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.
Contractors may also have recourse when the government takes an action or fails to take an action which ultimately impacts the contractor's ability to perform, such as denying a contractor the ability to deliver goods to a facility that is under access restrictions. Fixed-price contracts for supplies (other than commercial or modified commercial items) may include FAR 52.242-17 Government Delay of Work. If included in the contract, this clause permits a contractor to seek an adjustment to the contract (excluding profit) for any increase in the cost of performance of the contract caused by the government's delay or interruption. Specifically, the clause provides contractual relief when delays are by acts of the contracting officer that are not expressly or impliedly authorized, or by the contracting officer's failure to act within the time specified in this contract, or within a reasonable time, if not specified. FAR 52.242-17(a). In such cases, the contractor must submit a claim as soon as practicable, but not later than the last day of final payment under the contract. FAR 52.242-17(b)(2).
Even if a prime contract or subcontract does not expressly include FAR 52.249-14 or 52.242-17, contractors may still be able to seek either an extension to the delivery schedule or a change order to reflect increased costs resulting from impacts from COVID-19. For example, if a fixed-price construction or architect-engineer contract includes FAR 52.242-14 Suspension of Work, and if the contracting officer suspends, delays, or interrupts the performance of all or a portion of the work under the contract for an "unreasonable period of time," a contractor may seek an equitable adjustment to the contract for "any increase in the cost of performance (excluding profit) necessarily caused by the unreasonable suspension, delay, or interruption." FAR 52.242-14(b). Under both 52.242-14 and 52.242-17, the contractor must notify the government within 20 days of the incurrence of costs resulting from the government's action or failure to act to have the ability to submit a claim. Once proper notice has been provided, a contractor must submit a claim as soon as practicable, but not later than the last day of final payment under the contract. FAR 52.242-14(c).
Likewise, where contract for supplies, services, or research and development includes FAR 52.242-15 Stop Work Order, and the government issues a stop work order for all or a portion of the work under the contract, the contractor may seek an equitable adjustment either to the delivery schedule or contract price, or both, for "an increase in the time required for, or the Contractor's cost properly allocable to, the performance of any part of this contract." FAR 52.242-15(b). In this situation, the contractor must submit its request within 30 days after the end of the period of work stoppage, and before the final payment under this contract. Id. If the stop work order ultimately results in a termination for the government's convenience, the contracting officer shall allow reasonable costs resulting from the stop work order in its termination settlement. Similarly, under a termination for convenience, under FAR 52.212-4, a contractor may recover a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges the contractor can demonstrate to the satisfaction of the government, using its standard record keeping system, have resulted from the termination.
Contractors should also be aware that they can proactively seek modifications to their contract if the impacts associated with COVID-19 necessitate changes to the contract. Contractors should review their contracts to determine which of the following change clauses apply. For fixed-price and cost-reimbursement contracts, the contracting officer may order changes to the work specifications, method of shipment, or place of delivery. See FAR 52.243-1 Changes-Fixed Price; FAR 52.243-2 Changes-Cost Reimbursement. The ability to have the contract changed will provide flexibility to address the impacts of COVID-19. For fixed-price contracts, contractors need to be aware that they may seek an equitable adjustment, within 30 days after receipt of the written order, to the contract price, delivery schedule, or both. FAR 52.243-1. For cost-reimbursement contracts, contractors may seek an equitable adjustment, within 30 days from receipt of the government's order, to the estimated cost, delivery, or completion schedule, or both; the amount of any fixed fee, or other affected terms and conditions. FAR 52.243-2. For time-and-materials and labor-hours contracts that contain FAR 52.243-3 Changes-Time and Materials or Labor Hours, the contracting officer may order changes to the services to be performed, time of performance, place of performance, specifications, method of shipment, place of delivery, or amount of government-furnished property. Contractors may seek an equitable adjustment based on these changes, within 30 days from receipt of the written order, to the ceiling price, hourly rates, delivery schedule, or other affected terms. Changes under construction contracts are made pursuant to FAR 52.243-4 and 52.243-5. Finally, while typically suspension, stop work, or change orders are issued in writing by the contracting officer, contractors may be able to assert that a constructive change to their contract has been made orally in some instances and obtain relief.
Supply chain impacts
Contractors should also be vigilant about impacts to their supply chain resulting from the COVID-19 pandemic. If the government is not inclined to grant relief, the contractor may find itself in a situation where it must perform, even if subcontractors and suppliers cannot fulfill their contractual obligations because of disruptions to the supply chain. Accordingly, the contractor must consider what alternative sources are available to meet contract requirements, as well as what obligations it has to its original subcontractor or supplier, should there be a need to utilize an alternative source. Alternative sources must comply with all mandatory government regulations, including, but not limited to, those related to counterfeit parts. See, e.g., FAR 52.246-26, DFARS 252.246-7007. Likewise, the use of alternative sources may require government notice and approval, and contractors may be obliged to provide notice to their original subcontractors and suppliers if they utilize other sources to meet their needs. Contractors will also need to consider the impact on subcontractor costs or prices and schedules. If the contactor has flowed the applicable FAR clauses discussed in this client alert down to its subcontractor(s), many of these issues can be addressed through these clauses. However, now is the time for contractors to review potential supply chain disruptions and look at their subcontracts, just as they are reviewing their contracts with the government, to get out ahead of these issues. In the event contractors have already felt the impact of supply chain disruptions resulting from COVID-19, or anticipate likely delay resulting from disruptions in their supply chain, contractors are advised to address this issue with the contracting officer, prime, or higher-tier subcontractor as early as practicable to address concerns and reach an agreeable work-around.
Contractor employee impacts
Reed Smith has established a Novel Coronavirus Response Team that is tasked with providing the firm with access to the most accurate and up-to-date information about COVID-19. Additionally, Reed Smith attorneys have published a number of alerts in recent days, covering topics of vital importance to our clients and the broader network and community. For the reader's convenience, some of these alerts are linked below. However, for contractors that may be grappling with the impacts that COVID-19 will have on its employees and personnel operations, we recommend focusing on a few areas under the human resources policies and procedures umbrella. Contractors should consider reviewing applicable human resources policies to ensure that they have adequately addressed matters such as the use of sick leave, availability (if applicable) of extended leave, telework and remote work, and travel reporting requirements (if imposed). It is beyond doubt that employees will be looking for guidance regarding these matters going forward, and a lack of clarity in any of these areas can contribute to corporate disruptions. If there are gaps in any of the policies and procedures in these areas, now is the time to update or revise and publish them so that employees are aware of the expectations of the company going forward. Please visit Reed Smith's Coronavirus (COVID-19) Resource Center for published guidance related to COVID-19, including information about employment matters.
Finally, to stay up to date about the spread of COVID-19 and its related impacts, the amount of information available from various sources may be overwhelming. Nevertheless, there are a number of online sources where the COVID-19 authorities are sharing information regularly, and we have links to some of them below.
The Centers for Disease Control and Prevention (CDC) is the leading national public health institute of the United States. The CDC is updating the public daily regarding COVID-19. Information can be found at cdc.gov.
The World Health Organization (WHO) is an agency of the United Nations that is concerned with world public health. The WHO has a website devoted to regular updates regarding the global impact of COVID-19. Information can be found at who.int.
The Department of Labor has established a website dedicated to providing information for workers and employers about the evolving COVID-19 pandemic. Information can be found at dol.gov.
The Department of Defense (DOD) is working closely with the Department of Health and Human Services and the State Department to provide support in dealing with the COVID-19 pandemic, and has established a website with information for the public. Information can be found at defense.gov.
The DOD has also established a webpage dedicated to COVID-19 guidance specific to the Pentagon Reservation and other DOD facilities in the National Capital Region. This information is also applicable to civilian employees and contractors that do business with the DOD. Information can be found at whs.mil.
In closing, Reed Smith will continue to monitor the situation and provide timely updates to our clients as the COVID-19 pandemic evolves. Should you have any questions regarding the information contained in this client alert, please contact any of the authors of the alert, or the Reed Smith attorney with whom you regularly work.
Client Alert 2020-093