As the novel coronavirus, COVID-19, invades more and more of everyday life, the chance it will affect government contracts and government contractors becomes more and more likely. These effects might include workforce reductions from those out sick, travel restrictions, base closures, or telework. Indeed, as reported earlier this week in National Defense magazine, Representative Mac Thornberry recently predicted COVID-19 would threaten the defense supply chain as a result of the quarantine efforts and work stoppages in China. Whether such supply chain issues come from components manufactured in China, South Korea, Europe, or the United States, the effects are likely to be felt all the same.
What, then, must government contractors know?
Excusable Delays and Schedule Extensions
Contractors should keep in mind the various excusable delay provisions contained in the FAR. For example, FAR 52.249-14, which covers excusable delays for cost reimbursement 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 is “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 with an order by the Contracting Officer to purchase the effected supplies or services from another source. FAR 52.249-14(b). Any excusable delay should result in an amendment to the schedule to take into account the delay; if it does not, the Contractor may be able to recover its increased costs of performing to the original schedule by submitting a constructive acceleration claim.
For fixed price contracts, the FAR likewise provides that excusable delays prohibit the government from terminating the contract for default. For example, under FAR 52.249-8(c) and (d), if the cause of the failure to perform is beyond the control and without the fault of the Contractor or a subcontractor (including, again, for epidemics and quarantine restrictions), the Contractor cannot be liable for any excess costs. Moreover, subsection (g) of this clause explains that in the event of an excusable delay, any termination that is issued will be converted to a termination for convenience. Given the worldwide spread of COVID-19, of course, Contracting Officers will likely be more amenable to adjusting the contract schedule rather than attempting to start anew with a different contractor.
Contractors would be well-advised to 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
Notably, although the excusable delay provisions allow for a schedule adjustment, they do not provide for an adjustment to price (except, as noted, in the case of a constructive acceleration, where no schedule adjustment is provided). Where contractors may be able to seek a price adjustment would be in the context of 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 remedy under the FAR’s stop work order provision. 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 would be true if, for example, government personnel becoming sick delays inspection or testing. 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.
Under these circumstances, contractors should carefully track any additional costs or any delays caused by the government delay or stop work order and be prepared to provide these to the Contracting Officer as part of a future request for equitable adjustment.
Prioritization of DoD Needs
Finally, Contractors should keep in mind the potential use for rated orders under the Defense Priorities and Allocation System (“DPAS”). The DPAS is a system of rating and assigning precedence to orders in tiers to ensure the Department of Defense’s most critical needs are prioritized as necessary to meet required delivery dates. See 15 C.F.R. § 700.3; FAR 52.211-15. If a contractor that has both commercial and government contracts is performing DPAS-rated orders, the government could ask the contractor to fill the government’s orders first, potentially affecting the contractor’s ability to fulfill its commercial contracts. The government may also allow contractors a right to claim priority for materials or components that may be in short supply as a result of downstream supply chain issues.
We likely have only seen the beginning of COVID-19’s effects on the global economy generally and U.S. government contracting specifically. As in all cases, emergency situations in particular, the best course of action is to keep calm, ensure your program and contracts personnel communicate frequently and comprehensively with their counterparts in the government, and know your rights (and obligations) when it comes to delays, adjustments to contract price or schedule, and defense-related priorities.