Reed Smith Client Alerts

On March 11, 2020, the World Health Organization (WHO) officially declared that the novel coronavirus (COVID-19) should be characterized as a "pandemic" because there are now 118,000 cases of the virus in 114 countries, and nearly 4,300 people who have been infected have lost their lives. As this virus spreads around the world, affecting not only individuals but also the global supply chain, the U.S. government and businesses are facing unique and difficult challenges related to fulfilling and carrying out existing contractual obligations. In fact, government contractors are already seeing customer directives related to COVID-19 that are affecting their ability to meet contractual deadlines and causing impacts to their supply chain. If you and your company are asking yourself what recourse you will have, this client alert summarizes some of the available options to be considered.

Authors: Holly A. Roth Liza V. Craig Elizabeth Leavy William T. Kirkwood

Contract performance impacts

As the U.S. government and contractors alike respond to the spread of COVID-19, both prime and subcontractors are likely to experience impacts to their ability to perform certain aspects of their government contracts. These impacts may result from limited or restricted access to government facilities, employee illness or mandatory quarantine, or supply chain disruption and delays. To prepare for these issues, contractors should review their current contracts to determine whether contract clauses have been included which may provide relief. In particular, the following Federal Acquisition Regulations (FAR) clauses may prove useful to contractors (or to subcontractors, if flowed down in subcontracts) that are impacted by COVID-19.

First, contractors may have recourse to seek an equitable adjustment if the delay to contract performance is beyond their control, such as when contractors working on-site at a government facility are prohibited from accessing the job site because of facility restrictions imposed as a result of COVID-19. Cost-reimbursement contracts for supplies, services, construction, and research and development, as well as time-and-materials or labor-hour contracts may include FAR 52.249-14 Excusable Delays. When this clause is included in a government contract, a contractor that fails to perform will not be considered to be in default if "the failure arises from causes beyond the control and without the fault or negligence of the contractor." FAR 52.249-14(a). The clause identifies several potential examples of such causes, including "acts of God," "epidemics," and "quarantine restrictions." Id. Additionally, if the contractor's failure to perform results from a subcontractor who similarly failed to perform without the fault or negligence of the prime or subcontractor, the contractor will not be considered to be in default. FAR 52.249-14(b). Contractors may, however, be required to source supplies or services from a replacement vendor if they can be obtained from other sources, and the contracting officer may order the contractor, in writing, to do so. FAR 52.249-14(b)(1)-(3). It is important that contractors show not only the existence of the epidemic (and the WHO's declaration of a pandemic should satisfy this first prong), but that it contributed materially to the delay in performance. Appeal of Asa L. Shipman's Son's Ltd., GPOBCA No. 06-95 (Aug. 29, 1995). It further must be the sole cause of the delay, not merely a contributing cause. Id. Importantly, if a contractor's delay is found to be excusable, the contractor may seek a revision to the delivery schedule from the contracting officer pursuant to FAR 52.249-14(c).

In addition, for contracts for commercial items, contractors should look at FAR 52.212-4(f), which similarly covers excusable delays. Under this clause, contractors are not liable for default resulting from "an occurrence beyond the reasonable control of the Contractor and without its fault or negligence." FAR 52.212-4(f). The provision similarly calls out "epidemics" and "quarantine restrictions" as justifications for the excusable delay. The provision also denies, as an additional excusable basis, the "delays of common carriers" which may be useful in the event of delays resulting from supply chains affected by the coronavirus. It is important to note, however, that this clause requires the contractor to take affirmative action to notify the contracting officer of the occurrence of such a delay and when the delay has ended. The other government contracts clauses discussed do not contain this notification requirement.