Government Contracts Considerations Due to Coronavirus

20 March 2020 Coronavirus Resource Center Blog
Authors: David T. Ralston Jr Frank S. Murray Jr Erin L. Toomey Julia Di Vito

Government contractors should start now to develop a response action plan addressed at mitigating risk and preparing to deal with the fallout from coronavirus impacts on existing contracts with the U.S. Government.  An effective plan should include establishing an interdisciplinary crisis response team, drawing personnel from purchasing, operations, quality, finance, and legal, to identify, assess, and manage the risk presented by coronavirus containment/mitigation protocols or changes in funding/production priorities.  Below we provide an outline of government contracting issues for the team to consider.

The federal government is already making changes to contracts due to restrictions on social interactions at government work sites, or imposing requirements on contractors to telework to mitigate the risk of the spread of coronavirus.  At the same time, certain “ratings” applied to U.S. Department of Defense contracts may require contractors to prioritize fulfilment of those orders over other government and commercial contracts, particularly now that the President has invoked the Defense Production Act in response to the COVID-19 pandemic. In other cases, the federal government’s near-term funding priorities may have changed as a result of the coronavirus, causing the government to decline to exercise option periods on contracts or to divert funding anticipated for one program to another requirement deemed to be more pressing, leading to a premature termination of the contract.  

Federal government contractors should take the following steps to identify and mitigate the risks of coronavirus-related impacts on their contract performance:

Comply with Defense Production Act Priority Ratings

The Defense Production Act allows the government to assign priorities to certain government contracts through the Defense Priorities and Allocations Systems (“DPAS”) Program, and DPAS-rated contracts must be given priority over unrated government contracts and commercial contracts.  President Trump announced an intent to use the Defense Production Act to make medical supplies more readily available, and many existing government contracts already had been assigned DPAS-ratings.  Contractors with DPAS-rated contracts should familiarize themselves with the applicable priorities and the corresponding obligations for meeting those requirements to ensure that all DPAS-rated contracts will be fulfilled on time and in accordance with their level of priority, despite interruptions to the supply chain or labor.  In particular, contractors should make sure such DPAS-ratings are included in lower-tier subcontracts and purchase orders, as applicable.  If a contractor can fulfill a DPAS-rated contract using its existing inventory, it must use that inventory to fulfill the DPAS-rated contract before using that inventory for an unrated contract.  If a contractor with a DPAS-rated contract will be unable to meet the designated delivery date for a rated order, the contractor must immediately notify the government Contracting Officer or higher-tier customer, as appropriate, give the reasons for the delay, and advise of a new shipment or performance date.  This notification should be made in writing or, if made verbally, written (hard copy) or electronic confirmation must be provided within 1 working day of the verbal notice.  Contractors having difficulty obtaining supplies to fill DPAS-rated contracts can also seek special priorities assistance from the government through the DPAS Program. 

Respond to Government Direction to Telework

Government contractors may hear from their government customers that contractor personnel regularly required to work at government sites should not come to the government sites.  Before those contractor employees go to work at the contractor’s facility or work from home, be sure to review the government contract to confirm such off-site work is permitted, and that all applicable information technology and cybersecurity requirements can be met during remote work.  If the contract does not permit remote work, the contractor should contact the government Contracting Officer or a higher-tier customer, as appropriate, to determine how to proceed, and preferably, put the request in writing or confirm a verbal request in writing.  Under the Suspension of Work clause (FAR 52.242-14), if the performance of a contract is, for an unreasonable period of time, suspended, delayed, or interrupted (1) by an act of the Contracting Officer in the administration of this contract, or (2) by the Contracting Officer's failure to act within the time specified in the contract (or within a reasonable time if not specified), the contractor may be entitled to a price adjustment for increased costs due to the suspension, delay, or interruption.  Contractors will want to position themselves to be able to assert price adjustment requests for delays or suspensions of work attributable to social distancing directives or other coronavirus mitigation protocols imposed by the government.  Therefore, it is important to build a written record of the government actions that caused the suspension, delay or interruption, and the cost impact on the contractor.  Notice of such suspension, delay or interruption should be provided to the Contracting Officer immediately, and a request for an adjustment of the contract price or schedule must be submitted as soon as practicable after the termination of the suspension, delay, or interruption

Notify the Government of Excusable Delays

If a government contractor believes its contract performance will be delayed due to coronavirus impacts, the contractor should first determine whether such a delay is considered to be an excusable delay.  Many government contracts include FAR 52.249-14, Excusable Delays, or FAR 52.249-8, Default (Fixed-Price Supply and Service), which exempt delays or performance failures from a finding of contractor default if they are due to events beyond the control of the contractor, including specifically “acts of the Government in either its sovereign or contractual capacity” (which would likely include government-mandated coronavirus mitigation or containment measures), “epidemics,” and “quarantine restrictions.”  If a contractor finds that coronavirus containment or mitigation measures or supply chain disruptions are delaying its ability to meet its performance obligations, the contractor should notify the government Contracting Officer in writing of the delay and its linkage to the COVID-19 pandemic as soon as possible, to avoid any findings that the contractor is in default

Track Costs Incurred During Stop-Work Period

If the government Contracting Officer has issued a formal stop-work order, a contractor should track its costs incurred due to the stop work order.  Once the stop-work order is lifted, a contractor may be entitled to an adjustment to the contract price and/or delivery schedule due to the impact of the stop-work order, but a proposal for such an adjustment is due within 30 days after the stop-work order is lifted.  As a result, it is critical to track costs in real-time to be able to submit a timely request for a price adjustment.

Prepare to Negotiate Termination for Convenience Settlement Proposals

If the government terminates a government contract for the government’s convenience, the contractor should be prepared to submit a termination settlement proposal to recover any costs incurred as a result of the termination.  The appropriate costs to seek will depend on the specific contract, but the contractor should ensure it tracks and documents all costs associated with or resulting from a termination for convenience, including costs for uncompensated work performed prior to the termination, to ensure it can maximize recovery of its requested costs.  The contractor should also be sure to notify its subcontractors of the termination for convenience and require its subcontractors to report their termination costs promptly for inclusion with the contractor’s settlement proposal.  The contractor will not be able to recover any lost profits for work not completed prior to the termination.

Bid Protests

While government procurements may slow down while government employees are teleworking, for procurements that proceed, keep in mind the strict timeframes for submitting requests for mandatory debriefings and bid protest deadlines. 

In summary, it is important for government contractors to take additional steps now in order to mitigate their risk of suffering negative impacts from the coronavirus outbreak, and if those risks are realized, to develop a written record to support requests for financial relief. Contractors should communicate with their Contracting Officers early and often, and memorialize such discussions in writing, in an effort to prevent the government from taking adverse action against the contractor.  Keep in mind that only the Contracting Officer has the ability to issue binding direction to the contractor, except as otherwise delegated to the Administrative Contracting Officer in the contract. For more information about recommended steps, please contact your Foley relationship partner or one of the attorneys below. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization

Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form.

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