’s corresponding rating.

You must prioritize rated orders over non-rated commercial work and non-rated government work.  You are required to accept prioritized contracts so long as you can satisfy the delivery terms.  Penalties (see below) apply for willful failure to meet the terms of an order, and you have liability protections against breach of contract claims (also see below).

Section 707 of the DPA, 50 U.S.C. § 4557, provides liability protection against breach of contract claims for failure to perform non-priority work as a result of having to fulfill rated orders.

Willful failure to perform any act required by the DPA, or willful performance of an act prohibited by the DPA, is a crime subject to a fine of not more than $10,000 and/or imprisonment for not more than one year.

If an order cannot be filled (either because the contractor does not carry the items, the items are not available within the requested time frame, or acceptance of the order would interfere with delivery of a previously accepted rated order), the contractor must “reject” the order and notify the customer promptly.  The DPAS rules describe what such a response entails. If a company rejects a rated order because it cannot fulfill the order by the required date or the order would interfere with a previously accepted rated order, the company must inform the customer of the earliest date upon which delivery can be made and propose to accept the order on the basis of that modified date.

A contractor may be excused from fulfilling a rated order if it does not carry the items, cannot provide the items within the requested time frame, or acceptance of the order would interfere with delivery of a previously accepted rated order.

Not all agencies have authority to issue rated orders and not all agencies understand how and when to issue them.  Contractors should be ready to deal with customers who do not understand the DPAS program, who issue inappropriate or incorrect rated orders, or who issue unrated “rush” orders without proper DPAS authorization.

The CARES Act

The Coronavirus Aid, Relieve, and Economic Security (CARES) Act was enacted by Congress and signed by the President on March 27, 2020. It provides over $2.2 trillion in government funding as the United States weathers the COVID-19 pandemic.

Section 3610 of the CARES Act provides an important protection for the defense industrial base.  It states:

Notwithstanding any other provision of law, and subject to the availability of appropriations, funds made available to an agency by this Act or any other Act may be used by such agency to modify the terms and conditions of a contract, or other agreement, without consideration, to reimburse at the minimum applicable contract billing rates not to exceed an average of 40 hours per week any paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, including to protect the life and safety of Government and contractor personnel, but in no event beyond September 30, 2020. Such authority shall apply only to a contractor whose employees or subcontractors cannot perform work on a site that has been approved by the Federal Government, including a federally-owned or leased facility or site,  due to facility closures or other restrictions, and who cannot telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020 for COVID–19: Provided, that the maximum reimbursement authorized by this section shall be reduced by the amount of credit a contractor is allowed pursuant to division G of Public Law 116–127 and any applicable credits a contractor is allowed under this Act.

Section 3610 authorizes, but does not require, Government agencies to reimburse contractors for employees and subcontractors that are unable to perform work due to COVID-19 restrictions.  It is a way for contractors to keep their employees, or its subcontractors, in a “ready state” – i.e., ready to return to work and restart performance consistent with the life and safety of contractor and Government personnel.

The Act provides that agencies may modify a contract to reimburse any paid leave (up to 40 hours per week) that a contractor provides in order to keep its or its subcontractors’ employees in a “ready state,” provided that the employees (i) cannot perform work at their regular location due to facility closures or other restrictions, and (ii) cannot telework because their job duties cannot be performed remotely.

The law applies equally to contracts and “other agreements,” which means it covers task orders, delivery orders, cooperative agreements, other transactions, and other contractual agreements.  Beyond that, the Act does not specify applicability to or exclusion for any particular contract types, nor does it provide detail on how different contract types should be handled.  This may have been due to the rushed legislative process  We anticipate regulations and guidance in the coming days and weeks.

The Act applies to any paid leave, including sick leave, as long as the reimbursement is made “at the minimum applicable contract billing rates” and does not exceed “an average” of 40 hours per week.  The reference to contract billing rates is important as it suggests a price-based, rather than a cost-based, reimbursement.  It authorizes contractors under flexibly priced contracts to submit, and agencies to immediately pay, invoices based on leave paid to covered employees.  It authorizes contractors under fixed-price contracts to seek equitable adjustments of those contracts in the future to compensate the contractor for maintaining a “ready” workforce of covered employees. 

The employees (i) must be unable to perform work at their regular place of performance — which the Government typically approves through FAR 52.215-6 — due to facility closures or other restrictions related to COVID-19, and (ii) must be unable to telework because their job duties cannot be performed remotely. 

The government has strongly encouraged contractor telework, through policies issued by the Office of Management and Budget and the Defense Department.  If employees can do telework from home, then reimbursement may not be available.

The law is limited to leave granted through September 30, 2020.

This provision applies “without consideration,” so the contractor does not need to concede something of value in exchange for the reimbursement.

The reimbursement must be reduced by the amount of any credit the contractor receives under the Act.

Section 3610 is silent on the mechanics of reimbursement — a detail normally left to the agencies.  We anticipate regulations and guidance in the coming days and weeks.  Contractors should take steps now that will help them support a contract adjustment in the future.  This may include (i) establishing separate charge numbers for employees who are unable to work due to COVID-19 restrictions, (ii) documenting the specific public-health guidance and directives that the company relied on in implementing facility shutdowns or other work restrictions, (iii) documenting the company’s telework decisions, including the rationale for deciding which employees are capable of working remotely; and (iv) coordinating with subcontractors regarding the actions they should be taking to support a subcontract adjustment.  Industry groups should advocate for additional guidance to ensure that the law is equitably.

The CARES Act makes relief under the Act subject to audit by the Government Accountability Office, Congress’ watchdog agency.  Nothing in the Act suggests that contractors seeking reimbursement will be exempt from the criminal and civil fraud laws, debarment and exclusion rules that the government normally uses to block bad actors.

Contract Changes

Just like with any other changes situation, put the CO “on notice” that the government’s request or direction would have cost and/or schedule impacts, memorialize and quantify the cost and/or schedule impacts, and seek a formal modification to the contract.  Document all discussions and correspondence, avoid oral agreements, and insist on written notifications from the CO. 

Where possible, make attempts to achieve deliverables with alternative efforts other than working at the government facility, such as video conferencing, offsite work, etc.  Advise the contracting officer that the lack of access to the government facility is disrupting contract performance, memorialize and quantify the cost and/or schedule impacts, and seek a formal modification to the contract.  Document all discussions and correspondence, avoid oral agreements, and insist on written notifications from the CO.

Where possible, make attempts to achieve deliverables with alternative efforts other than working at the government facility, such as video conferencing, offsite work, etc.  Advise the contracting officer that the lack of access to the government facility is disrupting contract performance, memorialize and quantify the cost and/or schedule impacts, and seek a formal modification to the contract.  Document all discussions and correspondence, avoid oral agreements, and insist on written notifications from the CO.

Where possible, make attempts to achieve deliverables with alternative efforts other than working at the government facility, such as video conferencing, offsite work, etc.  Advise the contracting officer that the travel restrictions are disrupting contract performance, memorialize and quantify the cost and/or schedule impacts, and seek a formal modification to the contract.  Document all discussions and correspondence, avoid oral agreements, and insist on written notifications from the CO.

If your award includes the excusable delays clause, and the delay is caused by an “excusable” event, the CO’s denial of the schedule extension could be interpreted as a change to the contract.  Obligating you to perform under the reduced schedule, when a formal request for extension was sent, can constitute constructive acceleration. Document the request for schedule extension and the CO’s response.  Start to track the cost and/or schedule impacts on performance. Consult with legal counsel to ensure you take the right measures to qualify for recovery of costs under the constructive acceleration theory.

For cost-based contracts, increases to costs may need no special contract clause at all since the contract already contemplates payment based on cost.  However, if COVID-19 has cost impacts that would require changes to approved budgets or the contract’s spending caps, such as the limitations of funds and ceiling limits, immediately notify the contracting officer, memorialize and quantify the cost and/or schedule impacts, and seek a formal modification to the contract.  Document all discussions and correspondence, avoid oral agreements, and insist on written notifications from the CO.

Public Health Warnings and Other Government Orders

Contractors are now balancing instructions and orders from many authorities other than the CO.  For example, the Department of Transportation may restrict air or sea travel preventing materials from arriving at a work site. Unfortunately, the Changes clause typically requires direction from the CO to qualify as a compensable change.  Furthermore, public acts by the government (e.g., travel restrictions) not tied to a particular contract likely will not be compensable.  On the other hand, if a public health warning or government order entitles you to a delay in contract performance, but the contracting officer requires adherence to the original schedule, this may constitute constructive acceleration, which can be compensable.

CORs and other government officials, other than the contracting officer on each contract, typically do not have authority to change contract terms.  To the extent a COR or other government employee gives direction to a contractor, it is critical to obtain confirmation in writing from the CO. 

The Department of Homeland Security issued Guidance on the Essential Critical Infrastructure Workforce.  The Cybersecurity and Infrastructure Security Agency (CISA) executes the Secretary of Homeland Security’s authorities to secure critical infrastructure.  Consistent with these authorities, CISA has developed, in collaboration with other federal agencies, State and local governments, and the private sector, an “Essential Critical Infrastructure Workforce” advisory list. This list is intended to help State, local, tribal and territorial officials as they work to protect their communities, while ensuring continuity of functions critical to public health and safety, as well as economic and national security.  Decisions informed by this list should also take into consideration additional public health considerations based on the specific COVID-19-related concerns of particular jurisdictions. This list is advisory in nature.  It is not, nor should it be considered, a federal directive or standard.  Additionally, this advisory list is not intended to be the exclusive list of critical infrastructure sectors, workers, and functions that should continue during the COVID-19 response across all jurisdictions. Individual jurisdictions should add or subtract essential workforce categories based on their own requirements and discretion. 

OMB Memorandum M-20-18 answered this question.  First, options to telework exist.  Second, Government contracts provide for excusable delays, which may extend to quarantine restrictions due to exposure to COVID-19.  Third, 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 the contract employees as part of the performance of the contract.

Performance Delays

Communicate early with subcontractors at any tier to identify possible disruptions in the supply schedule that may trigger prime contractor delays.  Have the subcontractors identify and quantify impacts due to COVID.  Seek to mitigate disruptions by determining your right to purchase subcontracted supplies or services from other sources in time to meet the delivery schedule.  Notify the contracting officer and seek written approval for an excusable delay.

Make reasonable attempts to avoid delay and clearly document those attempts. For example, identify alternate sources for supplies, materials, and services, etc.  Notify the contracting officer and seek written approval for an excusable delay.

Seek direction and approval from the CO where possible, and document communications with the government in order to maximize your rights in the event of later disputes.  To gain relief, contractors must prove that they incurred actual delays as a proximate cause of an epidemic.  Rigorously document relevant events and impacts and be prepared to demonstrate cause.

The March 20 OMB Memorandum M-20-18 addresses this point in item number 2.  There, OMB states that the agencies should be as flexible as possible in finding solutions, that contracting officers should determine the best course of action such as finding substitute employees or re-procuring elsewhere and issuing a termination for convenience.  Make reasonable attempts to avoid delay and clearly document those attempts. Seek direction and approval from the CO where possible, and document communications with the government in order to maximize your rights in the event of later disputes.  Request a contract extension.  Regardless of the final outcome, this should not impact the contractor’s performance rating. 

Yes, FAR 52.249-14(a) and FAR 52.249-8(c) allow for schedule extensions based on causes beyond a contractor’s control.  Epidemics and quarantine restrictions both appear to be included in the examples of causes beyond a contractor’s control.  Accordingly, a contractor should not be in default because of a failure to perform the contract if the failure arises from causes beyond the control and without the fault or negligence of the contractor. 

Case law has established that the mere existence of an epidemic isn’t enough for an excusable delay to be granted.  The contractor must show that performance was, in fact, delayed by reason of the epidemic and submit a certified claim.  If the Contracting Officer denies the claim, the contractor then must follow the Contract Dispute Act options of submitting an appeal to the Board of Contract Appeals or the Court of Federal Claims.

Generally, no. Relief under the delays clause is limited to schedule relief only, it does not allow for recovery of added costs.  However, if the contracting officer orders a contractor to perform to the same schedule notwithstanding the delay, this may constitute constructive acceleration, which could entitle the contractor to a request for equitable cost adjustment.

Communicate any delays to the CO and document in writing your attempts to reach an agreement.  If no agreement is reached, and you’re faced with a Claim, you may be able to rely on common law doctrines of impractibility and impossibility in your defense.

No.  As with other excusable delays, merely showing the existence of an epidemic is insufficient. Case law has shown that merely showing issues in the supply chain with suppliers related to epidemics is not enough to gain relief.  To prevail, the contractor needs to not only show the existence of epidemics but also that it has exhausted all other alternatives (i.e. the product or service is unavailable from other sources) and that performance was commercially impractical (performance can be achieved only at an excessive and unreasonable cost).

Suspensions and Stop Work Orders

Carefully comply with directions received by the CO. Diligently track associated costs.  Timely file for equitable adjustment within 30 days after the end of work stoppage, in accordance with FAR 52.242-15.

Terminations

Yes.  Most government contracts typically have standard clauses allowing the government to terminate for convenience, or for default.  Contractors receiving such notice should carefully comply with directions received from the contracting officer and diligently track associated costs for inclusion in a request for equitable adjustment. 

If the contract is terminated for convenience, FAR part 49 allows the contractor to recover its incurred costs plus termination costs.  Allowable costs include all added costs as part of the termination including profit or fee on the performed work, but no profit on the terminated work, and reasonable costs of settlement of the terminated work (legal fees).  However, if the contracting officer successfully terminates for default, the agency is required to pay nothing for termination and can seek re-procurement costs. 

In the event of a termination notice, you must immediately stop all work and instruct all suppliers and subcontractors to cease work as well.

Impacts on Indirect Rates

COVID-19 can impact indirect rates in a number of ways.  Many contractors will see their billings for direct costs decrease because of idle or less productive workers, facility shut-downs, reduced travel, etc.  At the same time, indirect costs may increase due to cost tracking initiatives, the need for additional oversight, monitoring, compliance with regulations, submission of REAs, etc.  In a scenario like this, where the indirect rate numerator increases and/or the denominator decreases, there may be a significant increase to the indirect rate.  If this is anticipated, the contractor should inform the contracting officer and request an adjustment to the provisional billing rates to allow for better cost-recovery in real time.  See FAR 15.407-3.

For contracts where certified cost or pricing data are required, offerors are required to describe FPRAs in each specific pricing proposal to which the rates apply. However, conditions that may affect the agreement’s validity shall be reported promptly to the ACO. If the ACO determines that a changed condition invalidates the agreement, the ACO shall notify all interested parties of the extent of its effect and status of efforts to establish a revised FPRA.  See FAR 15.407-3.

OMB Issued guidance to recipients of federal financial assistance that awarding agencies may allow grantees to continue using the currently approved indirect cost rates. Agencies may approve grantee requests for an extension on the use of the current rates for one additional year without submission of an indirect cost proposal. Agencies may also approve grantee requests for an extension of the indirect cost rate proposal submission to finalize the current rates and establish future rates.  See OMB Memo M-20-17, see FAQ question 11.

Preparing for Claims Dispute

Government contractors that experience COVID-19 impacts should carefully document all efforts to avoid and mitigate performance disruptions. In addition, contractors should document all interactions with contracting officers regarding any anticipated or actual impacts, as well as similar interactions with subcontractors and vendors. Significantly, if a government contractor receives instructions or changes from any government official other than the contracting officer, the contractor must confirm such instructions/changes (in writing) with the contracting officer before proceeding or risk not being paid. Finally, contractors should carefully track all costs associated with any COVID-19 related delays, or any costs associated with COVID-19 related stop work or contract terminations, and retain these records. This will not only help contractors to adequately substantiate any requests for equitable adjustment or claims, but also to respond to audits and investigations, which often come years after emergency contracting actions. Whether a contractor’s claim, request for equitable adjustment or response to an audit or investigation is successful will depend, in large part, on how well the contractor has contemporaneously documented the issues.

Preparing for Audits and Investigations

Yes, every natural disaster, war, or other significant event that brings an uptick in government contracts spending also brings widespread overbillings and fraud – whether intentional, with reckless disregard, or merely billing unreasonably.  We anticipate years of audits and investigations, particularly around timekeeping for unproductive workers, REAs, and claims.  There surely will be many audit reports resulting in questioned costs due to inadequate documentary support, as well as False Claims Act cases and criminal prosecutions in more egregious case.

1) Identify risk areas particular to your award.  If labor makes up the brunt of your work, ensure your timekeeping protocols are robust.  If your contract calls for significant procurements, know that competitive pricing will be scrutinized regardless of a government mandate to spend quickly.  2) Vet subcontractor costs even more diligently and monitor their work.  Many may be first time contractors with the government and unfamiliar with rules and regulations.  You will be held responsible for their actions.  3) Don’t be blindsided by telework challenges.  Ensure adequate policies are documented and demonstrate reliable support for hours billed regardless of the workplace.  4) Train people on fraud indicators and responsibilities to self-report.  Remember transparency.  The largest qui tam cases usually stem from perceived corporate cover-ups.  5) A focus on compliance now means less enforcement action later.

Indemnification for Unusually Hazardous Activities

In support of national defense, this law authorizes certain federal agencies to, among other things, provide extraordinary contractual relief and to hold harmless and indemnify contractors for losses, claims, and damages arising from unusually hazardous risks under government contracts. 

Protections under this law are available only by certain agencies that authorize its use related to a specific “unusually hazardous risk”. For example, it could become a protection for those contractors working specifically to stem the COVID-19 pandemic but not for those contractors performing normal business on their standard contracts.

Only certain agencies are authorized to grant relief, and they usually do so sparingly.  If the agency has authority but does not include the relevant provision in a solicitation or contract involving an unusually hazardous risk, then the contractor can seek inclusion of the clause through outreach to the agency.  We have had luck with a “white paper” approach.

Impacts from Employee Layoffs

The Federal WARN Act requires employers to provide 60 days’ notice to employees (and the relevant state agency) when an anticipated layoff of 50 or more employees at a single worksite is expected to be permanent and/or last more than six months.  However, in situations like COVID-19, there is an exception to the notice requirement.  Specifically, 60 days’ notice is not required when the layoff is a result of “unforeseeable business circumstances” and/or a “natural disaster.”  In such a case, if the layoff event normally would trigger WARN, because 60 days’ notice is not feasible, an employer should issue WARN notices as soon as it is reasonably foreseeable that a triggering event, i.e. a layoff of more than 50 employees at one site, will occur. Moreover, in addition to Federal WARN, individual states also have “mini-WARN” acts that have their own unique requirements and exceptions – some of which have been waived due to the COVID-19 pandemic.

Cybersecurity Risks from Remote Working

Federal contracts bring with them a number of cybersecurity rules. For example, a contract may incorporate data security provisions requiring that sensitive information be maintained on secure systems with specific protections.  Have counsel review your contracts to understand what cybersecurity obligations apply.