While the existing federal economic assistance option with the U.S. Small Business Administration (“SBA”), called Economic Injury Disaster Loans (“EIDLs”), have existed for some time, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 (P.L. 116-123) increases the amount made available to the SBA to use for EIDLs to $197.2 million.
EIDLs are low-interest federal disaster loans of up to $2 million offered by the SBA to small businesses, as well as private, non-profit organizations in all U.S. states and territories to help alleviate economic injury directly caused by COVID-19. EIDLs may be used to pay fixed debts, payroll, accounts payable, and other bills that cannot be paid due to the impact of COVD-19. See 13 C.F.R. § 123.303(a).
Importantly, loan proceeds may not be used to: • Refinance existing debt; • Repay other SBA loans or loans from another federal agency; • Pay, directly or indirectly, any taxes, fines or penalties; • Repair physical damage; or • Pay dividends or other disbursements to owners, partners, officers or stockholders, except for reasonable remuneration directly related to their performance of services for the business.
13 C.F.R. § 123.303(b).
Small businesses that need working capital to help meet their financial obligations should consider applying for an EIDL. For more information on EIDLs, what constitutes an eligible “small business,” and how to apply for EIDLs, please see the full client alert here.
On March 20, 2020, the Department of Defense (“DoD”) issued Class Deviation 2020-O0010 (the “Deviation”) providing that, effective immediately, in response to the coronavirus national emergency, the progress payment rates at Defense Federal Acquisition Regulation Supplement (“DFARS”) § 232.501‑1 are increased to 90% for large business concerns and 95% for small business concerns. Pursuant to the Deviation, DoD contracting officers (“COs”) are required to use the following clauses attached to the Deviation:
DFARS § 252.232-7004, DoD Progress Payment Rates (DEVIATION 2020-O0010), in lieu of the clause at DFARS § 252.232-7004;
Federal Acquisition Regulation (“FAR”) § 52.232-16, Progress Payments (DEVIATION 2020‑O0010), in lieu of the clause at FAR § 52.232-16; and
Alternate II (DEVIATION 2020-O0010), in lieu of Alternate II of FAR § 52.232-16.
The Deviation affects all DoD contracts, that is, it applies to existing and future DoD contracts.
The Deviation constitutes a modification to the terms of affected contracts that already exist. Because the DoD CO assigned to the existing contract is the only individual with the actual authority to execute and memorialize the change in progress payment rates pursuant to the Deviation, the Deviation is effective only upon the DoD CO issuing a contract modification. See FAR § 43.102(a) (providing that only COs with authority are empowered to execute contract modifications on behalf of the government); see alsoWinter v. Cath-dr/Balti Joint Venture, 497 F.3d 1339, 1344 (Fed. Cir. 2007) (stating that an agent of the government must have actual authority to bind the government to modify contracts; apparent authority is not sufficient). Accordingly, contractors are advised to request a block change modification from their assigned DoD CO to implement the Deviation on all existing DoD contracts.
On March 18, 2020, in response to bipartisan calls from Congress and governors across the US, President Trump issued an executive order finding that health and medical resources needed to respond to the spread of COVID-19 meet the criteria under the Defense Production Act (DPA) to be given priority for purposes of supporting the national defense. The order identifies personal protective equipment (PPE) and ventilators as specific types of health and medical resources that will now be given priority. Examples of PPE the order is likely to cover include masks, goggles, gowns and gloves. Other health and medical resources, such as diagnostic test supplies, may soon be added to the list as the executive order delegates authority to the Secretary of Health and Human Services (HHS) to identify additional specific health and medical resources that meet applicable criteria under the DPA.
Because ongoing US production of essential health and medical resources is already addressing shortfalls related to the domestic impact of the COVID-19 pandemic, some experts, including at the Center for Strategic and International Studies, believe that the President’s invocation of the DPA may be used principally to provide financial incentives for increased and expanded production efforts. Moreover, soon after issuing the order, President Trump shared via social media that he, “only signed the [the order] … should we need to invoke it in a worst case scenario in the future.” In response, expressing the collective sense of urgency of state governments throughout the US, in a March 19, 2020, memorandum to the President and Vice President Mike Pence, the National Governors Association included in its list of top state priorities in response to the COVID-19 outbreak, “guidance on implementation of [the] Defense Production Act to include what health and medical resources Secretary of Health and Human Services Azar is prioritizing under his new authority.”
This advisory provides an overview of the DPA and what this executive order could mean for government contractors and their supply chains.
As discussed in our prior advisory, the DPA provides the President and delegated federal agencies the authority to essentially force private companies to prioritize orders rated for national defense. Rated orders may cover not only the manufacture and delivery of goods, but may also apply to services. What this means, in practice, is that companies must put the federal government’s orders at the front of the line to ensure timely delivery under a rated order. Companies receiving a rated order must also place rated orders with their suppliers (with limited exceptions) to meet delivery requirements, which means that entire supply chains may soon be subject to rated order requirements.
Many DoD contractors and subcontractors are already very familiar with the Defense Priorities and Allocation System (DPAS), as implemented by regulations issued by the Department of Commerce. 15 C.F.R. 700 et seq. Companies may be less familiar with the Health Resources Priorities and Allocations System, as implemented by the Department of Health and Human Services. 45 C.F.R. 101 et seq. The President’s recent executive order very likely will mean that private companies that have either never done business with the federal government or have done so on more routine “commercial item” basis may suddenly be faced with rated orders. Rated orders must be accepted or rejected in writing within specified periods of time. Moreover, the bases for rejection are specific and narrow. Ultimately, willful refusal to comply with a rated order can subject private companies and individuals to a variety risks, including potential criminal charges.
Companies with products and services that may fall within the scope of health and medical resources should immediately familiarize themselves with the DPA, its implementing regulations, and any nationwide priorities and regulations that may be established by the HHS Secretary. Given the pace of the pandemic and the changes and disruptions to the supply chain that are already being observed, another key consideration is how the DPA and the national security needs that it seeks to address in operation collide with state and local police power. Specifically, contractors and/or their suppliers are very likely located in places where workers have been encouraged or directed to work from home, among other social distancing practices that have been recommended or mandated. Similarly, business operations have likely been impacted by travel restrictions, significantly limited airline schedules, and regulations in foreign jurisdictions limiting the export of materials required to produce the health and medical resources necessary to combat COVID-19 that are in short supply in the US. In the most extreme cases, some local or state jurisdictions have issued orders for their residents to “shelter in place.”
California issued such an order, effective Thursday, March 19. In the face of these challenges, accepting and performing a rated order (or any other order) may well prove impossible. State and local officials and the federal government are working to provide clarity that the DPA allows continued performance by contractors and their employees not withstanding local orders limiting or closing businesses. While this is developing by the hour, the Department of Homeland Security issued guidance confirming that contractors performing defense or health related contracts are part of the nation’s “critical infrastructure.”
From a supply chain perspective, companies receiving rated orders must recognize that orders they place to support performance of a rated order must also be issued as a rated order, unless exceptions apply. Issuing a rated order properly requires:
Specifying the appropriate rating on the order, including special language in the order so that the supplier is notified of its obligations;
Obtaining timely written acceptance or rejection;
Identifying a specific delivery date for items being ordered; and
Obtaining timely acceptance or rejection of any changes made to the order, which amounts to a new rated order.
Any company combining rated items and un-rated items in the same order must separately designate those times. Further, a company does not need to issue an order as rated if it is under certain dollar thresholds, unless the company cannot ensure timely delivery without using the rating.
The issuance of rated orders for certain medical technologies may also have a wider impact in the overall supply chain that affects other contractors. This may include electronic components that are common to a variety of products, including medical devices. In addition, we have seen examples, such as in the UK, where the general manufacturing industry is being drafted to transition to medical device manufacturing. The UK Government, for example, asked both Rolls-Royce and Ford to transition to manufacturing ventilators. Similar realignment of the industrial base both in the US and abroad could have far reaching consequences for the overall supply chain for a variety of goods and services.
If entities receiving rated orders encounter problems, there are procedures to follow to secure what is known as special priorities assistance. There are also avenues to appeal the rating applied to orders and the rating itself.
Ultimately, the discussion above highlights the complexity and risk associated with the DPA and DPAS that private companies with no prior background in the area will soon be facing. The best way to deal with these extraordinary circumstances effectively is to be proactive and to secure assistance from knowledgeable counsel, where and when appropriate.
Stay up-to-date with all of our insights and guidance by visiting our US COVID-19 hub here.
The COVID-19 public health emergency that has been unfolding over the past weeks and months is predicted to get far worse before it gets better. On Friday March 13, 2020, the President declared a national emergency to combat the virus and we have seen unprecedented cancellations relating to international travel, sporting events and large public gatherings. There also have been employer-issued mandates that employees work from home. As part of our on-going series, this advisory addresses some of the issues government contractors should carefully consider in connection with interruptions to their contract work.
Indeed, as the pandemic evolves, there is increased potential that government contractor operations will be impacted in a variety of ways, some of which may be more likely than others. Under these circumstances, contractors should be proactively identifying and considering likely impacts and how best to position themselves to mitigate those impacts. For example, contractors may encounter circumstances where they conclude they must temporarily cease operations or direct their non-essential personnel to work remotely. Or they may be having difficulty securing material or other resources due to impacts in the supply chain. While all of these impacts on work trace back to COVID-19, there are likely intervening causes that, depending on relevant contract terms, may provide avenues for the contractor to excuse nonperformance and avoid default or, alternatively, seek recovery from the government for impacts associated with stopped or delayed work.
First, it will be important to distinguish between a contractor’s voluntary work stoppages and involuntary work stoppages. Our prior advisory noted that if a contractor is temporarily unable to continue contract performance, i.e., is involuntarily delayed or impacted due to the pandemic, it is likely that force majeure principles would operate to excuse non-performance and prevent a government default termination. On the other hand, if it is proven that the contractor voluntarily or unreasonably stopped work or failed to perform, the contractor may risk default termination. Depending on the circumstances, there may also be an order or direction from the government to change or stop work, which may provide an avenue for the contractor to secure an equitable adjustment to compensate for delays and cost impacts. Accordingly, it will be critical to understand, anticipate and distinguish between situations where a delay or disruption could create a risk of default, and situations where a delay or disruption is justified and excusable, or is the government’s responsibility.
Second, contractors should be thinking ahead about what they could or would do if they experience difficulties performing their government contracts as a result of COVID-19. The magnitude of the impacts and delays contractors may experience, of course, will depend upon the nature of their work and their particular circumstances. Similar to what occurs during a shutdown period, any work that is dependent upon government action may be delayed, including the issuance of new work or task orders, technical direction, first-article acceptance, approvals to test, acceptance inspections, and payments. In addition, in instances where contractors are performing at government facilities, contractors’ employees may have limited or no access to these facilities.
To the extent that a contractor suffers any adverse impacts due to COVID-19, it may be able to recover costs associated with these impacts pursuant to its contract terms. See,e.g., FAR 52.242-14, Suspension of Work; FAR 52.242-15, Stop-Work Order; FAR 52.242-17, Government Delay of Work; FAR 52.243-1, Changes – Fixed-Price. Importantly, unlike government shutdown circumstances, establishing that performance interruptions were caused by the government, through a contractual order, will be important. It is possible, however, that government contracting officers will avoid issuing a written order for the contractor to stop work. In this regard, issues of authority will be important to consider. In the event that the federal government issues an order that impacts contract performance, contractors should make every effort to obtain direction in writing from their contracting officer.
In instances where contractors are performing cost reimbursable contracts, even if the Stop Work clause is not incorporated into the contracts, any additional costs attributable to disruption in work due to COVID-19 likely are recoverable as allowable costs of performance. If the disruption significantly increases costs or the level of effort required, contractors may seek an adjustment to the contract’s estimated costs and/or fee pursuant to the Changes clause, FAR 52.243-2.
Where no stop-work order is issued and contractors continue performing their fixed-price contracts, but have been hindered by COVID-19, recovery of any increased costs is less certain because the government likely would assert that the COVID-19 public health emergency is entirely outside of its control. Additionally, where the President or federal health officials issue orders that adversely affect contract performance, the government likely will take the position that such action constitutes a sovereign act that precludes recovery.
Determining who is responsible for the costs and delays resulting from COVID-19 ultimately depends on the facts and circumstances, as well as relevant contract provisions. Nevertheless, similar to those best practices applicable in a government shutdown, contractors can best position themselves for recovery by adhering to the following guidance:
Document any cost impacts and performance delays that result from government contractual action. There is risk that a government direction resulting from, or in reaction to, other government orders regarding COVID-19 could be viewed as a sovereign act, precluding any contractual recovery. To mitigate this risk, ensure that you have received, or will receive, a stop-work notice or some other contractual direction and that this direction is maintained in the contract file. If no written guidance is issued, consider asking the contracting officer to do so as appropriate.
Costs resulting from COVID-19 disruptions may be recoverable depending on the contract type. When contractual direction exists, costs reasonably incurred as a result of the government order may be recovered through the stop-work order, or the contract’s suspension of work, government delay of work, or changes clauses, so long as the impacts and delays arise during a period where the contract is funded.
Schedule impacts from a government-ordered stop-work order should be addressed through extensions to the period of performance. Schedule impacts resulting from a government order also likely are addressable through the stop-work order, suspension of work, government delay of work, or changes clauses.
Contractors should mitigate the impact to contracts. While contractors may be entitled to recover costs and/or receive schedule adjustments to address the impact of a government- ordered stop-work, contractors are responsible for taking reasonable actions to reduce the cost and/or schedule impact. These actions may include examining the feasibility of workarounds, diverting employees to commercial efforts (if possible), and potentially furloughing employees. If a contractor fails to take mitigation steps, the government may assert that the contractor acted unreasonably and may attempt to reduce the total costs and/or length of the extension provided to address the impact of the stop-work.
Cost and schedule impacts should be carefully tracked. To recover increased costs or receive a schedule adjustment, contractors must be able to demonstrate that the cost or schedule impact occurred and tie the impact to the government’s contractual order or fault. Employees that are prevented from performing work, therefore, should provide detailed time entries and record their labor costs in segregated accounts to demonstrate the labor cost impact of the disrupted period. Other cost impacts, such as costs associated with rescheduling work or redirecting employees to perform commercial work (if possible), should be similarly documented. Likewise, any schedule impact should be fully documented and demonstrated through a critical path or similar schedule analysis.
Take appropriate actions with respect to subcontractors. If a stop-work order is issued by the government, then contractors should immediately issue similar stop-work orders to any affected subcontractors. If no stop-work order is issued by the government, managing subcontractors becomes more complicated.
Contractors performing work as subcontractors on government prime contracts should seek clarity and instructions from their prime contractor customers regarding any potential impacts COVID-19 may have on performance. To the extent that any subcontracts are stopped or suspended , consistent with the guidance above, subcontractors should ensure that they mitigate any resulting costs or schedule impacts, identify and accumulate any resulting costs, and seek contract direction from their prime contractor customers as appropriate.
To the extent possible, communicate with the contracting officer. Consider requesting guidance on whether a contracting activity is an essential activity or service that must continue, regardless of any orders regarding COVID-19.
The rippling impacts and effects of this unprecedented modern public health emergency likely will be with us for some significant amount of time. As always, contractors must be proactive in order to best position themselves to maximize any cost recoveries and/or contract extensions necessary to address the impact of COVID-19, including documenting, on a contract-by-contract basis, why certain actions taken were reasonable.
Stay up-to-date with all of our insights and guidance by visiting our US COVID-19 hub here.
Dentons has formed a COVID-19 Client Special Situations Team and Client Resources Hub that stands ready to assist contractors in addressing the full range of issues, both in the US and globally, that may arise in connection with the COVID-19 outbreak. This advisory is the latest update in a series of alerts that address various aspects in which the contracting community may be affected. This advisory focuses on the implications of President Trump’s emergency declaration under the Stafford Act and the government’s use of the Defense Production Act and similar authorities to acquire goods and services that may be necessary to combat COVID-19.
On Friday, March 13, 2020, President Trump declared a national emergency relating to the coronavirus (COVID-19) pandemic. This emergency declaration makes available billions of dollars in federal disaster relief funds to state and local governments pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), 42 U.S.C. ch. 68. Federal Emergency Management Agency (FEMA) administers the funds, pursuant to specific federal regulations, and generally makes them available to state and local governments in the form of grants. The state and local governments will further administer the funds for specific programs through subgrants and procurement contracts to support the COVID-19 response and relief effort.
In addition to the funds made available under the Stafford Act, contractors also should be cognizant of the fact that the federal government might exercise its authority under the Defense Production Act of 1950, 50 U.S.C. §§ 4501 et seq., which is implemented by the Defense Priorities and Allocations System (DPAS), 15 C.F.R. § Pt. 700, to rapidly respond to the COVID-19 pandemic. Under DPAS, the government has the authority to prioritize government contracts for goods and services over competing customers, to allocate or control the general distribution of materials, and to offer incentives within the domestic market to enhance the production and supply of critical materials and technologies when necessary to respond to a national emergency. Contractors that have prime contracts, subcontracts or purchase orders subject to DPAS generally must quickly accept DPAS-rated orders within a short timeframe (10 to 15 days), and may only reject a rated-order in very limited circumstances. Additionally, prime contractors and subcontractors are required to flowdown these rating requirements to suppliers, as necessary to meet delivery requirements. It is therefore important for contractors to be aware of which of their prime contracts, subcontracts and purchase orders are rated.
While it is unlikely that the government would exercise the more extreme authority granted under DPAS and effectively commandeer manufacturing and other types of facilities in order to produce critical medical supplies or to support other emergency relief efforts, contractors should further be mindful that the government could also authorize companies to use certain goods and technology that is patented by other companies without the consent of the patent holder. Specifically, pursuant to the Bayh-Dole Act, 35 U.S.C. ch. 18, or 28 U.S.C. § 1498, the federal government may authorize a company to produce, for example, critical pharmaceutical products, testing equipment or other essential items that are patented by another company to combat CoVID-19. Together, these authorities essentially authorize the US government to license and authorize the practice of patented inventions by industry competitors without regard to whether the patented technology was developed with government funding or exclusively at private expense. While patent holders are not without recourse, a patent holder’s recourse is typically limited to relief from the federal government in the form of royalty payments or damages—not from the companies who have received appropriate authorization and consent to use the patented items. Notably, however, in cases involving subject inventions funded by it, the government, pursuant to the Bayh-Dole Act, may exercise its “march-in” rights that permit the government to require the patent holder to license the invention to third parties. If the patent holder fails to do so, the Bayh-Dole Act permits the government to directly license the patented technology to non-patent holders upon terms that are reasonable under the circumstances. This may presumably include the payment of reasonable royalties to the patent holder, but the relevant provision of the Bayh-Dole Act (35 U.S.C. § 203) does not specifically require the payment of such royalties, creating risk that the patent holder may not receive the compensation that might normally be due. While the Bayh-Dole Act and its implementing regulations in the Federal Acquisition Regulation (FAR) apply to small businesses and non-profit organizations, the Act authorizes the government to extend the Act’s requirements to all contractors. See 35 U.S.C. § 210(c); FAR Subpart 27.3. In this regard, the Department of Defense has extended these requirements, among others, to large contractors through a specific clause, Defense Federal Acquisition Regulation Supplement (DFARS) 252.227-7038, which includes the government’s march-in rights. See DFARS 252.227-7038(h). Therefore, contractors of all sizes should be aware of the government’s ability to exercise these rights.
The national emergency surrounding COVID-19 creates a situation in which the government may utilize its vast national security powers and emergency resources to combat the virus. Contractors must be aware of the unique issues that may arise under these circumstances as the consequences of noncompliance may be drastic.
Please contact any of the authors if you require additional guidance on specific issues.
Dentons has formed a COVID-19 Client Special Situations Team that stands ready to assist contractors in addressing the full range of issues that may arise in connection with the COVID-19 outbreak. Over the next several weeks, we will provide updates regarding the various aspects in which the contracting community may be affected. This advisory focuses on what contractors must show to support excusable delay. Future advisories will focus on other contracting-related facets of the COVID-19 issue. Among the issues that may be addressed are managing supply-chain risks; the government’s issuance of stop-work or suspension-of-work orders; the government’s use of the Defense Production Act and its related authorities to acquire goods and services that may be necessary to combat COVID-19; and how to seek schedule and compensatory relief in the event the government is unable to support contracting activities, such as performing delivery inspections and providing access to facilities and government furnished equipment.
The COVID-19 outbreak is disrupting business around the world. The disruption stems from sick personnel unable to report to work, declines in the capital markets, and actions taken by governments and companies alike directing workers to stay home or ordering the closure of manufacturing plants or offices until the disease is under control. Yesterday, U.S. financial markets triggered a “circuit-breaker” that required a short suspension of trading and the Italian government ordered a quarantine of its northern provinces. As this client advisory is being drafted, the United States is facing reports of virus outbreaks in different locations around the country, including states of emergency in several U.S. States. The continued spread of COVID-19 could affect performance of federal contracts in various ways. Contractors could experience unexpectedly high levels of claimed sick leave or absenteeism, government-imposed or voluntary quarantines, cancelled travel, supply chain interruptions, and a number of other significant performance obstacles leading to dramatically reduced productivity and increased performance costs.
For many decades federal contracting regulations have recognized “epidemics” and ”quarantine restrictions” as force majeure bases for excused performance. FAR 52.249-8(c), Default (fixed price supply contracts) (“[the] Contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor” and citing among those causes “epidemics” and “quarantine restrictions”); FAR 52.212-4(f) (same for commercial item contracts); see also Clause 11, Default, Procurement Division Contract Terms No. 1, CCH War Law Services (1945) (same). A key point before relying on these “safe harbors” in the Default context is to remember that they are not a per se defense to nonperformance. The existence of an “epidemic” or imposition of a “quarantine restriction” does not necessarily mean performance is excused in the absence of showing causation and a lack of fault or negligence by the contractor (as well as other standard factors such as the amount of delay attributed to the specific cause).
Case law interpreting these specific bases for excusable delay have focused on the clause’s language and the requirement that there must be causation between an “epidemic” or “quarantine restriction” and nonperformance. In certain cases, that causation was proven. See, e.g., Big State Garment Co., ASBCA No. 337, 4 CCF ¶ 60,946 (1950) (contract performance extension granted due to employees’ need to recover from typhoid injection). However, in the majority of cases addressing these issues, contractors have failed to show excusable delay. In Ace Electrical Associates, Inc., the Armed Services Board of Contract Appeals (ASBCA) confronted a contractor’s contention that nonperformance was due to the excusable delay of a flu epidemic that had “passed through its plant causing a 30% to 40% rate of absenteeism over a period several weeks.” ASBCA No. 11781, 67-2 BCA ¶ 6,456. The board rejected the contractor’s position, explaining “[i]llness occasioned by the onset of a flu epidemic is in general an excusable delay provided it can be shown that performance was in fact delayed by reason of such epidemic. It is incumbent upon [the contractor] to establish not only the existence of an excusable delay as well as the actual extent of delay so caused.” Id. The Board concluded that the contractor had failed to present that evidence. See id.; see also Crawford Dev. and Mfg. Co., ASBCA No. 17565, 74-2 BCA ¶ 10,660 (appeal for excusable delay based on absence of several key employees due to flu-induced illness denied where contractor failed to show epidemic in surrounding community resulted in absence of a sufficient number of employees to cause delay).
The Default clause for fixed-price supply contracts emphasizes not once, but twice, that “the failure to perform must be beyond the control and without the fault or negligence of the Contractor.” FAR 52.249-8(c). Whether stated in the relevant clause or not, this element of proof generally is accepted as a predicate to showing excusable delay. In the context of an asserted excusable delay due to an epidemic, the Government Printing Office Board of Contract Appeals (GPOBCA) emphasized that the contractor’s burden in such situations is to show that it took every reasonable precaution to avoid foreseeable causes for delay and to minimize their effect. Asa L. Shipman’s Sons, Ltd., GPOBCA No. 06-95, 1995 WL 818784 (Aug. 29, 1995). In the context of the COVID-19 virus, and its present level of outbreak in the US, contractors should be examining and implementing today precautionary measures to ensure the ability to perform in the future. In Yarling, the Agriculture Board of Contract Appeals (AGBCA) noted that the government had been amenable to the contractor entering into a subcontract arrangement or novation to ensure continued performance. AGBCA No. 382, 75-2 BCA ¶ 11,540. The board denied the appeal because the contractor had options—such as subcontracting or novation—to continue performance even in the face of an epidemic. It makes sense to consider (and document) advance planning on ideas to deal with COVID-19 related performance delays. Even if those ideas are ultimately unsuccessful in ensuring continued timely performance, the record of a contractor’s reasonable efforts to prepare for a COVID-19-related disruption will support later entitlement to schedule relief in the context of default.
Epidemics and quarantine restrictions are longstanding bases for excused performance. However, contractors must be mindful of equally longstanding requirements to show that (i) any asserted delay in performance was, in fact, caused by the asserted epidemic or quarantine restriction; and (ii) the delay was beyond the control and without the fault or negligence of the contractor (and any relevant subcontractors). Contractors will not know in advance the facts on the first prong of these requirements, but as to the second prong, contractors may be well-served to set in motion contingency planning to meet performance requirements. This could include setting up alternative supply chain arrangements, tasking human resource departments with identifying alternative staffing plans and taking steps in operations to mitigate the effect of a COVID-19 outbreak in manufacturing facilities and offices. Being proactive today will help the contractor make the requisite showing later that it took reasonable precautions to meet performance deadlines in the event COVID-19 asserts itself as a disruptive epidemic in the coming weeks and months.
In the attached article, we summarize and discuss the impacts of disputes decisions that are likely to have sustained impacts on contractors and the Government alike into the foreseeable future in connection with our “Feature Comment: The Most Important Contract Disputes Decisions of 2019,” in The Government Contractor (Vol. 62, No. 5).
For commercial item contractors, some improvements—mixed with new and old barriers—in DoD’s final rule on procurement of commercial items and accompanying guidebook
Authors: Phil Seckman, Steve Masiello, Quincy Stott
At long last, the Department of Defense (DoD) on January 31, 2018, issued its final rule regarding the procurement of commercial items. On the same day, the DoD also published an updated two-part “Commercial Item Acquisition Guidebook,” a draft of which the DoD circulated last year. Dentons has been tracking both, including an analysis regarding the proposed rule and an earlier DFARS case that contributed to it. Although the final rule contains some beneficial elements for commercial item contractors and nontraditional defense contractors, it fails to overcome several of the barriers that deter such contractors from selling to DoD and sets the stage for possible problems down the road.
Starting with some potentially good news, it is helpful that the discussion and analysis in the final rule expressly acknowledges that the DoD considers the commercial item determination to be separate from the price reasonableness determination. This was an issue that was of particular concern in industry comments submitted in response to the DoD’s proposed rules. Moreover, the DoD’s acknowledgement of these separate inquiries is important because it also emphasizes and reinforces the avenue by which items that have not previously been sold may nonetheless qualify as commercial items if they are “of a type.” It was not long ago that the DoD was actively engaged in an effort to revise the statutory commercial item definition to remove this very concept.
Another bit of good news in the final rule relates to nontraditional defense contractors. The final rule defines a nontraditional defense contractor as an entity “that is not currently performing and has not performed any contract or subcontract for DoD that is subject to full coverage under [CAS] . . . for at least the 1-year period preceding the solicitation . . . .” The language at DFARS 212.102 states that contracting officers may treat supplies and services provided by nontraditional defense contractors as commercial items.
Although this permissive authority is not intended to “recategorize” current noncommercial items, the provision states that contracting officers may consider using the authority to procure supplies and services from business segments that meet the definition of nontraditional defense contractor even though they are affiliated with traditional defense contractors. The new guidance is enshrined in a new clause: DFARS 252.215-7013, Supplies and Services Provided by Nontraditional Defense Contractors. The provision may create incentives for nontraditional defense contractors to do business with the DoD (or for traditional defense contractors to spin off segments or affiliates that could qualify as nontraditional), but only time will tell whether contracting officers will exercise their discretion to do so.
On the other side of the ledger, the final rule potentially retains and creates new barriers for commercial item contractors. First, while the final rule’s treatment of data requirements for both commercial item determinations (CIDs) and price reasonableness offers additional clarity, it ultimately fails to meaningfully reduce barriers for commercial item contractors. As noted above, the DoD professes that it considers CIDs separately from price reasonableness determinations. Nonetheless, under the new DFARS provision, the DoD requires documentation in support of both to be included at proposal submission. The DoD’s rationale is that requiring commercial item contractors to turn over detailed pricing information up front with its proposal avoids delays in contract award. Of course, this likely invites contracting officers to ignore the FAR pricing policy at FAR 15.402 and the orderly sequence of information the government is to utilize before calling on the contractor to turn over its own information.
Moreover, while contracting officers may not request certified cost and pricing data for a commercial item acquisition, the final rule contemplates that they use business judgment and have broad discretion to require additional information from commercial item contractors for purposes of establishing price reasonableness. Again, contracting officers should be limited to the order of preference in FAR 15.402 for the type of data required. Nevertheless, the new language in DFARS 215.404-1(b) fails to curb potential overreach through onerous data requests by contracting officers determined to avoid any second guessing of their efforts in support of the commercial item price reasonableness determination. This dynamic may very well have the predictable result of causing many nontraditional defense contractors to turn away from the DoD market.
The final rule also implements DFARS 252.215-7010, Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or Pricing Data. Building on FAR 52.215-20, the new DFARS provision adds additional detail regarding submission of other than certified cost or pricing data. Contracting officers will use this new provision in lieu of FAR 52.215-20 in solicitations, including those using FAR Part 12 procedures for commercial item acquisitions. Notably, however, the final rule reworded the solicitation provision at paragraph (d) to require only the “minimum information necessary,” rather than the previous version’s “all data,” to determine that the proposed price is fair and reasonable
Finally, under DFARS 212.102 in the final rule, a contracting officer may presume that a prior CID “made by a military department, a defense agency, or another component of DoD shall serve as a determination for subsequent procurements of such item.” If a contracting officer does not presume a prior CID is valid, the head of the contracting activity conducting the procurement must, within 30 days, confirm that the prior CID is appropriate and still applicable, or issue a determination that it is no longer appropriate to use FAR Part 12 procedures to acquire the item. It seems that the presumption that Congress created in Section 851 of the FY 2016 NDAA may have unintended consequences. Rather than facilitating the DoD’s reliance on prior CIDs, the final rule suggests that it is within the contracting officer’s discretion to disregard them, though the risk of such discretion being exercised is low. Finally, despite industry urging, the DoD declined to extend the presumption for prior CIDs to those made by non-DoD agencies.
Simultaneous with the DoD’s publication of the final rule in the Federal Register, the department also published its final Commercial Item Acquisition Guidebook. Unlike the final rule, the guidebook contains no clear summary of changes made in response to industry comments. For this reason, contractors should carefully study the final version for valuable insight into how the DoD is approaching commercial item and fair-and-reasonableness-price determinations, and and use it to bolster your approach to commercial item issues in the context of contractor purchasing systems.
The culmination of many years of effort by the DoD, the final rule provides some needed clarity for commercial item contractors and opens up avenues for nontraditional defense contractors to sell their supplies and services to the government. The final rule does not, however, meaningfully reduce certain barriers for commercial item contractors and may even create new barriers. In future NDAAs, Congress will need to provide additional clarity regarding its goals for commercial item acquisition and to continue incentivizing the adoption of practices by the DoD that genuinely reflect the commercial marketplace. Only through the reduction of unnecessary complexity and the avoidance of onerous information demands will the DoD continue to attract and benefit from the commercial market.
On November 21, 2017, DCAA issued a Memorandum for Regional Directors (MRD) confirming that the Class Deviation 2017-O0010’s abrupt halt to technical interchange requirements as a condition of independent research and development (IR&D) cost allowability applies to auditors. Dentons previously discussed Class Deviation 2017-O0010 and its implications for contractors when the Class Deviation was issued in September 2017.
The MRD expressly applies the Class Deviation to DCAA auditors. It states that no IR&D costs should be questioned if an auditor finds that a technical interchange did not occur. This guidance applies retroactively to all audits performed of fiscal year 2017 costs, as well as current and future audits. The MRD is available on DCAA’s website.
Courts historically have been hesitant, for public policy reasons, to sanction relators for taking their former employers’ confidential documents to support their FCA claims. However, in US ex rel. Ferris v. Afognak Native Corp., a US District Court Judge for the District of Alaska sanctioned a plaintiff almost $17,000 for doing just that. We look at the key elements defense counsel in FCA actions should focus on when faced with a qui tam relator who has purloined his or her employer’s privileged (or non-privileged but confidential) documents.
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