Defense Department Guidance on COVID-19-Related Costs for Government Contractors
Date: August 20, 2020
The Department of Defense (DoD), through its office of Defense Pricing and Contracting (DPC), released new guidance in July concerning COVID-19-related impacts and costs for government contractors. The guidance concerns potential avenues of relief, in both cost reimbursement and fixed-price contractual settings, in addition to the possible recovery under Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
DoD’s July Guidance on COVID-19 Costs
DoD’s guidance recognizes that the government and industry have taken necessary actions in response to COVID-19, including maximizing the use of telework; using personal protective equipment (PPE) and special cleaning regimens to reduce exposure; and realigning shifts to practice social distancing. According to the guidance, DoD contractors will likely continue to incur delays and costs associated with their response to the COVID-19 pandemic, but to date, no funds have been appropriated specifically for reimbursement of these costs.
As stated in the guidance, DFARS Class Deviation 2020-O0013 – CARES Act Section 3610 Implementation (effective April 8, 2020) provides a means for affected contractors to request reimbursement of costs incurred for paid leave granted to their employees during the COVID-19 pandemic. Under Section 3610, contracting officers may modify contracts to reimburse up to 40 hours per week of paid leave costs, subject to the availability of funds.
The guidance concerns circumstances that may not be addressed by Section 3610, including reimbursement for other types of costs related to COVID-19, in both cost and fixed-price contractual settings. The guidance notes that contractors “may face further unplanned costs due to COVID-19, such as those related to providing PPE to employees, additional cleaning of work areas, changes to workspaces to accommodate social distancing, and delays in delivering and/or receiving purchased materials.”
Further, “where allowable and allocable, these costs may be recovered on cost-reimbursement and incentive contracts.”
The guidance notes that DoD contracts contain clauses to excuse performance delays not due to the contractor’s fault or negligence, including Federal Acquisition Regulation (FAR) 52.249-14, Excusable Delays; FAR 52.212-4, Contract Terms and Conditions – Commercial Contracts; and various termination clauses. Therefore, in the event of delays caused by COVID-19, a contractor may be entitled to relief from delivery requirements. However, as stated by the DoD guidance, “there is no statutory, regulatory, or contractual entitlement to an adjustment to contract price for schedule delays that are attributable to excusable delays.”
The guidance recognizes that, in contrast to performance under cost-type contracts, “contractors under fixed-price contracts generally must bear the risk of cost increases, including those due to COVID-19 (e.g., costs associated with PPE, social distancing, and supplier delays and inefficiencies).”
However, the DoD also recognizes that the government has discretion to grant relief even under fixed-price contracts:
Contracting Officers are granted discretion, subject to the availability of funds, to modify contracts (e.g., under FAR 52.243-1, Changes Fixed Price, and its applicable alternatives) to reflect changes to the Government’s needs as a result of COVID-19. Any resulting changes in contract price must be substantiated by the contractor and determined by the Contracting Officer to be required to perform the contract as modified, and must be driven exclusively by the change(s) directed by the Government.
In making such modifications, Contracting Officers must be mindful that they are stewards of the public funds. They must only execute contract actions that result in fair and reasonable prices for the supplies or services provided and are determined to be in the best interests of the Government.
The guidance also cautions that costs that would be associated with certain government-directed change modifications may be above current available funding, and in those cases, contracting officers may not direct a change or execute a modification that results in an increase to the contract price unless the DoD receives additional appropriations. Modifications are recommended to be contained in a separate contract line item for auditing purposes.
As stated in the guidance, the COVID-19 pandemic has presented historic and unprecedented challenges for DoD, its mission and its people. “These challenges require us to use all of our experience and skill to find innovative solutions to both protect Government interests and ensure the continued health of the Defense Industrial Base to support our mission.”
DoD Guidance on Section 3610
Section 3610 of the CARES Act allows agencies to reimburse paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, including to protect the life and safety of government and contractor personnel, during the public health emergency declared for COVID-19 on January 31, 2020, through September 30, 2020 (unless extended by Congress).
Industry groups have requested that Congress extend the period for reimbursement in the next stimulus law, although Congress has not yet reached an agreement on the pending bills. The Senate’s version has designated $10.8 billion for Section 3610 relief and DoD has asked Congress to expand this relief, including to other COVID-related costs.
The existing statutory authority allows agencies to modify a contract or agreement to reimburse this paid leave, subject to the availability of funds, at the minimum applicable contract billing rates, not to exceed an average of 40 hours per week. This authority applies only to a contractor whose employees or subcontractors could not perform work on a site that has been approved by the federal government, including a federally owned or leased facility or site, due to facility closures or other restrictions, and who could not telework because their job duties could not be performed remotely during the public health emergency.
DoD announced in May that it was working on a draft internal document to provide guidance for Section 3610 reimbursement. DPC released a memorandum concerning the “DoD Process for Section 3610 Reimbursement.” According to the May 1 memorandum, DoD “must now move rapidly to provide overarching implementation guidance to our workforce.” As stated by DPC:
This guidance will address the reimbursement process from requesting the contracting officer’s determination of an “affected contractor” to providing a checklist to guide collection, and evaluation of costs from the industry partner seeking reimbursement within the parameters of the section and the class deviation. This guidance must also provide the flexibility our contracting professionals need to resolve the numerous reimbursement requests expected under Section 3610 at the contract, business unit or the corporate level.
DPC announced that it was coordinating a “Department-wide, overarching guidance document for our workforce” and that DPC would release a “Draft DoD Process for Section 3610 Reimbursement.” DPC has posted the draft document to the Defense Acquisition Regulations System (DARS) website and industry partners have provided input. The DoD draft Implementation Guidance, as well as a draft “DoD Checklist for Submission of Section 3610 Reimbursement Requests” and related guidance, are available on the DARS website here. As of mid-August, DoD and the Office of Management and Budget (OMB) were in the process of finalizing the guidance.
At the end of July, the Defense Contract Auditing Agency (DCAA) posted its answers to frequently asked questions concerning Section 3610. DCAA coordinated with the Defense Contract Management Agency, the Defense Pricing and Contracting Office and the Department of Defense Comptroller before issuing the guidance. The OMB also issued additional guidance on July 14, with its own answers to FAQs, available here.
DoD Class Deviation on Section 3610
In April, DoD issued a memorandum and class deviation to the Defense Federal Acquisition Regulation Supplement (DFARS) for CARES Act Section 3610 Implementation. The class deviation to FAR Part 31 and DFARS Part 231 was effective immediately and authorized contracting officers to use the new DFARS clause, 231.205-79, as a framework for implementation of Section 3610.
The April 8 memorandum issuing the class deviation further pointed out that contracting officers must avoid duplication of payments and that contractors are responsible for supporting any claimed costs, including claimed leave costs for their employees, with appropriate documentation, and for identifying credits that may reduce reimbursement under Section 3610. In addition, representations from contractors may be required.
A related guidance memorandum on implementation of section 3610 was issued on April 9 by DPC. According to this DPC guidance, “it is critical that the contract and supporting documentation clearly identify these costs for reimbursement paid to contractors under section 3610 authority, as well as how such costs are identified, segregated, recorded, invoiced, and reimbursed.”
Further, implementation of Section 3610 will vary based on contract type, and the April 9 memorandum provided separate guidance for fixed price contracts, cost reimbursement contracts, and time and materials or labor hour contracts. The memorandum also discussed the role of the DCAA and contracting officers’ representatives.
DPC has also released updated answers to Frequently Asked Questions with further guidance, available here.
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