Government Contracts Advisor 

On April 23, 2020, pursuant to Section 4003(b)(3) of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136 (“CARES Act”), the U.S. Department of Treasury (“Treasury”) released a loan application form for “businesses critical to maintaining national security.” While the application form is “for informational purposes only” to allow prospective borrowers to begin to prepare their respective submissions, Treasury announced on April 25, 2020 that applications may be submitted online beginning on April 27, 2020.

Interested companies are advised to prepare and submit their applications promptly as applications are due at 3:00 P.M. EDT on May 1, 2020. Applications received after that time may not be considered. However, Treasury maintains discretion to consider late applications for approval subject to the availability of funds. Prospective borrowers are reminded that, unlike under the Paycheck Protection Program available to small businesses, loan forgiveness is not available under this loan program.

Specifically, the CARES Act authorizes the Treasury to make available up to $17 billion in loans and loan guarantees for “businesses critical to maintaining national security.” Section 4003(a), (b)(3). During an interview on April 23, 2020, Treasury Secretary Steven Mnuchin, in describing the intended beneficiaries of this loan program, stated that, “[t]his pot of money was designed to consider the needs of defense contractors, key suppliers to [the Department of Defense], and other companies that carry classified information.”

The purpose of the loan program is to provide liquidity to offset covered losses, which include losses incurred directly or indirectly as a result of the coronavirus (COVID-19) pandemic. Importantly, an applicant is eligible only if it has “not otherwise received adequate economic relief in the form of loans or loan guarantees” provided under the CARES Act. Section 4002(4)(B).

Treasury has defined a “business critical to maintaining national security” as one that, at the time of the loan application, is either:

• Performing under a DX-priority rated contract or order under the Defense Priorities and Allocations System regulations (15 CFR Part 700); or
• Operating under a valid Top Secret facility security clearance under the National Industrial Security Program regulations (32 CFR Part 2004).

Dep’t of Treasury, Q&A: Loans to Air Carriers and Eligible Businesses and National Security Businesses (updated as of Apr. 10, 2020).

The application requires applicants to submit detailed information supporting either of the above. If an applicant does not satisfy either threshold requirement, it may nevertheless be considered for a loan if the Secretary of Treasury, based on a recommendation and certification by the Secretary of Defense or the Director of National Intelligence, determines that the applicant is critical to maintaining national security.

In addition to requiring information supporting either of the above criterion, the loan application requires applicants to provide information regarding their:

• Corporate structure;
• Debt, asset, and equity positions;
• Operations in the United States;
• Covered losses;
• Most recently completed IRS Form 941 (“Employers Quarterly Federal Tax Return”);
• Various consolidated financial statements; and
• Any outstanding liens with the U.S. Government.

Applicants must also submit a financial plan. Two company officials must certify that the information and certifications provided in the application are true and correct.

Importantly, prior to submitting an application for a loan under this program, potential borrowers should be aware that such loans will be subject to certain conditions and restrictions, including:

• If the borrower is a public company, then the borrower “must provide a warrant or equity interest in the [b]orrower” to the U.S. Government, unless the Secretary of Treasury determines, in his discretion, that issuance of such warrant or equity interest would not be feasible;
• If the borrower is a private company, then the borrower may, at the discretion of the Secretary of Treasury, issue a senior debt instrument to the U.S. Government instead of a warrant or equity interest;
• The borrower must maintain employment levels as of March 24, 2020 to the extent practicable, and in any case not reduce its employment levels by more than 10 percent from the levels on such date, at least until September 30, 2020;
• Neither the borrower nor any affiliate of the borrower may purchase an equity security of the borrower or any parent company that is listed on a national securities exchange (this restriction does not apply if the borrower or affiliate is required to purchase such a security under a contractual obligation in effect as of March 27, 2020);
• Effective until 12 months after the borrower has repaid the loan, the borrower must not pay dividends or make other capital distributions with respect to the borrower’s common stock;
• Effective until 12 months after the borrower has repaid the loan, officers and employees whose total compensation (i.e., salary, bonuses, awards of stock, and other financial benefits) exceeded $425,000 but was less than $3 million in 2019 must not receive: (1) total compensation during any consecutive 12-month period that exceeds the total compensation received in 2019; and (2) severance pay or other benefits upon termination of employment that exceeds twice the compensation received in 2019; and
• Effective until 12 months after the borrower has repaid the loan, officers and employees whose total compensation exceeded $3 million in 2019 must not receive total compensation during any consecutive 12-month period that exceeds the sum of $3 million and 50 percent of the excess over $3 million of the total compensation received in 2019.

Businesses interested in applying for a loan under this program should carefully evaluate the applicable conditions and restrictions. Prospective borrowers are also advised that recipients of Treasury funds may be subject to increased government oversight and investigations, especially with respect to the certifications required in the application.

Further, any companies interested in applying should prepare their materials promptly to ensure submission in advance of the 3:00 P.M. EDT on May 1, 2020 deadline.

To date, Congress has enacted three pieces of legislation, described as “phases 1 through 3,” to respond to the COVID-19 epidemic. This legislation has both expanded requirements for sick leave and provided additional funding for contractors who have incurred costs retaining employees that are unable to work due to the closure of a federal site. Relevant provisions of the legislation, and the class deviation issued by the Department of Defense (“DoD”) for implementation of the CARES Act requirements in the DoD Federal Acquisition Regulation Supplement (“DFARS”) which we previously addressed in this blog on April 9, are discussed here.

Members of the Dentons’ Government Contracts Practice Group are available to assist government contractors regarding their obligations for paid sick leave under new or existing Federal legislation.

There is a rising army of contractors, commercial companies, and even private citizens who are racing to support federal, State and local agencies’ fight against the COVID-19 virus pandemic. By engaging in certain activities that may directly impact individuals infected or suspected of being infected with COVID-19, however, these contractors and other actors may be exposing themselves to potential liability claims. Specifically, infected or other individuals may be unintentionally harmed by a contractor’s activities or the countermeasures that the contractor deploys leading to the risk of subsequent lawsuits once the pandemic has subsided.

Under these circumstances, the federal government has made the appropriate policy choice that it is more important that we encourage private industry to fight the virus and, accordingly, legal protections are available to protect contractors and other actors against the vast majority of liability claims that might be brought by individuals. Specifically, the Public Readiness and Emergency Preparedness Act (the “PREP Act”) and the March 10, 2020 declaration issued by the Secretary of Health and Human Services (the “HHS Secretary”) provide liability immunity for certain recommended activities.

For more information on these legal protections and the activities to which they apply, please visit our client alert.

The April edition of Dentons’ monthly legislative and regulatory update is available!

On April 8, 2020, the Department of Defense issued a class deviation implementing CARES Act Section 3610, Federal Contractor Authority. Specifically, the Class Deviation, which is effectively immediately, authorizes contractors to use a new Department of Defense Federal Acquisition Regulation Supplement (DFARS) Part 231 clause—DFARS 231.205-79, CARES Act Section 3610 Implementation—”as a framework for implementation of section 3610″ of the CARES Act. The Class Deviation identifies that Section 3610 can provide “reimbursement on any contract type.”

Most notably in DFARS 231.205-79, provided below, is that:

• It only applies to contractors for which the “cognizant contracting officer has established in writing to be an affected contractor.”  This is an important distinction and contractors should ensure to obtain, and maintain in its contract files, this affirmation from the contracting officer; 
• It clarifies both that it applies to “work on a site that has been approved for work by the Federal Government, including on a government-owned, government-leased, contractor-owned, or contractor-leased facility approved by the federal government for contract performance,” which provided needed clarity to the language in the CARES Act, and that the performance location can be deemed inaccessible because of local shelter in place orders; and
• In order for costs to be allowable, they must be “segregated and identifiable in the contractor’s records so that compliance with all terms of this section can be reasonably ascertained.”

DFARS 231.205-79 CARES Act Section 3610 – Implementation

1. Applicability.
   1. This cost principle applies only to a contractor:
      1. that the cognizant contracting officer has established in writing to be an affected contractor;
      2. whose employees or subcontractor employees:
         1. Cannot perform work on a government-owned, government-leased, contractor-owned, or contractor-leased facility or site approved by the federal government for contract performance due to closures or other restrictions, and
         2. Are unable to telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020, for Coronavirus (COVID–19).
   2. The maximum reimbursement authorized by section 3610 shall be reduced by the amount of credit a contractor is allowed pursuant to division G of the Families First Coronavirus Response Act (Pub. L. 116– 127) and any applicable credits a contractor is allowed under the CARES Act (Pub. L. 116-136) or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020 for COVID–19.
2. Allowability.
   1. Notwithstanding any contrary provisions of FAR subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7, costs of paid leave (including sick leave), are allowable at the appropriate rates under the contract for up to an average of 40 hours per week, and may be charged as direct charges, if appropriate, if incurred for the purpose of:
      1. Keeping contractor employees and subcontractor employees in a ready state, including to protect the life and safety of Government and contractor personnel, notwithstanding the risks of the public health emergency declared on January 31, 2020, for COVID-19, or
      2. Protecting the life and safety of Government and contractor personnel against risks arising from the COVID-19 public health emergency.
   2. Costs covered by this section are limited to those that are incurred as a consequence of granting paid leave as a result of the COVID-19 national emergency and that would not be incurred in the normal course of the contractor’s business. Costs of paid leave that would be incurred without regard to the existence of the COVID-19 national emergency remain subject to all other applicable provisions of FAR subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7. In order to be allowable under this section, costs must be segregated and identifiable in the contractor’s records so that compliance with all terms of this section can be reasonably ascertained. Segregation and identification of costs can be performed by any reasonable method as long as the results provide a sufficient audit trail.
   3. Covered paid leave is limited to leave taken by employees who otherwise would be performing work on a site that has been approved for work by the Federal Government, including on a government-owned, government-leased, contractor-owned, or contractor-leased facility approved by the federal government for contract performance; but
      1. The work cannot be performed because such facilities have been closed or made practically inaccessible or inoperable, or other restrictions prevent performance of work at the facility or site as a result of the COVID-19 national emergency; and
      2. Paid leave is granted because the employee is unable to telework because their job duties cannot be performed remotely during public health emergency declared on January 31, 2020, for COVID-19.
   4. The facility at which work would otherwise be performed is deemed inaccessible for purposes of paragraph (b)(3) of this subpart to the extent that travel to the facility is prohibited or made impracticable by applicable Federal, State, or local law, including temporary orders having the effect of law.
   5. The paid leave made allowable by this section must be taken during the period of the public health emergency declared on January 31, 2020, for COVID–19, up to and including September 30, 2020.
   6. Costs made allowable by this section are reduced by the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020, for COVID–19, such as the tax credit allowed by division G of Public Law 116–127.

The Class Deviation can be found here and remains in effect until rescinded.

The COVID-19 global pandemic and the United States’ response to the national emergency are having significant impacts on the government contractor community, shaping the way contractors perform their current contractual obligations and the way contractors will negotiate future contracts, task orders, and modifications. Indeed, for contractors preparing proposals or negotiating new contracts, the landscape is now much different and more uncertain than it was prior to the COVID-19 global pandemic.

To assist contractors in protecting against these uncertainties, we have outlined below considerations and strategies that should be employed (additional details related to each of the below identified strategies may be found here):

• Understand the contract or subcontract type being negotiated and, in particular, the risk tradeoffs of flexibly priced contracts versus fixed price contracts – Fixed price contracts and subcontracts are designed to place the maximum risk on the seller for reasonably foreseeable risks; because the pandemic is a known fact, those considering a fixed price contract must proceed with caution.

• Understand that the government may assert the basic FAR excusable delay clause has limited applicability to new government contracts because COVID-19 is now a known fact – The government may argue that when a potential risk exists at the time of award, any impact to the contract stemming from that risk may be foreseeable and inexcusable under the FAR delay clauses. In order to protect against this risk, contractors should consider including disclaiming language in their proposals and, to the extent possible, negotiate a reopener or other special clause that makes clear that the full impact of COVID-19 is not foreseeable and the contractor does not assume such risks to schedule or cost.

• Consider how the contingencies cost principle affects contractors’ ability to include the costs of unforeseeable events in their proposals – Because COVID-19 is a presently known condition with an impact that likely cannot be measured with accuracy at this time, the government may take the position that any contingency, management reserve, or other cost associated with potential impacts arising from COVID-19 are unallowable and must be excluded from cost estimates. To protect against this risk, contractors should seek higher fee and/or the inclusion of reopener clauses in their contracts that permit the parties to reopen cost or price negotiations based on future COVID-19 related events.

• Monitor indirect cost rates carefully and make adjustments to forward pricing rates and billing rates as necessary. Terminate existing Forward Pricing Rate Agreements – In order to protect against the risk of a quick change to indirect rates, contractors should carefully monitor how COVID-19 related issues are impacting rates and take appropriate action, including, but not limited to, terminating FPRAs and updating forward pricing rates and billing rates.

• Prepare for a potential increase in sole source contracts and/or limited bid protests – If the government does utilize a full and open procurement competition, be aware that the government may override the automatic stay of performance in GAO bid protests, pursuant to FAR § 33.104(c)(2)).

Contractors should expect extraordinary circumstances as a result of the global pandemic, including rapid procurement processes for new government contracts, variable (and likely increased) contract performance costs, and disrupted contract performance schedules. Vigilant and proactive contractors may be able to create contractual protections, especially when entering into new government contracts, that may minimize financial repercussions of COVID-19.

The March edition of Dentons’ monthly legislative and regulatory update is available!

The United States Court of Appeals for the Fourth Circuit recently, and importantly, reestablished the status quo for government contractor disclosures made pursuant to the Mandatory Disclosure Rule (MDR), while also providing further insight into when a disclosure could waive privilege. Specifically, the Fourth Circuit, in a non-precedential decision, overturned an unsettling decision from the U.S. District Court for the Eastern District of Virginia that certain disclosures a government contractor made pursuant to the MDR constituted a waiver of the attorney-client privilege.

In reaching the conclusion that the contractor’s disclosure pursuant to the MDR did not waive the attorney-client privilege, the Fourth Circuit distinguished between disclosures based on the advice of an attorney (not a waiver of privilege) and disclosures that divulge the underlying attorney-client communication itself (a waiver of privilege). The Fourth Circuit also identified using strong dicta that its decision is consistent with the purpose of the MDR. In specifically focusing on the MDR, the Fourth Circuit stated that:

• “requiring [the contractor] to produce privileged materials is particularly injurious here, where [the contractor] acted pursuant to a regulatory scheme mandating disclosure of potential wrongdoing. Government contractors should not fear waiving attorney-client privilege in these circumstances”; and
• “the district court’s decision has potentially far-reaching consequences for companies subject to [the MDR] and other similar disclosure requirements. We struggle to envision how any company could disclose credible evidence of unlawful activity without also disclosing its conclusion, often based on the advice of its counsel, that such activity has occurred. More likely, companies would err on the side of making vague or incomplete disclosures, a result patently at odds with the policy objectives of the regulatory disclosure regime at issue in this case.”

While contractors must remain vigilant about the level of information disclosed pursuant to MDR and ensure the disclosure do not divulge the underlying attorney-client communication, this decision should provide comfort to the government contract community. Contractors, pursuant to the MDR, should be able to inform their government customers in sufficient detail of the contractor’s general conclusions as to whether conduct satisfies the credible evidence standard under the MDR. This, in turn, should enable contractors and the government to preserve resources and enable cost-savings to the extent additional investigations are unnecessary. 

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.

March 22, 2020

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 also Winter 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.