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.