Cost Recovery and Delay During COVID-19
March 26, 2020
How Government Contractors Can Safeguard Themselves and Mitigate Potential Losses
By Brett W. Johnson and Michael Calvanico
As the COVID-19 crisis progresses, government contractors continue to see significant impacts on their ability to provide goods and services to federal, state, and municipal government agencies. These issues range from ordering and scheduling delays (stop work orders) to addressing supply chain interruptions. These concerns ultimately lead to increased costs to perform the contract. Furthermore, the escalation of office closures and government declared stay-at-home orders add to uncertainty. During this time, government contractors should develop legal strategies to successfully navigate performance delays, modifications, and the ability to mitigate contract costs due to the COVID-19 outbreak.
If a government contractor is unable to complete performance in whole or in part, there are many standard contract clauses that can excuse certain types of delay. On a federal contract, Federal Acquisition Regulations (“FAR”) 52.249-14 (Excusable Delays); 52.212-4(f) (Commercial Items); 52.249-10 (Fixed-Price Construction); and 52.249-8 (Fixed-Price Supply and Service) are examples of clauses that government contracts need to be aware of. These clauses all specifically list “epidemics” and “quarantine restrictions” as an excusable delay that will not default a contractor for lack of performance.
However, these clauses state that the lack of performance must still be “beyond the control or without the fault or negligence of the Contractor” as well. Contractors must be wary that any delay in contract performance is due to the restrictions actually caused by COVID-19 and should continue to perform where able. For example, if a governor-issued declaration to shelter-in-place has an exemption for which the contractor qualifies, then they likely cannot utilize that declaration to take advantage of the contract terms unless some other exception applies.
In addition, documentation and communication with the contracting officer are essential to ensuring that all delays are excusable. Guidance from the Office of Management and Budget (“OMB”) to the heads of federal agencies specifically requests that contracting officers consider the above delay clauses when discussing the possibility of performance during this pandemic.1 This guidance further encourages contracting officers to explore alternative options to complete contract performance, i.e. the ability of certain employees to telework.
If feasible alternatives are not available, the guidance specifically requests contracting officers to attempt to re-procure elsewhere if possible, and to terminate existing contracts for convenience where re-procurement is preferred. Those terminations will not negatively impact the contractor’s performance ratings in any way. The flexibility encouraged in this guidance should reassure contracting officers that as long as they maintain open communication, they will not be held in default for failures to perform due to COVID-19.
Companies should be prepared to submit any requests for equitable adjustments or claims. Specifically, there may be opportunities for government contractors to recover costs due to a price adjustment or some other change in contract requirements as a result of COVID-19. Recoverability will depend largely on the specifics of the contract, the impact on performance, and the actions of the contracting officer. For example, if the contracting officer issues an official stop work order under FAR 52.242-15, the contractor can seek a price or schedule adjustment if they assert their rights within 30 days of the stoppage’s end.
If the government changes the work to be performed in some way through a formal order or constructive change, contractors may be entitled to an adjustment in the contract price under one of the various changes clauses. Although a formal change order is usually required, contractors may be able to establish a constructive change that increased the cost of performance and entitles the contractor to an adjustment. For example, if new onsite work policies require additional equipment or practices that increase the costs of performance, contractors may be able to establish that this constituted a constructive change to contract performance and request a price adjustment. These requests for adjustment must be brought within 30 days from “receipt” of the change. Again, it is always a best practice to not rely on a constructive change and work with the contracting officer to obtain a written modification.
Government contractors may even be entitled to price adjustments for work suspensions caused by the government. The Suspension of Work clause at FAR 52.242-14 provides for an adjustment of the contract price in the event that work is “unreasonably” delayed “(1) by an act of the Contracting Officer in the administration of this contract, or (2) by the Contracting Officer’s failure to act within the time specified in this contract (or within a reasonable time if not specified).” This language can be interpreted to provide recovery options for a contractor that is unable to perform due to the closure of a government building and is unable to feasibly perform in an alternative manner.
Government contractors must also be prepared to demonstrate the impacts that COVID-19 has had on performance. Whether a contractor is attempting to show how an excusable delay impacted performance or is preparing to file a request for adjustment, the contractor should carefully document the costs of any increased work and the reasons driving those costs. OMB guidance directs contracting officers to consider adjustment requests on a case-by-case basis taking into account whether the requested costs are allowable and reasonable to “protect the health and safety of contract employees as part of the performance of the contract.”
The OMB guidance further directs contracting officers to specifically consider whether the contractor took actions consistent with CDC guidance and whether the contractor reached out to the contracting officer to discuss appropriate actions. Adhering to this OMB guidance and maintaining meticulous documentation of costs and justifications will only help government contractors to recover some of the increased costs associated with COVID-19.
Communication is key at all times. As referenced, government contractors should have continuous communications with contracting officer, contracting officer representatives, and program managers. However, the government contractors also must have communications with subcontractors and vendors. If an issue arises, immediate communication related to potential solutions is ideal.
©2020 Snell & Wilmer. All rights reserved. The purpose of this publication is to provide readers with information on current topics of general interest and nothing herein shall be construed to create, offer, or memorialize the existence of an attorney-client relationship. The content should not be considered legal advice or opinion, because it may not apply to the specific facts of a particular matter. As guidance in areas is constantly changing and evolving, you should consider checking for updated guidance, or consult with legal counsel, before making any decisions.