Pandemic Implications for Government Contractors: How the FAR Covers COVID-19

Developed in conjunction with our friends at The Pulse of GovCon, and from the desk of Ryan Bradel, Partner at Ward & Berry PLLC, here is what government contractors should know while navigating the COVID-19 pandemic:

I.       Introduction

The last week has seen a stunning advance in the breadth of the Coronavirus (COVID-19) pandemic and its effects on almost every area of life.  This crisis has already and will continue to affect the way that government contractors do business.  It is critical that government contractors get out in front of the legal issues that will inevitably arise from this crisis.
This client alert will address two (2) main topics:

1. legal issues that may arise between a contractor and the government
2. legal obligations that a contractor has to its employees

II.      Addressing legal issues with the government customer

The primary concern for a contractor vs. the federal government is how to approach the likelihood that at some point this crisis will increase the cost of performance for the contractor.  The increased cost of performance is likely to be caused by:

1. performance delays—either those ordered by the government or those resulting from an inability of the contractor to continue to perform; and/or
2. the need for the contractor to add additional resources to the contract in order to continue performance. In the likely event of increased cost of performance, the contractor needs to take the necessary steps to ensure that those costs are recovered.

A.      Suspension directed by the government

The Federal Acquisition Regulation (FAR) allows to the government to order a contractor to either suspend work (FAR 52.242-14) or to issue a stop-work order (FAR 52.242-15).  A “constructive suspension” of the contractor’s work may also occur if the contractor is unable to continue to work and, after the fact, it is determined that the government caused the circumstances making it impossible for the contractor to continue even though the government did not formally order the work to be stopped.

In the event of Suspension of Work (FAR 52.242-14), which is at the government’s convenience, a contractor is entitled to an adjustment for the increased cost associated with the suspension only where the suspension is for an unreasonable period of time and is caused by an act or omission of the government.  Furthermore, the contractor is not entitled to any costs incurred more than 20 days before the date that the contractor notified the government of the act or omission that caused the increased cost to the contractor (certain exceptions to this 20 day limit apply).

In the event of Stop-Work Order (FAR 52.242-15) the contractor is entitled to an equitable adjustment for all increased costs caused by the stop work order or for additional time to complete the contract if the stop work order increases the amount of time required.  A claim for an equitable adjustment under this clause must be asserted within 30 days of the cancellation of the stop work order.

A constructive suspension arises when: “(1) contract performance was delayed; (2) the government directly caused the delay; (3) the delay was for an unreasonable period of time; and (4) the delay injured the contractor in the form of additional expense or loss.” W.M. Schlosser, Inc. v. United States, 50 Fed. Cl. 147, 152 (2002) (citation omitted).

The key take-away here is that any suspension directed by the government is subject to intricate rules and tight deadlines.  Accordingly, it is important to have your legal adviser involved very early in the process.  Your legal adviser should review any notice from the government regarding a suspension.  Furthermore, it is important to begin carefully documenting all costs that are the result of any suspension.

B.      Excusable Delay

The point of the excusable delay provisions in the FAR are to protect the contractor from any sanctions from the government in the event that the contractor is unable to perform the contract due to an unforeseen circumstance.  The FAR contains several provisions regarding excusable delays which apply depending on the type of contract involved (i.e., fixed price construction, fixed price supply and service, commercial items, etc.).  Each of these clauses specifically mentions “epidemics” and “quarantine restrictions.”  Clauses include FAR 52.249-10, FAR 52.249-14, FAR 52.249-8, and FAR 52.213-4. 

Accordingly, contractors should have solid legal protection if they are in a position where they are no longer able to perform their contract due to the Coronavirus crisis.  However, to be able to take advantage of this protection, it is important that the contractors take the necessary steps in consultation with their legal advisers.

First and foremost, contractors must carefully document all circumstances that are causing the excusable delay, for example, if employees are unable to make it to their duty station due to a quarantine or if your supply chain has been affected by the crisis.

Secondly, contractors should clearly communicate their situation to the government—don’t wait until you must stop work to let the government know that you might have a problem continuing performance due to the crisis.  While the law may protect the contractor from a sanction due to an excusable delay, like with any legal right it may only be vindicated after expensive litigation.  That process may be able to be avoided if the contractor keeps in mind the human element of the relationship with the government.  The government may be more likely to recognize the excusable delay and work with the contractor to mitigate it if the contractor provides advance notice.

C.      Increased costs

A contractor’s cost of performance may be increased by this crisis in any number of ways.  Several examples quickly come to mind.

• A contingency operations contractor must continue to provide personnel to military or intelligence activities overseas and so moves forward with its training despite the Coronavirus.In order to protect its personnel from transmission, the contractor hires a doctor to be present at the training to check each trainee for symptoms.
• Another example would be a contractor that has to unexpectedly and rapidly bring overseas personnel home to because of the crisis.Still another example would be a contractor that has to order special protective equipment for its employees.

There are any number of legal theories under which entitlement to payment for these increased costs may be justified.  The justification will depend on several different circumstances, most importantly the language of the contract and how critical the added costs are to the scope of work of the contract.

At the risk of sounding like a broken record, any contractor that thinks it may need to incur additional costs to perform the contract should:

1. contact its legal adviser
2. carefully document the facts and circumstances that have led to the increased cost
3. communicate with the government

III.      Addressing legal issues with employees.

The issues with which a contractor must contend vs. its employees in the midst of the COVID-19 crisis are not all that different than what a contractor has faced during the several government shutdowns due to a budget impasse that have occurred over the several decades.  That is, there is the possibility that the COVID-19 crisis will cause the government to suspend non-essential operations and contractors will have to face the decision of whether to furlough the employees involved in these non-essential operations.

If the government suspends operations, it will be highly unlikely that a contractor will be able to obtain an equitable adjustment for the cost of paying its employees when the employees were not performing work for the government.  Thus, a contractor must decide to either furlough the employees or else eat the cost of continuing to pay them.

During the most recent budget impasse shutdown, Congress and the president enacted a law to provide contactors with back pay for furloughed employees.  However, while hope springs eternal, it would be unwise for a contractor to count on this to be reprised in response to the Coronavirus crisis, though it may.

If a contractor is in a position where it needs to furlough employees, it should keep the following legal realities in mind and communicate them to their employees, as appropriate, after consulting with their legal advisor:

• Nonexempt, furloughed federal contractor employees do not have to be paid retroactively for hours or days of a partial government shutdown that they did not work, unless Congress dictates otherwise.
• Exempt, furloughed federal contractor workers are entitled to their regular salary for any workweek in which they perform any work or if they work a partial workweek during the shutdown. If the furlough lasts for an entire workweek and the exempt federal contractor employee does not perform any work during the week, the employer does not need to pay the employee for the workweek
• Furloughed employees are generally eligible for unemployment compensation, though the requirements can vary from state-to-state.
• Furloughed employees may take other jobs during a shutdown but are still subject to executive branch standards of ethical conduct and rules regarding outside employment.
• A furloughed employee may not volunteer to do his or her job on a volunteer basis or without pay.
• At-will employees may be terminated during a shutdown.

Again, it is important to contact your legal adviser to understand the nuances of these requirements in the event any of your employees must be furloughed as a result of the COVID-19 crisis.
If you have any additional questions, please contact Ryan Bradel at rbradel@wardberry.com.