While the global economy grinds to a halt over spread of the novel coronavirus (COVID-19) and people disband amidst calls for "social distancing," these are uncertain times to say the least. Stay safe out there, we will get through this. While the health and welfare of our loved ones and the general public becomes the primary focus, federal contractors and subcontractors face a secondary and yet critical concern—how to address the impacts from COVID-19, which include labor disruptions, supply chain shortages, facility closures, remote work environments and government-mandated restrictions that make it difficult, if not impossible, to move programs and projects forward.
A recent decision by the Civilian Board of Contract Appeals ("CBCA") related to an epidemic makes clear that whether or not a contractor will prevail in recovering costs associated with COVID-19 is going to be dependent on the specific contract provisions the parties have negotiated in their contracts.
Pernix Serka Joint Venture, CBCA 5683 (Apr. 22, 2020)
The decision of Pernix Serka Joint Venture, CBCA 5683 (Apr. 22, 2020) arises out of a contract between Pernix Serka Joint Venture ("PSJV") and the Department of State ("DOS") for the construction of a rainwater capture and storage system in Freetown, Sierra Leone. The contract was awarded on a firm, fixed-price basis in the amount of $1,626,195. The contract included Federal Acquisition Regulation ("FAR") 52.249-10, which states that a contractor shall not be in default for "delay in completing the work aris[ing] from unforeseeable causes beyond the control and without the fault or negligence of the Contractor," including "epidemics" and "quarantine restrictions." FAR 52.249-10(b)(5) & (6).
After an outbreak of the Ebola virus began in the Republic of Guinea in March 2014, which spread to Freetown, Sierra Leone, by July 2014, PSJV sought guidance from the government on how to move forward with the project. The government failed to provide any direction to PSJV with regard to evacuating the jobsite. Thereafter, PSJV made the decision to issue a Notice of Delay on August 7, 2014.
The next day, August 8, 2014, the World Health Organization (WHO") declared the outbreak an "international public health emergency," resulting in suspension of airlines and the evacuation of eligible family members from the US Embassy in Freetown. In response, PSJV provided notice to the government that it was shutting down the jobsite and evacuating all personal from the country. The government responded stating that this was a unilateral action on the part of PSJV, that this was based on circumstances beyond the control of either party, and that such actions would not provide a basis for an equitable adjustment of the contract. PSJV continued to shut down the jobsite, including securing all materials and equipment.
Despite several meetings with the government between August 2014 and January 2015 and despite several requests for guidance, the government continued to stonewall PSJV by failing to provide any instructions. In January 2015, PSJV notified the government that the impacts of the Ebola outbreak constituted a cardinal change to the contract for which it should receive additional compensation. PSJV ultimately remobilized to the jobsite in March 2015, and thereafter submitted two Requests for Equitable Adjustment ("REA") for cost impacts associated with the Ebola virus outbreak, including the remobilization of its workforce to the jobsite and the purchase of medical services and equipment for the site to protect its employees and workers from contracting the virus.
The government denied PSJV's REA stating that there was no contractual basis for an adjustment of the contract price. The government did provide a time extension of 195 calendar days. PSJV filed a certified claim with the Civilian Board of Contract Appeals ("CBCA"). The government subsequently filed a Motion for Summary Judgment arguing that PSJV had a firm, fixed-price contract, and therefore assumed the risks of unexpected costs. PSJV argued in response that the impacts constituted a cardinal or constructive change.
The CBCA granted the government's motion, and in doing so, reasoned that PSJV's firm, fixed-price contract contained FAR 52.249-10 (Default - Fixed Price Construction)—which the Board referred to as the "Excusable Delay" clause—which only allows a contractor additional time, but no additional costs, for acts of God, epidemics, and quarantine restrictions. Furthermore, the CBCA concluded that the contract contained no other risk-shifting provisions that would permit PSJV additional costs for such impacts, and that the government was not required to provide PSJV with direction on how to respond to the Ebola outbreak.
In response to PSJV's argument that the impacts from the Ebola outbreak constituted a cardinal change, the CBCA disagreed, finding that the government never changed the description of work to be performed. In addition, the CBCA noted the government's continued reluctance to provide guidance. Significantly, the Board held:
"Any changes in conditions surrounding performance of the contract arose from the Ebola outbreak and the host country's reaction to the outbreak"
The CBCA was equally dismissive of PSJV's position that the impacts constituted a constructive change. The doctrine of constructive change provides respite to contractors where the government has not followed the formal change procedures under the regulations, and the contractor has nevertheless been impacted by government-imposed orders. The CBCA found that the government failed to take any action in response to the Ebola outbreak, and that the government's inaction was insufficient to establish a constructive change. Thus, "PSJV remained obligated to perform throughout the performance period, and the Excusable Delay clause provided for additional time, but not additional money."1
Avenues for recovery in the wake of the PSJV decision
Every government contract contains specific remedy-granting clauses designed to address contingencies, such as delays, impacts, and additional costs that arise during contract performance. These clauses provide instructions on how the risk of those contingencies is to be allocated between the parties, and further provide remedies. The fundamental manner in which the government allocates risk is through contract type—thus, contractors will first need to know what type of contract they have, whether fixed-price or cost-reimbursement, or otherwise. While the standard remedy-granting clauses are generally consistent across contracts, the contract type will define how that risk gets allocated and what costs are recoverable.
The PSJV decision is limited to a firm, fixed-price contract that was devoid of any remedy-granting clause to grant compensation to the contractor for the impacts caused by COVID-19. Notwithstanding the PSJV decision, there are avenues for recovery depending on the contract.
Assess any government restrictions
The first consideration for any contractor operating in this environment should be to analyze the various government restrictions, whether federal, state, or local government to determine what is mandatory or merely advisory. In the PSJV decision, the local government declared a curfew and the WHO declared an international health emergency. Like the 2014-2016 Ebola outbreak, COVID-19 has also been classified by the Centers for Disease Control ("CDC") and World Health Organization ("WHO) as an epidemic and international health emergency. However, unlike in PSJV, the federal government and each of the states and local governments have imposed their own restrictions in light of COVID-19, including mandating robust health and safety protocols never contemplated at the time parties have executed their contracts. Thus for a contractor assessing the impacts to its project, their strategy for recovering cost impacts could be location-dependent. Moreover, in the PSJV decision, the CBCA found that, "Any changes in conditions surrounding performance of the contract arose from the Ebola outbreak the host country's reaction to the outbreak." Here, however, the federal government has taken action and imposed restrictions to combat the COVID-19 pandemic, which opens the door for contractors to argue that, in addition to the pandemic itself, government-caused actions and measures have increased their costs.
Document any government-caused delay
Moreover, where work is formally suspended or interrupted by an order of the Contracting Officer, and depending on whether the length of the suspension is unreasonable, the contractor may submit an equitable adjustment under the Suspension of Work clause (see, e.g. FAR 52.242-14) for both the increase in the contract time and contract sum (excluding profit) resulting for the impact. Similarly, where a Stop Work Order is issued (see FAR 52.242-15), the Contracting Officer may adjust the contract schedule or price where the contractor is impacted. A formal suspension of work or stop work order due to COVID-19, therefore, provides a federal contractor with an avenue to both protect their workforce and recover their additional costs arising from the pandemic.
The Government Delay of Work clause (see FAR 52.242-17) covers a similar concept referred to as "constructive suspension." In order for a constructive suspension to arise, triggering the Government Delay of Work clause, work must be prevented, not voluntarily stopped. Constructive suspensions occur when work is stopped absent an express order by the Contracting Officer and the government is found to be responsible for the work stoppage. Courts and boards have long held that, when the contractor's work is effectively suspended but the Contracting Officer does not issue an order of suspension, "the law considers that done which ought to have been done" and characterizes the circumstances as a constructive (or de facto) suspension. Merritt-Chapman & Scott Corp. v. United States, 429 F.2d 431, 443 (Ct. Cl. 1970); George Sollitt Constr. Co. v. United States, 64 Fed. Cl. 229 (2005) (if the contractor suffers increased costs caused because of government action or inaction which effectively suspends the contractor's progress on contract work, the suspension clause may provide a remedy).
Although contractors are likely going to experience delay and disruption of performance, the Government may nevertheless require the contractor to complete the work on time. If this happens, contractors may have a claim for constructive acceleration, which provides a monetary remedy for a contractor who was delayed, but still performed the work on time. If the government is telling you to complete on time in the face of excusable delays, be sure to communicate in writing that you consider this a constructive change to the contract in order to preserve your claim.
Cost recovery under a terminations for convenience
With mounting government debt and increased scrutiny of spending as a result of COVID-19, contractors should prepare to see an uptick in terminations for convenience in the coming years, as the government implements cost saving measures. Contractors who are terminated for convenience are entitled to compensation for all costs of performance up to the date of termination, including an allowance for profit and settlement costs. See FAR 52.249-2. Terminated contractors may have an argument that costs incurred as a result of COVID-19 are allowable costs under the cost principles as defined in FAR Part 31. For a cost to be allowable, it must meet five basic requirements: (1) it must be reasonable; (2) it must be allocable to the contract in question (and not absorbed by another contract); (3) for certain contracts, the costs must be in accordance with the Cost Accounting Standards; (4) it must be consistent with the terms of the contract; and (5) it is subject to any specific limitations contained in FAR 31.205.
To the extent costs related to COVID-19 are allowable, contractors would be entitled to include them in its termination settlement proposal.
Communication with the government
Nonetheless, government contractors confronting COVID-19 need to anticipate that their project may not be formally or constructively suspended by the government, or that the government will not provide direction concerning the outbreak, and they will need to move forward nonetheless. In light of the PSJV decision, contractors should open a dialogue with the Contracting Officer regarding the protection of both contractor and government personnel as well as any anticipated additional costs and time for performance resulting from the pandemic. For example, if your supply chain is disrupted and as a result you will not be able to deliver materials or equipment by the date set forth in your contract, you should immediately notify the Contracting Officer of the impacts in writing. From there, the contractor should attempt to partner with the agency and develop a fair and equitable contract adjustment.
But what if the government refuses to cooperate? The contractor should nevertheless provide timely notice of the delays and impacts it is experiencing, continue to track and document all additional costs and time resulting from the impacts, and submit an equitable adjustment under the applicable remedy-granting clauses as soon as possible. If the government asserts that the contractor is only entitled to a force majeure time extension pursuant to FAR 52.249-10, the contractor should look for other remedy-granting clauses in its contract such as the Changes clause or may proceed under an alternate theory of recovery such as constructive suspension or constructive acceleration.
Cost recovery through overhead
To the extent that a contractor is unsuccessful in recovering additional costs arising from an event that is not the fault of either party, contractors could ostensibly allocate those incurred costs to their overhead pools and recover those costs in the prices of future contracts. The government permits the contractor to use its overhead rates from the prior year in pricing its bid or proposal and may consider overhead rates when negotiating fixed-price contracts.
While the world tries to flatten the curve and stem the outbreak, the impacts of COVID-19 are still in their infancy and are bound to reverberate for years to come. While the PSJV decision provides some guidance, contractors need to take a deep breath and realize that not all projects and contracts are created equal—each and every one will present unique circumstances. Furthermore, the Court of Federal Claims, the Armed Services Board of Contract appeals, or other boards of contract appeals are not bound by decisions of the CBCA. Those forums may ultimately have a different view of the COVID-19 impacts when considering contractor's requests for cost recovery. Before choosing the forum in which to file its action, the contractor should research the key legal issues affecting its case, including the rules concerning binding authority.
While the precedent is being set, contractors are still required to document their cost and schedule impacts from COVID-19 in order to put themselves in the most optimal position to recover. Affected contractors, regardless of contract-type, should immediately consider the following:
- Analyze and seek guidance from Contracting Officers concerning the government's willingness to exercise its discretion under Section 3610 of the CARES Act, which is discussed in more detail below;
- Collect evidence of when the pandemic began to impact key geographic areas to their operations;
- Collect evidence of federal, state, and local decrees which have impacted the project;
- Collect evidence of how the epidemic materially contributed to the contractors delay in terms of the specific personnel or costs;
- Collect evidence of how the extent of delay affected performance;
- Coordinate with subcontractors regarding the actions they should be taking;
- Document/describe the periods the personnel were absent because of the epidemic;
- Identify/document personnel who were unable to work due to facility closures and where telework was not an option based on the nature of the work;
- Document how the absence of the personnel caused a delay in performance (contemporaneous memos summarizing the impact is one way);
- Document/describe the efforts made to hire alternate personnel and/or vendors to perform the contract;
- Advise the Contracting Officers of the actions that the company is taking in reaction to the coronavirus and how to minimize the impact of the virus on contract schedule and costs and invite the Contracting Officer to suggest additional or different approaches;
- Document the government's failure to fulfill its contract obligations (e.g. to review and approve documents, to attend briefings, to provide Government Furnished Equipment ("GFE"), to provide access to government facilities, etc.); and/or
- Document any direction from the government vis-a-vis how to respond generally (or with reference to specific contracts) with regard to the coronavirus. Be careful to have the Contracting Officer endorse any direction from other government officials.
Contractors should also identify and track the costs of the impact such as:
- leave for personnel;
- medical care costs (such as medicine, doctor's visits, etc.);
- added costs of cleaning in the contractors' facilities;
- inefficiency costs;
- impacts of the various aspects of the coronavirus vis-a-vis overhead rates;
- review cost and/or funding limitations on cost reimbursable contracts. Advise the Contracting Officer when approaching the limits as required by the prescribed clauses. Monitor costs so as not to exceed limitations;
- analyze whether to request to re-negotiate interim billing rates (and future costs rates) with the government; and
- analyze whether to seek advance agreements pursuant to FAR 31.109 for any costs sought to be recovered under the CARES Act.
1. The CBCA did not consider the contractor's assertion of constructive suspension as an additional basis for entitlement to the claimed costs because the contractor failed to raise the issue in its certified claim.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.