Government contractors continue to face disruptions from COVID-19 and the attempts to halt its spread: closures of government and contractor facilities, quarantined personnel, the inefficiencies of telework, delays and disruption in the supply chain, and uncertainty over how to apply the sometimes conflicting guidance provided by federal, state, and local authorities.
On March 30, the Acting Principal Director for Defense Pricing and Contracting (DPC) issued a memorandum on Managing Defense Contracts Impact of the Novel Coronavirus. That memorandum noted may of the regulatory tools already in place, including FAR regulations concerning excusable delays, as well as the standard FAR changes clauses. With respect to requests for equitable adjustment, the memorandum stated that requests “must be considered on a case-by-case basis” and “inclusive of any relief that may be authorized by laws enacted in response to this national emergency.” The memorandum also stated that contracting officers reviewing requests for equitable adjustment should consider “whether the requested costs would be allowable, allocable and reasonable to protect the health and safety of contract employees as part of the performance of the contract.” Finally, the memorandum acknowledged Section 3610 of the CARES Act, “which provides discretion for the agency to modify the terms and conditions of the contract to reimburse paid leave where contractor employees could not access work sites or telework but actions were needed to keep such employees in a ready state,” and states that DPC will provide additional guidance shortly. (We addressed Section 3610 here).
How then can contractors use the regulatory frameworks in place to protect themselves and get compensated for increased costs during this national crisis?
Excusable Delays and Schedule Extensions
As noted in the DPC memo, and in our initial post on the topic, the FAR contains various excusable delay provisions for potential inclusion in government contracts. For example, the Excusable Delays clause at FAR 52.249-14, which is included in “contracts for supplies, services, construction, and research and development on a fee basis whenever a cost-reimbursement contract is contemplated [and] . . . time-and-material contracts, and labor-hour contracts,” states that a contractor shall not be in default as a result of “causes beyond the control and without the fault or negligence of the Contractor.” Listed among the examples of such causes are “epidemics” as well as “quarantine restrictions.” FAR 52.249-14(a)(5) & (6). This protection also extends to failures on the part of subcontractors so long as the cause of the failure is beyond the control of both the contractor and subcontractor and the contractor did not fail to comply with an agency order to purchase the affected supplies or services from another source. FAR 52.249-14(b). Any excusable delay should result in an adjustment to the schedule to take into account the delay.
A similar provision exists in the Default clause at FAR 52.249-8, which is included in fixed-price supply and service contracts. Under paragraphs (c) and (d), if a contractor fails to perform due to causes beyond the control and without the fault of the contractor or a subcontractor (including, again, epidemics and quarantine restrictions), the contractor is not liable to the government for any excess costs. Paragraph (g) of this clause further provides that any default termination that is based upon an excusable delay will be converted to a termination for convenience. The upshot of this clause is that, similar to the Excusable Delays clause, a contractor is not in default if it misses a contractual delivery date due to a cause beyond its control and without its fault.
Excusable delays ordinarily result in a schedule adjustment, and not an increase in contract price under fixed-price contracts. But, even where a remedy-granting clause ordinarily would excuse a schedule slip, contracting officers sometimes demand on-time performance anyway. The OSD A&S memorandum suggests that critical infrastructure contractors may expect to receive exactly such orders. What do you do if a significant portion of your workforce is legitimately unable to report to work, but the contracting officer insists on meeting your existing schedule? The available workforce likely will have to work additional hours, perhaps incurring overtime, to accelerate their own performance to meet a schedule that contractually should be extended. That is a classic example of “constructive acceleration.” A contractor in that position should inform the contracting officer that the contractor will incur the additional costs necessary to comply with the contracting officer’s direction, and (if the contract is fixed price) will present a request for equitable adjustment. This assumes that the epidemic, quarantine, or other extenuating circumstance is truly an obstacle to performance and the contractor can document that the constructive acceleration both occurred and increased its costs.
Contractors should keep in close communication with their contracting officers about any potential threats to their workforce or their supply chains as a result of COVID-19 to ensure that issues such as schedule adjustments can be negotiated early in the process, rather than waiting until there is a failure to perform.
Price Adjustments for Stop Work or Government-Created Delay
Although the standard excusable delay provisions allow for schedule adjustments, they do not provide for an adjustment to price (except in the case of a constructive acceleration). Different remedies apply to a government-issued stop work order or as a result of a government-caused delay. For example, if base closures or travel restrictions result in a stop work order from the government, contractors may be able to seek an equitable adjustment under the Stop-Work Order clause at FAR 52.242-15. If the government creates delay through a base closure or travel restriction and does not issue a stop-work order, the contractor may be entitled to a schedule adjustment for its excusable delay, as described above, or potentially a price adjustment for constructive acceleration if no schedule relief is provided.
The same remedy may be applicable if, for example, the government delays inspections or testing because government personnel are absent due to illness, quarantine, or other causes. And although government-caused delays unavoidably stemming from COVID-19 do not, without a refusal to provide schedule relief, by themselves entitle a contractor to a price adjustment, if those delays become unreasonable in length, the contractor may seek compensation under the FAR’s Government Delay of Work clause. FAR 52.242-17.
Finally, as the DPC memo points out, the FAR’s Changes clauses (FAR 52.243-1 and 52.243-2) may serve as the basis for a price adjustment under a request for equitable adjustment or a claim. This clause gives the government the ability to change a contractor’s work in accordance with the scope and terms of the clause, no matter how the contractor initially planned to do it. If the contracting officer requires a contractor to perform any work that is different from or additional to the work as specified in the contract, or interferes with a contractor’s performance, the Changes clause typically will provide for an equitable adjustment, increasing the contract price and extending the schedule, so long as the contractor has been careful to notify the contracting officer of the event.
As a result, it is imperative that contractors (1) recognize the events that could lead to a price or cost adjustment when they occur; (2) report their occurrence to the contracting officer; (3) refrain from doing ad hoc “work-arounds” without direction from the government; and (4) figure out how to track the cost and schedule effects of these events.
Common causes of delay and disruption that may allow a contractor to pursue an equitable adjustment during the COVID-19 National emergency are the following:
- Closed customer facilities;
- Unavailable customer inspectors or delays in inspections;
- Stop-work orders;
- Customer direction to change performance schedule;
- Customer direction that directly or indirectly requires use of more costly performance methods;
- Customer direction to telework;
- Customer requests to host agency personnel in contractor facilities;
- Customer direction to take additional steps to maintain a healthy environment (e.g., increasing the space or equipment necessary for performance to effect social distancing, increasing janitorial services);
- Customer direction to increase or decrease the number of personnel who report to work, or hours that they work; and
- Customer direction to maintain existing delivery schedules and performance levels despite the presence of events that create excusable delay and will require acceleration to meet existing schedules (e.g., epidemic and quarantine restrictions that delay the supply chain or restrict the workforce’s ability to perform as usual).
As contractors encounter delays and disruptions, the causes and effects need to be documented in real time, e.g., what government action or inaction occurred, how it affected schedule and cost, and what steps the contractor has taken to mitigate the effects. Common categories of increased costs (which may or may not be compensable, depending on cause and contract type) include, but are not limited to:
- Costs of idle labor (i.e., when the company must continue to incur labor costs for contract personnel even if the personnel are unable to report to work);
- Costs of idle equipment (for example, rental costs for idled equipment);
- Increased labor and material costs due to production slipping into later cost periods;
- Increased costs caused by having to change work flow or sequence (e.g., work-arounds);
- Other higher costs due to less efficient methods of performance (e.g., being unable to use spaces to full capacity due to social distancing, having to surrender usable space for the use of customer personnel);
- Costs of temporarily ramping up or down to meet changing customer requirements;
- Costs of new materials or services necessary to adjust to changed requirements (e.g., infrastructure to enable mandated telework or changed place of performance, having to occupy additional space to effect social distancing);
- Costs incurred to train personnel to adapt to changed requirements; and
- Unabsorbed overhead (e.g., the increase in an overhead rate due to a diminished base of costs).
There are doubtless other types of delay and disruption costs contractors will encounter. Some of these may be easier to identify and quantify than others. Contractors should continue to review and analyze actual cost data—such as learning curves, staffing levels, changing Estimates-to-Complete, etc.—to identify potential additional divergences from the costs the contractor expected to incur prior to the start of COVID-19 impacts.
Finally, and perhaps most importantly, contractors should continue to maintain open lines of communication with contracting officers. This will be imperative for contractors to understand any changes the customer may require, and to ensure the government receives reasonable notice of events outside a contractor’s control that may require schedule adjustments, as well as when the customer’s own changed requirements may increase performance costs.