DOD COVID-19 guidance answers some questions but creates others

Since the Coronavirus Aid, Relief and Economic Security Act and several prior agency memos addressing relief for (or at least an attempt to comfort) the government contractor community, additional guidance was recently issued by the Defense Department with regard to Section 3610.

As you may recall, CARES Section 3610 provides funds to allow agencies to modify contracts 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.” The agency’s authority to modify the contracts applies only to “approved” sites because of that site’s “closures or other restrictions, and who cannot telework because their job duties cannot be performed remotely.” (See my April 3 commentary)

Since CARES became law on March 27, DOD issued additional guidance in an attempt to clarify this language. But what these memos underscore is that CARES Section 3610 is hardly a model of clarity. Understandably it was hastily drafted and even more understandably agencies and in particular DOD may not be on the same page in interpreting its provisions or applying them consistently.

Here’s a brief summary of some the latest guidance (note there have been about 17 of these so far just from DOD):

• March 30: the DOD Acting Director of Defense Pricing and Contracting (DPC) issued a memo noting the availability of various FAR clauses applicable to COVID-related issues to include those excusable delays and changes (see my March 16 commentary). The memo states that “Where the contracting officer directs changes in the terms of contract performance, which may include recognition of COVID-19 impacts on performance under that contract, the contractor may also be entitled to an equitable adjustment to contract price using the standard FAR changes clauses (e.g., FAR 52.243-1 or FAR 52.243-2).” The memo does advise that REAs will be “considered on a case-by-case basis, in consideration of the particular circumstances of each contract, impacts realized from COVID-19, applicable law, and regulations, and inclusive of any relief that may be authorized by laws enacted in response to this national emergency.” It also alludes to the FAR Part 31 Cost Principles which will control in any REA. No real change from earlier guidance except that, although this memo mentions CARES Section 3610, it seems to (albeit awkwardly) address non labor COVID-related costs.

• April 3: The DPC issued a class deviation that the requirement to limit contract obligations to 75 percent of the not-to-exceed price will not apply to undefinitized contract actions or UCA (i.e., contract terms and pricing not formally agreed upon before performance commences) during the COVID emergency. It would seem this would apply to those contracts containing the DFARS UCA clause (217.7404), although if the contract doesn’t contain the clause a contractor can request its incorporation. Better yet, DOD should issue a “mass modification” so it covers every contractor equally. Such mass modifications are not uncommon in GSA contracts. Note another DPC memo regarding implementing the prior class deviations for progress payment billings.

• April 3: The General Services Administration (GSA) issued a “Class Determination and Finding” allowing agencies to make purchases under GSA Schedule contacts of certain COVID-essential products that are not compliant with the Trade Agreements Act (TAA). The TAA limits Government procurements to products made in the U.S. or certain designated countries - China for example is not a designated country. The listed products include N95 masks, hand sanitizers and various cleaning chemicals, although this list may be expanded. This TAA waiver extends to July 1, 2020. The waiver has no dollar limits.

• April 8: The DPC issued another class deviation to implement Section 3610 by advising that (1) contractors should not recover duplicate amounts from Section 3610 in addition to other CARES relief provisions (such as the Paycheck Protection Program); (2) 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”; (3) contacting officers shall consider specific operational and financial circumstances of each contractor situation when determining allowability of COVID-related costs.

Attached to this DPC memo is an implementation framework for reimbursing contractors for paid leave for employees prevented from working due to COVID-caused facility closures or other restrictions. The implementation mainly parrots Section 3610 but also says that the rates used are to be “the appropriate rates under the contract up to an average of 40 hours per week. . . .” The purposes of the payments are, as the statute says, to keep contractor/subcontractor employees in a “ready state,” but providing no guidance as to what a ready state really means, and what it doesn’t mean.

• April 8: The Office of the Director of National Intelligence or ODNI released an unclassified “Guiding Principles” related to implementing Section 3610 in contracts with the intelligence community, mostly in line with Section 3610. More boldly, however, the guidance states that maximum flexibility should be employed on deliverable dates, and that “any additional costs would trigger an REA.” It also notes that “ODNI has reduced its acquisition and procurement staffing to manage the response to the pandemic.”
• April 9: The DPC issued a guidance memo advising that the paid leave would be included in any fixed price, time and materials/labor hour or cost-reimbursement contracts, and provides guidance for each of these contract types to include the creation of separate COVID-related contract line item numbers. It also advises, as we have seen previously, that contractors provide documentation to “clearly identify these costs for reimbursement paid to contractors under section 3610 authority, as well as how such costs are identified, segregated, recorded, invoiced, and reimbursed.” The guidance reminds agencies that any increased costs are subject to the availability of funds, so without the proper funding (as with any Government contract) the adjustments will not be made.

Putting aside the GSA’S TAA waiver, the DOD/DPC guidance memos and class deviations don’t entirely clear up the confusion of Section 3610, nor do they assure that agencies will in fact fully and consistently reimburse contractors for COVID-related costs increases, both labor and other related costs. 

For example, what does “paid leave” include? Does it encompass all family and medical leave (ala the Family and Medical Leave Act) or any leave? Note FMLA doesn’t apply overseas. What is a “ready state?” 

Sounds simple enough but does it cover those employees who cannot perform for any reason during the COVID-19 emergency or for specific reasons (e.g., having young kids that prevent working at home full time). It certainly should not cover non-working time where the employee lacks distractions but just wants to catch up on Hulu shows. 

Also, there seems to be some confusion regarding “billing rates.” While Section 3610 provides for payment at the contract’s “minimum billing rate,” the DPC April 8 guidance calls for payment at the “appropriate rates” under the contract. Does that mean the rates currently being charged under the contract by the person seeking paid leave, or the contract’s minimum billing rate even if there are a variety of billing rates depending on labor category skills and experience? Also, what about contracts that don’t contain billing rates? How are COVID-related cost increases here to be quantified?

I would hope that agencies will rely on upon rates that a contractor developed for its proposal or existing internal billing rates to use in this situation.

But there’s another gnawing question: how does Section 3610 and all this guidance to include the “ready state” requirement address the inevitable productivity gap caused by employees (Government and contractor) working from home during the COVID-19 crisis? Does Section 3610 envision that not being able to work remotely may not apply to those who have the resources to telework but cannot be fully productive because of a number of circumstances that are directly or even remotely COVID-related? There are a number of studies pointing to the advantages of teleworking and its attendant productivity benefits. But that’s not the same here. Teleworking in the normal world is one thing, but another thing doing it day after day in the midst of a massive, economy-crippling pandemic where children are without daycare or schools to go to, elderly are without in-home assistance or adult day care, workspaces are unsuitable for all day-every day work, privacy is questionable and there is simply no choice to go to the office, not to mention the stress and cabin-fever-on-steroids this all causes. 

Many employees are not accustomed to working from home and are scrambling to set up home systems, secure VPN and enjoy a modicum of privacy and quiet from the distractions caused by kids, spouses, partners, pets and roommates. There are some who have a large enough home, a muffled dog but no kids, double private studies and enough cocktails to last until the next pandemic. Others are not as fortunate.

So how can there not be some downward impact on productivity? How will the Government consider these dynamics in determining whether or not there should be price adjustments for paid leave under CARES Section 3610, or agreeing to excusable delays due to late deliverables, or providing for compensable changes for these and other non-labor COVID-related cost increases?

The bottom line is that there will be disagreements, denied REAs. And there will be audits and investigations, which means there will be contractor/government disputes. The best way through such disputes is to avoid them, by using a reasoned and common sense approach at COVID-related costs (both government and industry), keeping proper and detailed documentation of your COVID-related cost increases, communicating with the customer, especially the CO, “early and often,” and by keeping on the same page with your subcontractors and employees.

Stay safe.