March 17, 2020
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.