Government contractors are facing unprecedented performance obstacles these days as they grapple with the coronavirus pandemic. Besides having to navigate evolving (and often conflicting) rules and regulations impacting performance, many also face government facility closures; staff shortages; work stoppages; and more.
“Federal contractors are uniquely positioned to provide critical goods and services, and everybody, especially the government, recognizes that,” Steve McBrady, a partner in government contracts group of Crowell & Moring, said on a recent Webinar. “But federal contractors are also uniquely positioned to bear the brunt of balancing, on the one hand, continued performance when possible and, on the other hand, risk associated with performing under uncertain and constantly changing circumstances.”
In a March 20 memorandum on managing federal contractor performance issues associated with the pandemic, the Office of Management and Budget encouraged agencies to “be flexible in providing extensions to performance dates if telework or other flexible work solutions, such as virtual work environments, are not possible, or if a contractor is unable to perform in a timely manner due to quarantining, social distancing, or other COVID-19 related interruptions.” Concurrently, however, the memo states that “requests for equitable adjustment should be considered on a case-by-case basis.”
Companies that provide goods and services to the U.S. government during the pandemic may be entitled to recovery for a variety of reasons, including delays caused by COVID-19 related issues; increased performance costs attributable to COVID-19 related changes requested by the government; or costs resulting from government-initiated contract terminations that are driven by COVID-19 related priorities and/or performance issues.
No matter the circumstances, the compliance message is the same: Take steps in communicating and documenting issues now when facing scheduling and performance disruptions in anticipation of needing potential relief down the road.
Excusable delays are a common exception in federal contracts. Under FAR 52.249-8, a contractor will be excused from liability “for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the contractor.” The clause specifically lists epidemics and quarantine restrictions as examples of excusable delays.
The contractor must meet certain criteria, however, including causation and absence of fault. Regarding causation, the most important thing to remember is that the excusable delay itself is not enough. “It’s not, per se, relief,” Mark Meagher, a partner at law firm Dentons, said in a separate Webinar. “You have to connect the dots between that condition and the experienced delay in your contract performance.”
It’s also important to immediately document the cause of the delay. “We all feel with extreme immediacy the critical nature of the situation the country is in today,” Meagher said. But a pandemic-related contract issue might not be litigated for a few years, and that sense of crisis that we all feel right now can get lost, he said. The only way to recreate is “to work very carefully and methodically with your contract team to connect the dots.”
One specific clause to keep in mind is FAR 52.242-17, which provides a broad remedy for “any” contracting officer action “or inaction” that affects performance and causes cost or schedule impacts. A real-life scenario amid the coronavirus, for example, is if the contractor must be on-site at a government facility to perform but receives notification that the facility is not open and the contractor’s personnel are not permitted on-site.
An important step here is to notify your contracting officer of any impact you’re experiencing and document those impacts. “Now is not the time to be afraid to talk to the contracting officer about the impact that you’re experiencing,” said Michelle Coleman, counsel in the government contracts group at Crowell & Moring.
Keep in mind, FAR 52.242-17 expressly does not allow profit for delays. Thus, because there’s often overlap between FAR 52.242-17 and a stop-work order, “reserve your rights to both of them,” said Skye Mathieson, counsel in the government contracts group at Crowell & Moring. “It’s always good to try to claim a delay and try to get paid for it.”
“The main purpose of excusable delays is to prevent the government from terminating you for default,” Coleman said. Supplier-related problems that aren’t within your control can also be excusable defenses to a termination for default.
Under FAR 52.249-8, the government cannot terminate for default for failure to deliver supplies, make progress, or perform provisions under the contract. It’s important to notify the contracting officer “early and often in writing” that you’re experiencing delays, however, so that you can defend a termination for default later down the road, she said.
Contractors should be prepared to show what proactive measures they considered to try to mitigate the impact—for example, coming up with alternative supply-chain sources or looking at alternative ways for employees to work off-site. Also, document those considerations to show you did your best to avoid any delays in the contract.
Maximizing cost recoveries
For government contractors, aside from being able to excuse non-performance—either temporarily or otherwise discharging the obligation to perform—another key issue is how to obtain some form of cost recovery. With fixed price contracts, “the threshold golden rule of government contract is you need to consider the terms and conditions of the contract,” said Phillip Seckman, a partner at law firm Dentons. What types of theories can be utilized to protect your interest? An example may be a contracting officer’s failure to reasonably cooperate.
Extraordinary contractual relief may be another avenue to consider during the coronavirus pandemic. Under Public Law 85-804, the President may “authorize any department or agency … to enter into contracts or into amendments or modifications of contracts … whenever he deems that such action would facilitate the national defense.”
Whichever route you take, document the exchange with the contracting officer. “Be proactive in written communication with the contracting officer about the circumstances you’re encountering,” Seckman said. “Attempt to establish that, to the extent your being impacted, there is a superseding cause … that is traceable to the direction you’re getting from the federal government.”
“Be proactive in written communication with the contracting officer about the circumstances you’re encountering. Attempt to establish that, to the extent your being impacted, there is a superseding cause … that is traceable to the direction you’re getting from the federal government.”
Phillip Seckman, Partner, Dentons
Sub-contractors are another sticky area, because they’re going to want to shift their risk, particularly onto their higher-tier contractors. Seckman recommended “shift[ing] the burden or obligation to the contracting officer to tell you what you should be doing under these circumstances.”
A stop work order can be issued for 90 days (or more by agreement). When the period ends, the contractor must resume or the contracting officer must terminate the work (either for default or convenience). The remedy for the contractor is equitable adjustment plus profit or extension of billing schedule or both. “The key thing here is that you have to assert entitlements to an adjustment within 30 days after the period ends in order to recover,” Coleman said.
Be aware of differences between involuntary work stoppages and voluntary work stoppages. An involuntary work stoppage and cause for recovery, for example, would be if the government issues a stop work order because a government base or facility is closed but telework is allowed. A voluntary work stoppage, on the other hand, may be if you have people who are voluntarily staying at home due to the need to self-quarantine or they just don’t comfortable coming into work. “It’s likely that would be an excusable delay but not a contestable delay,” Coleman said.
In circumstances where a government base or facility is closed but the contracting officer outright refuses to issue a stop work order, “the contractor is still entitled to assert its rights under that clause,” Coleman said. A situation like that also falls under a government delay under FAR 52.242-17.
With any delay, notify the contracting officer. “That’s the first step,” said Steven Masiello, chair of the U.S. government contracts practice and a leader of the global government contracts and procurement group at Dentons. Document that the delay occurred, that the delay was a government act, and that the company experienced a cost impact.
Costs are likely to be considered “reasonable” where the contractor has done everything possible to mitigate the harm of the increased cost to the government. “If there are really no other economical avenues to reduce costs of materials, those are likely reasonable costs and reasonably incurred and contractor should continue to bill for those costs,” Masiello said.
During the coronavirus, specifically, contractors will also want to keep in mind the 2005 Public Readiness and Emergency Preparedness Act (PREP Act), which authorizes the Secretary of Health and Human Services to issue a declaration to provide liability immunity to certain individuals and entities against any claim of loss caused by, arising out of, relating to, or resulting from the manufacture, distribution, administration, or use of medical countermeasures, except for “willful misconduct” claims as defined in the PREP Act.
In February, the HHS issued a declaration concerning the PREP Act specifically related to COVID-19 countermeasures. Effectively, it affords contractors immunity from product liability, warranty, or negligence lawsuits stemming from the use and distribution of COVID-19 countermeasures.
To enjoy immunity under the PREP Act, it’s important to understand the definitions of the terms “covered persons,” “recommended activities,” and whether the contractor is engaging in those recommended activities, Seckman said. “This can be an important avenue for entities that are engaged in attempting to help with this emergency.”
Some companies might think they can’t benefit under the PREP Act, but with so many companies pitching in right now to help fight this pandemic—hockey equipment companies opening their factories to manufacture face masks for hospitals, for example—that may not necessarily be the case. “We are only in the early stages of responding to the pandemic, and the industrial mobilization that we’re likely to see will be unprecedented,” Masiello said. “So, many that have the opportunity to convert to public health and welfare activities may benefit from this declaration.”
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