3:00PM - 3:45PM EDT
A memorandum released on July 2, 2020 by Acting Principal Director for Defense Pricing Kim Herrington provides guidance on some of the action taken by the Department of Defense (DoD) in its efforts to support its contractors with reimbursement for the related impacts and costs incurred by DoD contractors in response to the COVID-19 pandemic. The memorandum highlights the possibility of contractor cost recovery for measures that may have been taken by industry to prevent the spread of COVID-19 and allow facilities to remain open and productive during the pandemic. It further directs contracting officers to use their experience and skill to find innovative solutions to both protect government interests and ensure the continued health of the defense industrial base.
While the memorandum does not provide any avenues for contractor reimbursement not previously reported in Pillsbury client alerts published on March 17, March 23 and March 30, 2020, it discusses the avenues available to contracting officers to reimburse contractors under both cost-type contracts and fixed-price contracts.
Initially, contractors may be reimbursed by federal agencies under the CARES Act Section 3610, implemented through DFARS Class Deviation 2020-O0013—effective April 8, 2020—for any paid leave, including sick leave, for up to an average of 40 hours per week, that was caused by COVID-19. In fact, in her testimony before Congress in June 2020, Defense Undersecretary for Acquisition and Sustainment Ellen M. Lord, underscored the toll the coronavirus will have on the department, stating, “one of our major primes estimates that [Section] 3610 impacts could be up to $1.5 billion for their company and their associated suppliers.”
Moreover, Section 3610 contains significant limitations. It only applies to cost incurred for employee “leave.” In addition, a contractor may only receive reimbursement if: (1) its employees or subcontractors cannot perform work on government-owned, government-leased, contractor-owned, contractor-leased facility, or site approved by the government due to closures or other restrictions; and, (2) the employee's duties are such that they are unable to telework from January 31, 2020 to September 30, 2020. See DFARS 231.205-79, CARES Act Section 3610—Implementation. Furthermore, allowability of costs incurred covered by this section are limited to those that were incurred as a result of COVID-19, as all other costs incurred are subject to the applicable provisions in FAR Subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7.
Additionally, for cost-reimbursement and incentive contracts, where allowable and allocable, costs may be recovered on unplanned costs due to COVID-19, such as those related to providing PPE to employees, additional cleaning of work areas, changes to workspaces to accommodate social distancing, and delays in delivering and/or receiving purchased materials. However, for fixed-price contracts, contractors generally must bear the risk of cost increases, including those due to COVID-19 (e.g., costs associated with PPE, social distancing, and supplier delays and inefficiencies). However, Defense Pricing’s July 2 memorandum emphasizes that contracting officers are granted discretion, subject to the availability of funds, to modify contracts (e.g., under FAR 52.243-1, Changes Fixed Price, and its applicable alternatives) to reflect changes to the government’s needs as a result of COVID-19. Any resulting changes in contract price must be substantiated by the contractor and determined by the contracting officer to be required to perform the contract as modified and must be driven exclusively by the change(s) directed by the government.
Therefore, based on this guidance, even contractors with fixed price contract types may still be able to recover for COVID-19 related expenses that increased the contractor’s cost experience. One note of caution for contractors is that, while Section 3610 authorizes agencies to obligate funds in response to this pandemic, it does not appropriate funds. As such, reimbursement under Section 3610 is subject to the availability of funds. That being said, during Lord’s testimony to Congress, she stated that DoD expects to pay billions in reimbursements under Section 3610 of the CARES Act, and this section is merely one of many ways under which contractors can attempt to recoup their losses from responding to the coronavirus.
If you have any questions about the content of this alert, please contact the authors, or the Pillsbury attorney with whom you regularly work.
Pillsbury’s experienced, multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.