On March 30, 2020, the Office of the Under Secretary of Defense issued a Memorandum in response to impacts of COVID-19 on Department of Defense contracts (“Memorandum”). During this unprecedented time, the agency acknowledged the delays that may arise under current contracts with the Department of Defense because contractors are unable to access their work sites and the employees of defense contractors are unable to report to work because of the quarantine and stay at home orders in effect in many jurisdictions. Additionally, on April 9, 2020, Defense Pricing and Contracting office issued Implementation Guidance related to Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
To address the concerns of affected defense contractors, the agency provided in the Memorandum that its contracts include certain clauses entitling contractors to particular remedies for delays and changes arising out of this global pandemic. More specifically, FAR 52.249-14, Excusable Delays, certain Termination clauses and FAR 52.212-4, among others are often incorporated into DoD contracts and provide the contractor a right to an equitable adjustment of the contract schedule and avoid a termination for default by the government when the delay or failure to perform is beyond the control and without the fault or negligence of the contractor. Additionally, the contractor may be entitled to an equitable adjustment to the contract price if the contracting officer directs changes to the performance of the contract. Such changes, “may include recognition of COVID-19 impacts on performance.”
The contracting officer will determine each request for equitable adjustment (“REA”), based on relevant circumstances arising out of the non-performance of contractors caused by the COVID-19 crisis. The contracting officers are directed to determine whether the costs in the submitted REA are “allowable, allocable and reasonable to protect the health and safety contract employees as part of performance of the contract.” When submitting your REA arising out delays or changes caused by the impacts of COVID-19, you should provide sufficient information to the contracting officer, including whether your employees were quarantined or directed to stay at home by their state or local authority. Your contractor performance rating will not be negatively affected if the contracting officer grants your REA or you otherwise rely on an excusable delay.
In addition to the relief that may already be included in your contracts with DoD, the Office of the Undersecretary of Defense and DPC published Implementation Guidance regarding Section 3610 of the CARES Act and a class deviation governing paid leave as an allowable cost. The purpose of Section 3610 of the CARES Act is to provide contracting officers the discretion to reimburse contractors and subcontractors for paid leave, including sick leave, when the contractor’s employees cannot access work sites or telework to keep the contractor’s employees in a ready state. DPC provided that ready state means, “a contractor’s ability to mobilize and resume performance in a timely manner.” Relief under Section 3610 of CARES applies to employees of contractors and subcontractors, who:
…cannot perform on a government-owned, government-leased, contractor-owned, or contractor-leased facility or site approved by the federal government for contract performance for contract performance due to closures or other restrictions, and… [a]re unable to telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020, for Coronavirus (COVID–19).
DFARS 231.205-79. To further execute Section 3610 of the CARES Act, the Office of the Undersecretary of Defense, issued a class deviation to the standard contract cost principles under FAR Part 31 and DFARS Part 231 providing for a new cost principle governing allowable paid leave costs incurred by the contractor for contracts in place from January 31, 2020 through September 30, 2020. Contractors will not be entitled to reimbursement for leave costs incurred outside this period or leave costs unassociated with the impact of COVID-19. Under the newly issued DFARS 231.205-79, contracting officers are permitted to reimburse contractors not to exceed an average of 40 hours per week, including paid leave and sick leave contingent upon the availability of funding.
Generally, compensation plans in contracts do provide granting leave as an allowable cost except as provided under the cost principles of FAR 31.2. As provided in the Implementation Guidance, contractors must segregate costs allowable costs under existing cost principles from paid leave costs requested under DFARS 231.205-79. Contractors must provide contracting officers with supporting documentation for claimed costs requested under the CARES Act, including why its employees are unable to work via telework or remotely, how the leave will keep its employees in ready state and a statement that the costs are not reimbursable under other authorities. If the contractor’s work is considered essential critical infrastructure work or if the contractor was required to implement a Continuation of Essential Services Plan in its contract, then the contractor must show it made reasonable efforts to continue to perform. Reimbursement procedures under DFARS 231.205-79 will vary in the following ways based on the type of contract to ensure traceability:
- Fixed Price Contracts – The contracting officer will adjust the price and delivery schedule as necessary – e., provide for more time and money upon receipt of the REA for impacts arising out of COVID-19. The contracting officer will create a line item for CARES Act invoicing. Contractors will then submit a monthly invoice under such line item with the number of hours of eligible leave per labor category. If the contract contains an incentive provision, the reimbursed costs will be a separate fixed price line and will not be subject to the incentive structure. While contracting officers may adjust the contract price to maintain a ready state, they may not adjust the contract price to increase the contractor’s profit.
- Cost-reimbursement contracts – Reimbursable costs will be charged to a separate account and contracting officers are directed to work with contractors to establish appropriate cost procedures.
- Time and Materials/Labor Hour Contracts – Contractors are directed to submit REAs for reimbursement under Section 3610 of the CARES Act, which will be allocated towards a separate line item.
- Mixed Fixed Price and Cost Type Contracts – The Implementation Guidance provides that because contractors may only recover once under Section 3610 of the CARES Act, the agency prefers reimbursement procedures provided for cost-reimbursement contracts.
Because contractors must demonstrate its employees are unable to continue performance, reimbursement under the CARES Act is only available for actually incurred costs as a result of granting paid leave because of the existence of the COVID-19 national emergency, and therefore, contractors are not entitled to advance payments.
Contractors will be required to submit representations when seeking reimbursement under Section 3610 of the CARES Act of any other relief it has claimed arising out of the pandemic and that it will not pursue reimbursement for the same costs it has incurred provided in the supporting documentation. In other words, contractors may not seek double reimbursement for the same costs if it is receiving compensation for paid leave costs from other COVID-19 relief statutes or regulations, including tax credits. Further, relief under Section 3610 of the CARES Act is not appropriate for small business that should instead enroll itself into the Paycheck Protection Program.
Additionally, the case may be that while the work site is open and available, the contractor’s employees may be unable to report to the work site and cannot otherwise work remotely due to school closures and inaccessibility to adequate child care, or such employees are under quarantine because of exposure to the virus. Nonetheless, the contractor can still demonstrate under DFARS 231.205-79, the costs of paid leave are allowable because the contractor made efforts to keep its workforce in ready state by providing supporting documentation.
The Office of the Under Secretary of Defense directed contracting officers to consider the immediacy of the specific needs of the contractor. In its Memorandum discussing the agency’s implementation of Section 3610 of the Cares Act, the agency recognized certain contractors are not conducting business during the pandemic and therefore are not generating revenue, which would otherwise allow them to meet their payroll, retain employees, and meet their financial obligations, such as paying rent for their business operations. While other contractors may still be generating revenue or can perform work remotely. Accordingly, contracting officers have been given wide discretion and flexibility to keep their contractors in ready state. However, a contracting officer’s decision to ultimately grant relief under Section 3610 of the CARES Act and DFARS 231.205-79 will be determined on a case-by-case basis and the contracting officer is not obligated to grant relief to the contractor. Whether a contractor should seek relief under Section 3610 of the CARES Act, will depend on the extent of the impact of COVID-19 on the contractor’s ability to perform and the relief the contractor may be able to seek under applicable changes and delays provision available in its contract.