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COVID-19 – Addressing the Risks of Disease Delays and Disruptions Under Federal Contracts

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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.