Contracts, the law and coronavirus

The novel coronavirus (COVID-19) is now a global pandemic. Some of our Government contracting clients are asking how this will affect their businesses. I understand our first concerns are with our loved ones, our employees, our customers, our neighbors. But when the dust settles, there will be a business to protect, especially the small businesses who may not have the robust cash flow or other resources to deal with this emergency. And it’s not too early to consider how COVID-19 will impact your government prime contracts and subcontracts.

This commentary will briefly address how COVID-19 may be impacting the government business (now or later), the resulting contractual and legal issues and their potential pitfalls, and some tips to address this issue. But suffice it to say that the situation is fluid and changing daily. 

THE IMPACT

First, here are some the issues facing Government contractors:

1. Service Disruptions

One particular concern is what happens if a government customer decides to close its work site, in effect preventing the contractor from performing its prime contract (and subcontractors from performing their subcontracts.) Remember all those government shutdowns?

Another equally plausible scenario is the agency allowing or requiring key Government contracting and program personnel and other “essential” employees to leave the work site or work remotely (i.e., telework), which may prevent the contractor from following customer direction or meeting its deliverable requirements.

And while FAR 7.108 states that the Government may not “discourage” contractor employee teleworking, yet that does not consider potential performance issues. In some cases, an agency may attempt to issue a Stop Work Order if its own employees are not available on-site to interact directly with the contractor employees.

1. Availability of Products

According to several publications, the COVID-19 outbreak has severely disrupted the global supply chain. Axios reports that that this will impact nearly 75 percent of U.S. companies. Contractors, especially value added resellers, are reliant on manufacturers who face challenges in sourcing products from countries where these products are substantially transformed for government use (e.g., TAA-compliant products in South Korea/Taiwan/Mexico), or even here domestically. Disruption to the supply chain especially for IT products, many of the basic components of which come from China, could cause substantial backorders and long delays in meeting government delivery deadlines. Agencies may or may not be very forgiving depending on their immediate to intermediate needs and the pressure on some Government buyers to meet their agency’s ongoing product demands. 

1. Subcontracts

Contracts between prime contractors and subcontractors are considered commercial contracts (even if they contain FAR/DFARS or other flow-down clauses). Most commercial contracts do contain a force majeure clause that excuses delay. Those same clauses, however, may or may not have the same protections as in prime contracts. Subcontracts also may not prohibit prime contractors from seeking goods and services elsewhere if a subcontractor cannot fulfill their obligations.

1. Employee Issues

A full review of HR legal issues is beyond the scope of this article. But consider that some contractor employees are refusing to work at government and contractor work sites or deploy to high risk overseas (OCONUS) sites. Some are being allowed to telework with the agency’s consent. Others are demanding increased protective measures from their employers, especially employees working at those high risk OCONUS sites (e.g., Korea, Japan, Italy), such as providing COVID-19 testing, protective equipment such as masks, gloves, safety glasses and even hazmat suits, hazard pay, additional paid time off, and repatriation – all at the employer’s expense.

Much or all the cost for these items may or may not be allowable or compensable under the FAR. While OPM is expected to issue guidance to protect federal employees, for now there seems to be no such guidance with respect to contractor employees. Like government shutdowns of the past, the government’s focus appears to be more toward the federal employees than contractors.

CONTRACT-LEGAL ISSUES

The above raises a variety of potential contractual and legal issues related to government prime and subcontracts.

1. Recovery of Increased Contract Costs

Not unlike previous government shutdowns, contractors will have challenges but also a potential opportunity to recover additional costs related to these matters. For example, if there is a performance interruption as a result of the COVID-19 virus, consider the following:

• Suspension of Work or Stop-Work Order Clause (FAR 52.242-14, FAR 52.242-15) – This clause may be used by the government to order all or part of the work stopped for up to 90 days, after which the government must either cancel the order or terminate the contract for default or convenience. If cancelled, the contractor is required to resume work. For this clause to apply, the order must be in writing and issued by the contracting officer.

In some cases, the order is erroneously issued by someone other than the CO (e.g., a COR/COTR) or may not be in writing. Under such circumstances, the contractor should insist on such a written order by the CO and may argue that the direction to stop work constitutes a termination for convenience (FAR 52.249) if the order is not properly issued or work does not resume within the 90 day period, unless the parties agree otherwise.

The clause does provide for equitable adjustments with proper notice (typically 30 days). It is also important to properly document all efforts to reduce or eliminate such additional costs.

• “Government Delay of Work” Clause (FAR 52.242-17) – This cause may also be useful in seeking a request for equitable adjustment (REA) based on performance delays caused by the government. This clause, having its own notice requirements, has been used to justify cost recoveries during the shutdowns; its use may be more limited here as the government may defend the delay based on circumstances beyond its own control.

• Excusable Delays Clause (FAR 52.249-14) – This clause provides that contract performance delays may be excusable if they are “beyond the control and without the fault or negligence of the contractor.” One of the specifically mentioned examples noted in this clause is “epidemics” and “quarantine restrictions.” (For commercial items see FAR 52.212-4(f)).

• Changes Clause (FAR 52.243-2, FAR 52.243-3) – This clause covers contracting officer written orders to direct changes to contract performance under certain circumstances. Normally used to fix or modify work requirements or react to newly encountered circumstances, an agency may issue such an order related to the COVID-19 virus. Compensation is typically allowed for cost increases. Absent such an order, a “constructive change” may arise from increased costs caused by circumstances affecting the manner, method or scope of performance. The contractor notice requirement here is typically 20 days. The challenge is whether Government activities related to COVID-19 may be considered a constructive contract change.

• Formal Claims/Request for Contracting Officer Final Decision – Where work is interrupted or stopped and the contractor believes it may be entitled to compensation under any of the above clauses, it should seek to resolve the matter with the contracting officer on an informal basis through an REA or similar request. If that fails, a contractor may seek a final contracting officer final decision through the submission of a formal certified claim under the federal Contract Disputes Act. Agencies are required to respond within 60 days although extensions are common. Keep in mind that the claim must meet all CDA requirement to include an exact claim amount as well as a proper and signed claim certification. Note DOD contracts require certifications even for REAs.

• Sponsored Subcontractor Claims – Subcontractor remedies for the interruption of its work may be at the mercy of the prime contractor. Subcontractors typically have no direct recourse against the agencies; if they have a potential breach of contract issue they can in most cases sue the prime. In some cases, however, the prime contractor may submit an REA or certified claim on behalf of the subcontractor –known as a “sponsored” claim. The best approach here for the subcontractor is to include a clause in the subcontractor requiring the prime to submit a sponsored claim to include any appeals.

POTENTIAL PITFALLS

Despite the potential availability of these remedies, consider the following:

• The particular contract and facts and circumstances of each case must be considered. Can tasks be completed without the presences or availability of key government personnel? Does the extent of the delay support the costs claimed? Can a contractor support an excusable delay argument if the agency fails to take proper measures to provide certain protections against potential exposure to the virus at the government work site? Can a contractor justify an argument that it can properly perform with its employees teleworking as opposed to being required to be on-site? To name a few. Either way, this is largely uncharted territory so the availability of these remedies is far from certain.

• Under the above FAR clauses, only properly allocable and allowable costs are recoverable. These costs are likely to be direct labor and benefits and associated indirect costs (e.g., overhead and/or G&A). 

• Government expenditures in dealing with COVID-19, unless separately funded, may impact the availability of funds to cover such costs. FAR 52.232-18 states in relevant part that “government's obligation under this contract is contingent upon the availability of appropriated funds from which payment for contract purposes can be made.”

• Even if your basis for recovery is correct, your contracting officer may still oppose any REAs or claims either because of pressure from agency powers that be or some other bureaucratic or political reason. We have experienced some the latter during the shutdown.

• The government still reserves the right to terminate the prime contract if there is a delay or for any other reason for its convenience. In ability to timely perform may be grounds for a government termination for default.

• Your ability to recover will be lessened if you don’t provide the proper notices to the contracting officer (and I mean the CO, not anyone else without a proper contracting “warrant”), and fail to properly document your costs to include any efforts to mitigate those costs as the FAR requires.

• Subcontracts may have a more restrictive force majeure clause that may or may not cover pandemics or epidemics, and query whether the typical force majeure ground of “Act of God” alone may suffice. Hopefully for the subcontractor, the sometimes more expansive FAR excusable delays and changes clauses will be flowed down to the subcontract. Keep in mind that in some subcontracts the notice requirements in such a clause may be shorter.

THE BOTTOM LINE

Here are some brief tips in dealing with COVID-19 relative to government prime and subcontracts:

• Carefully review your prime contracts and subcontracts to determine your rights and obligations under these agreements, as well as any risks associated with the consequences and potential for recovery of additional costs or a price adjustment as a result of a work delay or stoppage.

• Subcontractors should also carefully review their subcontracts to determine their rights, obligations and potential for recovery. Subcontractor circumstances may differ.

• Communicate and properly document the incurrence of such additional costs to include any potential mitigation of such costs. Although effective communication with the government customer is essential, any formal communications concerning the above FAR clauses must be with the warranted contracting officer. The point here is to document, document, document and communicate, communicate, communicate.

• Communicate with your subcontractors on your efforts in dealing with COVID-19. Determine how your company will be coordinating an approach consistent with the contracting officer’s direction or changes as a result of the virus.