We previously looked at whether the COVID-19 pandemic is an excusable delay that would give contractors relief from delivery deadlines and schedule commitments. But many contractors impacted by Coronavirus may see their costs of performance increase due to agency instructions intended to control the spread of the virus. Today we review potential avenues for recovering those costs.
- The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
The first potential avenue for recovering Coronavirus impact costs is the recently passed CARES Act (Pub. L. 116-136). Section 3610 of the CARES Act allows agencies to reimburse contractors for paid or sick leave costs that they incur to pay their employees when a site is impacted by Coronavirus. This reimbursement authority applies where (i) employees or subcontractors are unable to perform work on a federally approved site “due to facility closure or other restrictions;” and (ii) those employees or subcontractors cannot telework because their duties cannot be performed remotely.
But this reimbursement authority is subject to some very specific limitations. First, the CARES Act does not require that agencies reimburse these costs. It just gives agencies discretion to do so and allows them to use any available appropriations. Contractors seeking reimbursement under this avenue will need to affirmatively request reimbursement and provide the agency with compelling reasons to exercise its discretion.
Second, the agency’s reimbursement authority is limited to “the minimum applicable contract billing rates not to exceed an average of 40 hours per week,” and is only for leave that is paid by the contractor to “keep its employees or subcontractors in a ready state, including to protect the life and safety of Government and contract personnel.”
Third, any reimbursements received pursuant to § 3610 of the CARES Act must be reduced by the amount of payroll tax credits the contractor is allowed under Division G of the Families First Coronavirus Response Act (Pub. L. 116-127).
On April 9, 2020, the Office of the Under Secretary of Defense for Acquisition and Sustainment issued Implementation Guidance for § 3610 of the CARES Act. The guidance emphasizes the need for documentation to show how leave costs are “identified, segregated, recorded, invoiced, and reimbursed.” It also notes that implementation will vary based on the contract type and suggests creation of a separate line item (or series of line items) to track CARES
§ 3610 costs.
- Changes clauses (FAR 52.243-1 through 52.243-7)
Outside of the CARES Act context, several standard government contracting clauses may provide additional avenues of relief for Coronavirus-impacted contractors. The various federal, state, and local orders on social distancing, for example, may result in changes in how contractors perform their work. Contractors that share space with federal employees may be asked to reduce on-site staff or implement remote work arrangements to allow for “social distancing.” They may be asked to observe increased workplace safety requirements or to source items from alternate suppliers. Contractors may be instructed to accelerate performance to meet a deadline that might otherwise be extended.
Contractors facing circumstances like these may be entitled to relief under the Changes clause. The standard Changes clauses used in federal contracts permit the government to order changes within the general scope of the contract, including the means and methods of performance, the schedule, and delivery locations. Changes can be done formally through a written change order. They can be done informally through an email or a phone call. Changes can also be “constructive,” which is the term used to describe changes that arise through a disagreement about the underlying contract requirements.
The Changes clauses provide that contractors are entitled to an equitable adjustment in their contract to reflect the increase in their costs of performance. Seeking payment of additional compensation under the Changes clause begins with the submission of a timely written notice to the contracting officer. When a change is implemented by a formal change order, contractors usually must assert the right to an equitable adjustment within 30 days of receiving the order. For constructive changes, contractors have the additional responsibility of notifying the government that they consider a particular action or inaction to be a change order.
- Suspension of Work clause (FAR 52.242-14)
In addition to changing the means and methods of contractor performance, the government may suspend performance due to the Coronavirus. Suspensions can be costly for contractors. In most cases they would continue to incur payroll costs, equipment rental costs, overhead, and general and administrative expenses that cannot easily be avoided.
The Suspension of Work clause allows contractors to recover their costs resulting from a suspension that lasts for an “unreasonable period of time.” That phrase is not defined in the FAR, but courts and boards of contract appeals considering claims for suspension costs have identified several factors in evaluating whether a suspension is “unreasonable.” The factors include: (i) the length of the suspension; (ii) the ability of the contractor to undertake other work while the contract is suspended; and (iii) the government’s interests in the length of the suspension.
A compensable suspension of work can be issued by a formal contracting officer directive. It can also result from the government’s failure to take an action within a reasonable period of time or a time specified in the contract. In both situations, contractors must give prompt notice of their intention to seek reimbursement of their suspension costs and timely submit their request for reimbursement.
- Stop-Work Order clause (FAR 52.242-15)
An alternative to a suspension of work is an order directing a contractor to stop work entirely under the Stop-Work Order clause. Unlike a suspension, which has no guaranteed end, a stop-work order is limited to 90 days unless both the government and contractor jointly agree to a longer period. Stop-work orders provide more clarity and certainty than a suspension of work, but the immediate cessation of performance can potentially be more disruptive and costly.
Stop-work orders end in one of two ways. The government can lift the order and allow the contractor to resume performance. When this happens, the affected contractor generally must seek an adjustment of the contract price and the performance period within 30 days after the stop-work period ends. The contracting officer has discretion to consider requests for adjustment made after that 30-day period, but such requests must be made before final payment.
A stop-work order can also end when the contract is terminated. Typically, in this situation the contract would be terminated for convenience, and the contractor’s entitlement to compensation for costs incurred from the stop-work order would be an element of the termination-for-convenience settlement.
- Termination for Convenience clauses (FAR 52.249-1 through FAR 52.249-7)
The Coronavirus pandemic may also lead the government to reconsider its needs and its available funds. Some government contracts will likely be terminated so that limited resources can be reallocated from one project to another. The termination-for-convenience clauses, which have appeared in nearly all government contracts since the Civil War, grant the government broad authority in this area. The government can terminate all or any part of a contract whenever it is in its interest to do so.
While no termination could be considered convenient for a contractor, the termination-for-convenience clauses grant contractors a well-established means of receiving payment for work performed and recovering costs incurred due to the termination. Although they cannot recover lost profits on the work they do not perform, contractors do recover the costs incurred to implement the termination, such as lease termination fees, costs to terminate subcontracts, and the costs of attorneys and consultants needed in connection with the termination. Contractors have up to one year to submit their request for payment of these costs in what is known as a termination settlement proposal.
Proving your Coronavirus impacts
Whether any of the avenues outlined will be available to a Coronavirus-impacted contractor depends on both the terms of the contract and the circumstances and extent of those impacts. But there are certain steps contractors should take regardless of which compensable avenue(s) they intend to pursue.
First, track your Coronavirus impacts. Be able to show when the impacts occurred, how long they lasted, what costs were incurred as a result, and why those costs were reasonable. Second, establish the causal connection between the Coronavirus impacts and the increased costs. Third, contemporaneously inform the contracting officer of the impacts and additional costs being incurred. Although dialogue with the contracting officer is always important, it is critical in this context. Fourth, review any COVID-19 guidance issued by your contracting agency. We are following federal agencies’ guidance on the COVID-19 pandemic and are updating new orders as they come out. They provide useful insight into how agencies are responding to COVID-19 and what they are instructing contractors to do.