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Fears of a global pandemic and economic downturn are growing in lockstep with the number of reported cases of COVID-19, the disease caused by the novel coronavirus. What started in December 2019 as a crisis constrained to Wuhan, China has spread to every continent except Antarctica. As of the time of publication, at least 36 US states and the District of Columbia have confirmed cases of COVID-19, and 16 states have declared states of emergency.1 While governments and public health organizations attempt to contain the virus and develop a vaccine or treatment, millions of people across the world are being quarantined to avoid further spreading the virus.2 Conferences and other large public events have been cancelled, schools have closed, and many companies have encouraged or required employees to work from home. At least one US government agency, the Securities and Exchange Commission, has asked Washington, DC employees to work from home. Governments and companies have issued travel advisories and imposed travel restrictions. International shipping has declined as manufacturing in many countries—particularly China—has slowed.
In the modern global economy, these developments will have serious short-term (and likely long-term) impacts on all businesses, including government contractors. Contractors must prepare for and mitigate the impacts of performance delays and business disruptions due to workforce illness, facility closures, travel restrictions, and domestic and international supply chain issues, among other threats. Prudent steps include assessments of continuity plans, workforce telecommuting policies, current insurance coverage, alternative suppliers, and the threats to performance and how to mitigate them.
Some business disruption mitigation considerations are unique to federal government contractors. For example, government contractors should (i) review the contingency plans and directives of their customer agencies,3 (ii) update any applicable Mission Essential Contractor Services Plans required by Defense Federal Acquisition Regulation Supplement (DFARS) 252.237-7023 as necessary,4 (iii) identify any other contract clauses requiring close coordination with government customers in connection with any business disruptions (e.g., whether Contracting Officer approval is required to substitute a supplier or material) and implement plans for compliance, (iv) identify any rated order requirements (and reaffirm those to suppliers), and (v) document all disruptions and mitigation efforts, and segregate related costs.
We have summarized below some unique contract clauses, supply chain risks, and employment issues government contractors should consider and address in light of potential commercial and government business disruptions the COVID-19 outbreak and response will precipitate. In all events, contractors should consider these topics and other guidance in light of specific contract terms and evolving circumstances.
I. Government Contract Clauses That May Provide Some Protection for COVID-19 Related Performance Delays and Government-Ordered or Caused Work Stoppages or Interruptions
It is a government contracting maxim to read your contracts. Although standard clauses exist in the Federal Acquisition Regulation (FAR), it is important to review and understand which standard and unique clauses govern the performance at issue. Several standard FAR clauses may provide some protection to government contractors faced with coronavirus-caused business disruptions, including FAR 52.249-14, Excusable Delays; FAR 52.242-15, Stop-Work Order; FAR 52.242-14, Suspension of Work; and the various Changes clauses (FAR 52.243-1 through 52.243-4 and FAR 52.212-4). Each of these clauses has unique requirements, requires close coordination and communication with government customers, and offers different types of potential relief.
A. Defensible Performance Delays Under the Applicable Excusable Delay Clause
An excusable delay defense is available in both standard commercial item and non-commercial item contracts for certain delays or non-performance.5 These clauses excuse delays arising solely from causes that are beyond the contractor's control.6
The commercial clause requires the contractor to (i) notify the Contracting Officer, in writing, of the excusable delay "as soon as it is reasonably possible after the commencement of the excusable delay, setting forth the full particulars," (ii) "remedy such occurrence with all reasonable dispatch," and (iii) notify "the Contracting Officer of the cessation of such occurrence."7 Providing notice to the Contracting Officer, and conducting discussions with and obtaining buy-in from the customer on how to handle the delay, are best practices when seeking protection under either clause.
As relevant to the current and ever-growing business disruptions arising from COVID-19, both clauses identify "acts of the Government in either its sovereign or contractual capacity," "epidemics," and "quarantine restrictions," as examples of potential excusable delay. Itemized triggers qualifying for excusable delay do not mean, however, that the Contracting Officer or any tribunal will always excuse contractor nonperformance based on a claimed COVID-19 epidemic or quarantine restriction. Each claim for an excusable delay is evaluated on its facts, and the contractor has the burden of proving not only that the triggering event covered by the clause caused the delay but also that the delay was outside of its control. The Boards of Contract Appeals have made clear that delays are not excusable if nonperformance was in actuality the result of some reason other than the claimed epidemic or the contractor had the capability to overcome the effect of the epidemic or quarantine restrictions.8 Boards will also consider other facts, such as the number of employees impacted and the average length of employee absences.9 The Court of Federal Claims has reached similar conclusions.10
Contemporaneously documenting how the excusable condition caused the delay and having real-time discussions with, and agreement from, the Contracting Officer about its impacts during the crisis provide a much better path than seeking to defend against a default termination in after-the-fact litigation. Time extensions or terminations for convenience are potential remedies under the clause.11
B. Potential Requests for Equitable Adjustments to Address Government-Directed Work Stoppages or Interference
Government contractors also should be vigilant to document government actions or inactions related to the coronavirus outbreak that impact contract performance, to segregate any related costs, and to request equitable adjustment in delivery schedule, costs, or both, if permissible and capable of proof.12 Relief may be available under one of the following clauses depending on the circumstances.
1. Government-Ordered Stop Work and De Facto Stop Work Orders
FAR 52.242-15, the Stop-Work Order clause, allows the Contracting Officer to stop work "for a period of 90 days" and for any additional periods agreed to by the parties.13 Once an agency issues a stop-work order, the contractor must "immediately comply with the terms" of the order and "take all reasonable steps to minimize the incurrence of costs" related to the work covered by the order.14 Contractors that receive a stop-work order may be entitled to an equitable adjustment if "[t]he stop-work order results in an increase in the time required for, or in the Contractor's cost properly allocable to, the performance of any part of [the] contract."15 The contractor must seek the adjustment no later than 30 days after the work stoppage ends.16
Even when the government does not issue a stop-work order, its actions or inactions may result in a de facto stop-work order. Consider, for example, the contractor required to perform at a government installation where the government shuts down the installation due to concerns about the spread of the coronavirus. The contractor should be well aware of any agency contingency plans, notify the Contracting Officer in writing of the impact on performance, and segregate any increased costs related thereto. When the condition is lifted, the contractor may be able to seek an equitable adjustment for the related time and/or cost impact.
Contractors should also review their contracts for any clauses related to denied access to government facilities. For example, the National Aeronautics and Space Administration (NASA) FAR Supplement contains clause 1852.7001, which permits the Contracting Officer to deny contractor access to a NASA facility "for any reason" and requires the contractor to "exercise sound judgment to minimize unnecessary contract costs and performance impacts by, for example, performing required work off-site if possible or reassigning personnel to other activities if appropriate."17 The clause contemplates a possible equitable adjustment of the contract performance or delivery schedule or consideration of "properly documented requests for equitable adjustment, claim, or any other remedy" available under the contract.18 The National Oceanic and Atmospheric Administration (NOAA) acquisition manual sets forth a similar clause, 1330-52.237-72 Contractor Access to NOAA Facilities, although the NOAA clause does not expressly provide for consideration of requests for equitable adjustment.19
2. Government-Caused Delays or Suspension
In connection with fixed-priced construction contracts, the Contracting Officer may order the contractor to suspend, delay, or interrupt any or all of the work under FAR 52.242-14. Unlike stop-work orders, suspension orders are not limited to 90 days, and contractors are not entitled to equitable adjustments unless the work is suspended "for an unreasonable period of time" and performance would not have otherwise been impacted.20 The contractor must assert the claimed amount in writing as soon as practicable after the suspension termination, and such amount must exclude any costs incurred more than 20 days before the contractor provided written notice of the act or failure to act causing the delay.21
Contractors should also review their fixed price contracts for FAR 52.242-17, Government Delay of Work. Under this clause, the contractor may be entitled to an adjustment of time or cost when the Contracting Officer's act or failure to act delays or interrupts the work. Relief is not available under the clause "for any delay or interruption to the extent that performance would have been delayed or interrupted by any other cause . . . , or for which an adjustment is provided or excluded under any other term or condition of the contract."22 As with FAR 52.242-14, the contractor must assert the claimed amount in writing as soon as practicable after the delay or interruption, and any claimed amount must exclude all costs incurred more than 20 days before the contractor provided written notice to the Contracting Officer of the act or failure to act causing the delay.23
3. Constructive and Other Changes to Contemplated Performance
The FAR contains various clauses that permit a contractor to seek an equitable adjustment when the government changes directly or indirectly the time or place of performance, the time and place of delivery, the method of shipment, and other contractual specifications related to performance. The government may issue such changes in response to the coronavirus and related disruptions. The requested adjustment may be either additive or deductive. It is important to review the specific changes clause in the applicable contract because each of the clauses provides a specified timeframe (typically 30 days of the written order) by which the contractor must assert its right to any such adjustment.24
Even if the Contracting Officer does not issue a change order, the contractor may be entitled to an equitable adjustment if the government's action or inaction constitutes a modification of the contract without a formal order (i.e., a constructive change). It is a best practice to notify the Contracting Officer of the action or inaction that constitutes the change and the potential impact on contract performance and to seek direction of how to proceed. Any disputes shall be addressed under the contract's disputes clause. To obtain relief for changes, the contractor must establish a legal right to the change and prove the quantum. Accordingly, contractors should document the change and immediately begin to segregate the costs related to the changed work.
II. The Government Contract Supply Chain and the COVID-19 Butterfly Effect
As noted above, excusable delay and force majeure clauses may offer some protection to government contractors unable to perform on schedule. But few rules have no exceptions. In this regard, many federal contractors and subcontractors hold Defense Priorities and Allocations System (DPAS) rated contracts. DPAS reprioritizes supply chain obligations in times of trouble and complicates the excusable delay analysis set forth above. Thus, if a federal contractor or subcontractor holds a rated contract or subcontract, further analysis beyond the excusable delay epidemic and quarantine provisions is necessary.
The Defense Production Act25 authorizes DPAS—a Department of Commerce Regulation (15 C.F.R. Part 700) and system designed to ensure the timely availability of industrial resources necessary to the national defense and emergency preparedness. Under DPAS, certain "delegate agencies" have authority to place "rated orders" in support of authorized programs.26 A "rated order means a prime contract for any product, service, or material (including controlled materials) placed by a Delegate Agency under the provisions of DPAS in support of an authorized program and which requires preferential treatment."27
DPAS establishes two levels of "order ratings," DX and DO.28 All DX ratings have equal priority and take precedence over DO-rated and -unrated contracts (government or commercial).29 Whether a contractor or subcontractor holds a rated order is typically apparent from the front page of the contract or subcontract. On Standard Form 1449, the rating information appears in Box 13, which answers both whether the DPAS covers the prime contract and provides the rating assigned.
"Persons who receive rated orders must in turn place rated orders with their suppliers for the items they need to fill the orders."30 Thus, for example, "[i]f a person is in receipt of a DO-A3 rated order for a navigation system and needs to purchase semiconductors for its manufacture, that person must use a DO-A3 rated order to obtain the needed semiconductors."31 Significantly for contractors and subcontractors receiving rated orders and facing supply shortages, DPAS contains a series of mandatory acceptance, mandatory rejection, non-discrimination, and timely response rules.32 Scheduling conflicts with lower rated and unrated orders do not provide a basis for rejection.33 Where a DPAS order relates to emergency preparedness, DPAS permits minimum times for acceptance or rejection as short as six hours where the hazard has occurred.34 Unsurprisingly given its penalties, DPAS limits the use of rated orders to obtain greater quantities than needed or delivery at dates earlier than needed.35 Contractors also cannot use DPAS to acquire certain specific items (e.g., copper raw materials, slag, etc.) or apply DPAS outside of the United States.36
As relevant here, a contractor or subcontractor already holding a rated order must prioritize (if and as necessary to meet the contract schedule) the rated work over lower rated government work, unrated government work, or commercial work. Significantly, a prime contractor that issues a proper rated order to its subcontractor can require the subcontractor to hold the schedule even at peril to the subcontractor's lesser or unrated work. The failure to leverage DPAS in such a situation could impact the availability of an excusable delay or create other performance risks.
If a contractor holds a rated contract or subcontract and can meet the schedule despite supply chain impacts by adjusting delivery on lesser or lower rated work, DPAS may require the contractor to do so. The failure to do so likely would not constitute excusable delay. Instead, the failure to reprioritize risks a potential DPAS violation. "Willful violation" of the DPAS regulations can carry heavy fines and up to one year of jail time.37
Stated otherwise, if a contractor or subcontractor holds a rated order and suffers a supply chain impact, the contractor or subcontractor must use its scarce supplies as necessary to meet the rated contract obligations. If, however, the contractor cannot meet a DPAS rated order schedule deadline, the contractor or subcontractor "must notify the customer immediately, give the reasons for the delay, and advise of a new shipment or performance date."38 The law, in turn, requires nothing more of the government (or higher tier subcontractor) than payment for the goods or services it received.39 To be certain, the law does protect the contractor from claims for damages as to DPAS-displaced work, but DPAS does not compensate the contractor for the loss of its commercial work, etc.40
III. COVID-19-Related Employment Concerns For Government Contractors
One of the greatest impacts companies face due to the spread of the coronavirus is the health and safety of its own employees. On March 6, Arnold & Porter published Pandemic Coronavirus: Practical and Legal Issues for Employers, which discusses general employment concerns related to coronavirus. This section focuses on some of the more unique issues facing government contractors.
- Maintaining Workforces: Contractors must be prepared to resume performance as soon as a stop-work or suspension order ends. This means contractors should maintain their workforces to the maximum extent practicable or discuss plans with their government customers to reestablish their workforces after the work stoppage ends.
- Sick Leave: Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors, and its implementing regulations require contractors performing covered contracts to provide paid sick leave to their employees. This requirement applies to a variety of types of contracts, including those subject to the Service Contract Act.41 Sick leave must accrue at a rate of at least one hour of paid leave per 30 hours worked on or in connection with the covered contract.42 Contractors should review their sick leave policies to ensure compliance with these requirements if applicable.
- Worker Adjustment and Retraining Notification ("WARN") Act Notices: Government contractors (and other companies) must ensure that they comply with state and federal WARN act requirements. The federal WARN Act43 generally requires employers with at least 100 employees who close plants or conduct mass layoffs to notify affected employees at least 60 days prior to closures or layoffs.44 Many states have similar or even more onerous WARN statutes.
- Telework: Contractors should review telework policies or consider creating such policies to maintain the maximum amount of flexibility and the ability to perform government contracts in the event of facility closures, quarantines, or similar restrictions. Establishing reasonable telework policies as a mitigation to any performance disruptions may be critical to justifying a delay as excusable or risk a tribunal viewing delays that could have been prevented through telework as the fault of the contractor. Contractors which allow employees to telework should implement measures to verify compliance with timekeeping requirements to avoid potential liability under the False Claims Act and other statutes. Of course, telework is not an option for many contracts, including classified work. To resolve any doubt, contractors should communicate with the Contracting Officer about any telework questions and maintain the documentation of any guidance.
IV. Adversity Begets Opportunities (With Their Own Risks) for Government Contractors
With COVID-19 on the rise and concerns rising about how to contain its spread, multiple federal, state, and local governments are scrambling to respond. Department of Health and Human Services agencies, including the Centers for Disease Control and the National Institutes of Health, are looking at medications, diagnostic tests, and potential vaccines for immediate use and for the Strategic National Stockpile. DHS and the Federal Emergency Management Agency (FEMA) also have needs and may call on FEMA's prepositioned contracts. There is speculation that DPAS, described above, may be invoked to ensure orders under a given contract will receive priority.
Agencies (and others) may not know exactly what they need in order to respond to COVID-19, but whatever it is, they need it quickly. Contractors who are in a position to respond to these exigent needs may be able to take advantage of previously unavailable opportunities. Congress passed, and the President signed, an $8.3 billion emergency supplemental appropriations bill to address coronavirus. Should the President declare a state of emergency, expedited contracting will also be available under FAR Part 18. If a contractor's supply chain is such that it can provide what others cannot, it may be in a position to reap greater market share and profits, including through unsolicited proposals for items of which the government may not be aware. Sole-source or limited competition awards may also be available. In addition to standard market research, government agencies may also rely on the System for Award Management's Disaster Response Registry to find contractors that can help in the response.
Contractors should proceed with caution, however. As always, read your contract. Contractors should be sure that they can accept and comply with the terms and conditions the government is requiring. This is especially important for companies that do not traditionally work with the government, as the government's terms and conditions differ from those in the commercial marketplace. A thorough and careful review of solicitation terms is equally important for experienced government contractors, as coronavirus-related contracts may contain unique, non-standard requirements. For instance, at least one solicitation we reviewed included standard domestic preference clauses like FAR 52.225-6 (Trade Agreements Act) and also included non-standard supply chain provisions requiring a fully domestic supply chain.
While agencies learned from the Hurricane Katrina disaster and others before it, the acquisition workforce is still perceived as understaffed for emergency contracting.45 In responding to these exigent procurement needs, contractors should be mindful that what is happening quickly now "in the heat of the moment" will later be examined in minute detail once the current crisis is over. In light of the history showing that periods of emergency government contracting are often followed by periods of heightened enforcement (e.g., audits and investigations),46 contractors must be vigilant to maintain all records of contract negotiations, resolve any ambiguous requirements or obligations, and confirm the authority of their government counterparts. Later reviews and investigations are likely, but potential disputes may be avoided or mitigated through early and continuous contractor diligence.
*James Mestichelli contributed to this Advisory. Mr. Mestichelli is a graduate of University of Michigan Law School and is employed at Arnold & Porter's Washington, DC office. Mr. Mestichelli is admitted only in Oregon. He is not admitted to the practice of law in Washington, DC.
- Locations with Confirmed COVID-19 Cases Global Map.
- As of the time of publication, Italy has placed its entire country on lockdown, adding to the 11 million people quarantined in China's Wuhan province.
- Department of Homeland Security (DHS) Memo from the Chief Procurement Officer to the DHS Contractor Community, March 5, 2020.
- This clause requires the contractor to notify the Contracting Officer "as expeditiously as possible" if and when the contractor anticipates not being able to perform an essential service and to "use its best efforts to cooperate with the Government's efforts to maintain the continuity of operations." DFARS 252.237-7023(d)(2). This clause also requires the contractor to "segregate and separately identify all costs incurred in continuing performance of essential services in a crisis situation" and to "notify the Contracting Officer of an increase or decrease in costs within ninety days after continued performance has been directed by the Contracting Officer" with a proposal for equitable adjustment and supporting information. DFARS 252.237-7023(f).
- FAR 52.212-4(f); FAR 52.249-14.
- FAR 52.212-4(f); FAR 52.249-14. Note that, under the standard clause, a subcontractor's delay is not excusable if the contractor could have obtained the supplies or services from another source, the Contracting Officer ordered the contractor in writing to purchase the supplies or services from the other source, and the contractor failed to comply with the order. FAR 52.249-14(b).
- FAR 52.212-4(f).
- Tommy Nobis Ctr., Inc., GSBCA No. 8988-TD, Jul. 5, 1989, 89-3 BCA ¶ 22112 (finding no evidence that claimed influenza epidemic "was of long duration, or that it had an adverse effect on the volume of production"); Brazier Lumber Co., ASBCA 18601, Nov. 12, 1976, 76-2 BCA ¶ 12207 (finding no excusable delay where supplies causing delay were available from other sources and obtaining them was not economically impractical); Crawford Dev. & Mfg. Co., ASBCA No. 17565, May 28, 1974, 74-2 BCA ¶ 10660 (manufacturer was without critical parts during time of claimed influenza epidemic); Ace Elecs. Assocs., Inc., ASBCA No. 11496, July 18, 1967, 67-2 BCA ¶ 6456 (denying excusable delay where contractor presented no evidence of which personnel were affected by influenza epidemic, whether absences in fact caused a delay, and what efforts were taken to "keep the work going"); Emco Metal Mfg. Corp., ASBCA No. 4983, Jan. 15, 1960, 60-1 BCA ¶ 2502 (denying appeal based on influenza epidemic that impacted certain key employees because evidence showed it was nevertheless possible for contractor to complete performance by contractual deadline).
- See Crawford Dev. & Mfg. Co., ASBCA No. 17565, May 28, 1974, 74-2 BCA ¶ 10660 (recognizing that Tucson, AZ faced an influenza epidemic but holding that delay was not excusable where "several key employees" became ill but missed only an average of 2.5 days of work per week and no more than one employee was absent in any given week during delay).
- Jennie-O Foods v. United States, 580 F.2d 400, 405 (Ct. Cl. 1978) (no excusable delay for epidemic among subcontractor's turkey supply where there was "little evidence to support a finding of serious turkey disease" statewide).
- Compensation is not available under the excusable delay clause, but an excusable delay may lead to the opportunity for additional compensation for accelerated performance. See Pilcher, Livington & Wallace, Inc., ASBCA No. 13391, Sept. 25, 1970, 70-2 BCA ¶ 8488; John Cibinic, Ralph Nash & James Nagle, Administration of Government Contracts ch. 6, § 1 (5th ed. 2006).
- Note that the DFARS includes its own request for equitable adjustment clause that requires the contractor to certify any such request that exceeds the simplified acquisition threshold. DFARS 252.243-7002.
- FAR 52.242-15(a).
- FAR 52.242-15(b)(1).
- FAR 52.242-15(b)(2).
- 48 C.F.R. § 1852.242-72(b).
- Id. § 1842.242-72(d).
- See NOAA Acquisition Manual, Part 1330-52.
- FAR 52.242-14(b).
- FAR 52.242-14(c).
- FAR 52.242-17(a).
- FAR 52.242-17(b).
- See, e.g., FAR 52.243-1(c); FAR 52.243-2(c); FAR 52.243-3(c). But see FAR 52.243-4(d) (specifying 20 days).
- 50 U.S.C. App. §§ 2061-2070.
- FAR 11.602.
- FAR 11.601.
- FAR 11.603.
- 15 C.F.R. § 700.14(b); FAR 11.603.
- Id. § 700.3(d).
- Id. § 700.15(a).
- Id. § 700.13.
- Id. § 700.13(d).
- Id. § 700.18.
- Id. §§ 700.18(b), 700.55.
- Id. § 700.74(a).
- Id. § 700.13(d)(3).
- See Kearney & Trecker Corp. v. United States, 688 F.2d 780 (Ct. Cl. 1982).
- 15 C.F.R. § 700.90 ("A person shall not be held liable for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with any provision of this part, or an official action, notwithstanding that such provision or action shall subsequently be declared invalid by judicial or other competent authority.")
- 29 C.F.R. § 13.3; FAR 22.2110.
- FAR 52.222-62(c)(1).
- 29 U.S.C. §§ 2101-2109.
- 20 C.F.R. §§ 639.2, 639.3.
- Disaster Contracting: FEMA Needs to Cohesively Manage Its Workforce and Fully Address Post-Katrina Reforms, Government Accountability Office (GAO), GAO-15-783 (Sept. 2015).
- Government auditors prepared over 550 reports regarding the over $10.6 billion in Hurricane Katrina procurement spending. These included 387 Defense Contract Audit Agency reports, 57 GAO reports, and 42 reports prepared by various agency inspectors general. Waste, Fraud, and Abuse in Hurricane Katrina Contracts, H.R. Comm. on Gov't Reform (Minority Staff) Special Investigations Div. (Aug. 2006).