Chances are the rapid spread of COVID-19 has or will impact your company’s ability to perform its government contracts/subcontracts. Here are some issues to be aware of and things you can do to prepare.
The COVID-19 outbreak will likely impact the performance of federal contracts and subcontracts in several ways, including: (i) work cannot be performed because of supply chain issues or because offices are closed; (ii) employees working at a government facility can no longer work there because the government shuts down that office/facility or (iii) contractors cannot work because its employees are sick, under self-quarantine or under a federally or state-ordered quarantine.
There are certain Federal Acquisition Regulation (FAR) clauses that can excuse nonperformance or delayed performance for circumstances that are outside of the contractor’s control. For example, the FAR Excusable Delay clauses (52.249-8, 52.249-9 and 52.249-10) and FAR Commercial Items Terms and Conditions clause (52.249-14) all list “epidemics” or “quarantine restrictions” as a recognized example of an excusable delay. While these clauses provide a basis for a contractor to seek a time extension for performance or to excuse delays, they do not entitle the contractor to receive additional compensation.
In addition, even though COVID-19 will be recognized as an “epidemic”, these clauses require the contractor to provide notice of the delay, prove that the epidemic caused their delay and prove that the impacts could not be avoided with other commercially reasonable measures. In order to “prove” COVID-19 caused their delay, it is recommended that contractors keep records which detail (i) when the epidemic first impacted operations; (ii) how long the impact lasted; (iii) what personnel were affected and when they were absent; (iv) whether their absences in fact caused delay; (iv) whether products or materials were available from other sources; (vii) what efforts the contractor took to continue work despite absences or lack of materials and (viii) how the impacts delayed or prevented performance.
In addition, contractors need to mitigate the impacts. Now is the time to consider alternative methods to perform the work and alternative sources of supply. Most importantly, keep your contracting officer or higher-tier contractor informed of the impacts and additional costs you are incurring as you continue performance.
Suspension of Work
Actions taken by the government in its sovereign capacity shield the government from liability for claims resulting from those acts, even though a contractor will be allowed additional time to perform. This is the Sovereign Act Doctrine.
However, as the circumstances surrounding the government’s response continue to evolve, contracting officers may seek to delay work by issuing stop-work orders or otherwise informally suspending performance. Should this occur, contractors need to ensure they immediately comply with the stop-work or suspension instructions and communicate those instructions to subcontractors to ensure their compliance as well. The FAR Stop-Work Order (Supply or Services Contracts) (52.242-15), Suspension of Work (Construction Contracts) (52.242-14) and Government Delay of Work (Supply or Services Contracts) (52.242.17) clauses may entitle a contractor to a price adjustment for government-caused suspensions or delays if it results in an increase in time or costs properly allocable to performance of the contract.
If the government does not issue a formal stop-work or suspension order, to avoid financial responsibility, the contractor must timely notify the contracting officer in writing, such as by email or letter sent via email, of the act or failure to act that essentially causes a stop in work. These notifications will be critical should the contractor wish to submit a claim for the costs of any delay or suspension.
The FAR Changes clauses, 52.243-1 (Fixed-Price), 52.243-2 (Cost Reimbursement), 52.243-3 (Time-and-Materials) and 52.243-4 (Construction), give the government the unilateral right to make changes to the contract that are within the general scope of the contract. Examples include changes to the description of services to be performed, the time of performance, method of performance and/or place of performance. Contractors are entitled to pursue an equitable adjustment where such government-ordered changes under these clauses cause an increase in performance costs or time.
Modifications are key when the government wants to make changes. Consequently, contractors should always request a contract modification before agreeing to any changes to the work or agreeing to take on any additional work. Even if the government issues a unilateral no-cost modification, contractors may be entitled to a request for equitable adjustment.
Given the fluid nature of events, government personnel may direct or instruct contractors and subcontractors to reduce work or to increase work – informally. It is important to get any such instructions/directions in writing and authorized by someone such as the contracting officer who can bind the government. If the instructions come from others within the government, make sure to send the information to the contracting officer so they know what is happening. This will help should you need to submit a claim due to a constructive change to your contract or subcontract.
The Defense Priorities & Allocations System (DPAS), which implements the Defense Production Act (DPA), authorizes the president to require preferential acceptance and performance of contracts in support of national defense and energy programs, and that those contracts be accepted and performed on a priority basis over all other contracts. Here’s how it works. Prime contracts, subcontracts or purchase orders in support of an authorized program are given a priority rating (DX, DO, unrated). A DX rating takes priority over a DO rating, which takes priority over an unrated order. Rated orders take priority over unrated orders and orders from a contractor’s commercial customers, even if those orders were placed before the rated order.
When a contractor, subcontractor or supplier receives a rated order it must either accept or reject it, in writing, within a certain time period – 15 working days for DO rated orders and 10 days for DX rated orders. Prime contractors are responsible for extending the received contract rating to their entire product supply chain, to the lowest level, so it can fill the rated orders or obtain replacements of inventoried items.
If a contractor has accepted a rated order and subsequently finds that shipment or performance will be delayed, the contractor must immediately notify the customer, provide reasons for the delay and advise the customer of a new shipment or performance date.
Since contractors must prioritize DPAS-rated contracts, deliveries or work for other customers may have to be delayed. Although the government will not compensate contractors for costs associated with loss of work resulting from performing a rated order, DPAS does protect a contractor from breach of contract claims when it is unable to meet the obligations of its unrated orders.
So far we haven’t seen an increase in the use of rated orders as a result of COVID-19. But, it could occur in the near future, particularly for those items needed to respond to COVID-19 such as key personal protective supplies, masks, exam gloves, ventilators, medicines and other medical supplies. Contractors need to be reviewing all contracts or orders they receive as a prime or a sub to determine whether they are rated orders, ensure they accept or reject those orders in a timely manner and to make preparations to prioritize the performance of them accordingly.
Currently, contractors subject to the FAR Paid Sick Leave Under Executive Order 13706 clause (52.222-62) are required to provide sick leave to its employees that are engaged in performing work on or in connection with a federal contract.
The new stimulus legislation pending in Congress is likely to provide additional coverage. Once it is passed and signed into law, Taft will provide guidance as to what that means at the contractor and subcontractor levels.
- Contractors need to be talking to their contracting officers and program managers (PM)/customers now. Offer solutions and be a valued partner. It’s okay if those suggestions are also of benefit to you, so long as the government makes decisions that are in its best interest. Make sure you are including the contracting officer in conversations with your PM/customer, as the contracting officer is the only one with the authority to bind the government.
- Read your contracts/subcontract/orders – not only may they contain clauses referenced above which will be helpful long-term, but you also need to be prepared to take appropriate actions if you receive a rated order.
- Mitigate and document – treat this time as though you are preparing to submit a request for equitable adjustment or claim.
- Make sure you mitigate costs to the extent possible now and document what actions you’ve taken.
- If you have idle labor costs or layoffs, detail what actions you are taking to mitigate the costs. Track the costs.
- Confirm telephone calls in an email, sent shortly after the call.
- Obtain formal contracting actions such as formal mods, stop-work orders, etc., when applicable.
- If you are a small business, talk to your Small Business Administration (SBA) representative now. Explore what other options could support your business. For example, small business disaster loans are currently available up to $2 Million with a 30-year payback. More information on the availability of SBA Disaster Loans in response to COVID-19 can be found here.
- Contact your legal counsel for additional, contract-specific guidance.
Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.