Borrower Beware Series - Part VI: Considerations for Government Contractors and Federal Grantees Seeking Relief Under the CARES Act

For additional guidance, please refer to Steptoe's COVID-19 Resource Center.

Previous installments in the Borrower Beware Series highlighted how the CARES Act has allocated hundreds of billions of dollars in relief funding for businesses impacted by the COVID-19 pandemic. 

The series (found here and here) also reviewed the CARES Act oversight and enforcement mechanisms, which are designed to ensure funds are properly obtained and spent, and the potential exposure to criminal and civil liability facing CARES Act program participants. 

This installment examines the unique compliance risks government contractors face in pursuing relief under the CARES Act.

The CARES Act offers much needed relief to businesses, including government contractors and federal grant recipients. However, it is critical that businesses pay close attention to the compliance risks associated with applying for and securing this relief. Government contractors and grantees in particular face unique risks, as noncompliance can result in harsher and more impactful consequences. 

Suspension and Debarment Risks

As discussed in Part I and Part II of our series, the CARES Act provides for a robust, multifaceted enforcement system designed to detect fraud, waste, and mismanagement in connection with the distribution and use of CARES Act relief. Moreover, the Department of Justice can be expected to use its key enforcement tool – the False Claims Act to investigate and prosecute CARES Act related fraud. 

In addition to punitive enforcement mechanisms, the federal government also has at its disposal administrative exclusion remedies to ensure that it only does business with entities and persons it deems "presently responsible." Specifically, federal regulation affords federal agencies the authority to suspend (temporarily disqualify) or debar (disqualify for a set time period) persons or entities that engage in dishonest, unethical, or illegal conduct. When a contractor is suspended or debarred, the contractor is precluded from participating in government contracts and subcontracts, loans, grants and other federal assistance programs.^[1] The purpose of the government’s suspension and debarment authority is not to "punish" contractors or recipients of federal funds for past misconduct, but to protect government and taxpayer interests. 

Suspensions and debarments have a government-wide effect. As a result, for a contractor whose business is largely or perhaps solely dependent on federal contract work, a debarment can essentially amount to a death sentence. A debarment can also impact a contractor's commercial business, as businesses often consult government exclusion lists when considering entering into certain business relationships. To avoid the costs associated with, and the harsh consequences that stem from, suspension and debarment actions, government contractors must be particularly mindful of compliance considerations when pursuing relief under the CARES Act. 

Causes of Debarment 

Federal regulation sets forth the circumstances in which a federal agency may debar a contractor from federal contracting or other federal programs. If the debarment is not based on a conviction or a civil judgment, the government must prove the basis for debarment by a preponderance of the evidence.^[2] Generally, the following offenses could provide the basis for debarment: 

• Where the contractor has been convicted of or found civilly liable for the commission of fraud, fraud related offenses, or other criminal offenses, or any other offenses indicating a lack of business integrity or honesty that seriously and directly affects the contractor’s present responsibility. 
• Where the government determines, by a preponderance of the evidence, that the contractor has committed a serious violation of the material terms of a contract, subcontract, or other transaction. 
• Where the government determines, by a preponderance of the evidence, that there exists any other cause so serious or compelling a nature that it affects the present responsibility of the contractor.^[3] 

In a debarment proceeding, when the government has met its burden of establishing the basis for a debarment, the burden then shifts to the contractor to establish that it is "presently responsible." A contractor can establish its present responsibility by implementing certain compliance measures, terminating bad actors responsible for past misconduct, or undergoing training related to business integrity and ethics. 

If the government ultimately determines that the contractor is not "presently responsible" and debars the contractor, the debarment is imposed for a set period of time, which is decided on a case-by-case basis, but should be "commensurate with the seriousness of the cause(s)" for debarment.^[4] Typically, a debarment does not exceed three years, but could be longer if the government determines that a longer period is in the government’s interests. 

Causes of Suspension 

Prior to issuing a notice of proposed debarment, the government may also suspend a contractor (temporarily disqualify) when it has "adequate evidence" to suspect that a contractor has committed an offense that would be grounds for debarment, and immediate action is necessary to protect the government’s interests.^[5] An indictment constitutes adequate evidence that a basis for suspension exists.^[6] A suspension can last anywhere from 12 to 18 months, and possibly longer if legal proceedings have been initiated. A suspension typically lasts for the duration of the government's investigation into the alleged offense(s). 

Unique CARES Act Considerations for Contractors

Because government contractors operate in a highly regulated environment and compliance issues can result in particularly devastating consequences, many contractors appreciate the importance of implementing robust compliance programs. However, emergencies, such as those caused by a global pandemic, can put stress on even the most robust compliance programs. As a result, to avoid the long-term pain associated with noncompliance that can come in the form of litigation costs, monetary penalties, and lost contracting opportunities, in seeking relief under the CARES Act, contractors and grantees should pay particular attention to certain unique compliance risks. 

Below are some aspects of the CARES Act to which contractors should pay particular attention: 

Paycheck Protection Program Eligibility: As discussed in Part III of our series, the Paycheck Protection Program (PPP) established by the CARES Act expands the definition of "small business," such that entities not considered small under the Small Business Administration's current size standards may still be eligible for small business loans. As a result, contractors that have historically been considered large businesses may be eligible to participate in the PPP. However, these contractors may be less familiar with certain small business regulations that govern their eligibility – for example, how to count the total number of employees or whether to include the employees of affiliates. Contractors should carefully assess whether they meet the PPP's size requirements prior to applying. 

Certification of Economic Uncertainty: The PPP also requires applicants to certify that current economic uncertainty makes the loan request necessary to support their ongoing business operations. Although government contractors will certainly not be immune to the economic impact of COVID-19, many contractors will be able to continue and, in some cases, required to continue business operations. For example, contractors that perform essential functions, such as activities that support critical manufacturing or support for the defense industrial base, are excepted from most state and local stay-at-home or shelter-in-place orders. As a result, contractors that can continue operations should carefully document their need for the loan to support their applications. 

Section 3610, Federal Contractor Authority: The CARES Act provides a specific avenue for relief for contractors impacted by COVID-19 to recover certain labor costs. Implementing guidance from the Department of Defense (DoD) requires contractors to provide representations regarding any other relief claimed or received stemming from COVID-19, including an affirmation that the contractor has not or will not pursue reimbursement for the same costs accounted for under their request for relief under Section 3610. DoD specifically noted that contractors that obtain relief under the PPP should not seek relief under Section 3610. It is therefore crucial that contractors keep track of the various avenues of relief they pursue, the relief they secure, and ensure that they use the funds in accordance with the terms of the relief. 

Conclusion 

The CARES Act provides several lifelines for businesses, including government contractors, impacted by COVID-19. Ensuring that relief is timely sought and secured is likely the top priority for most businesses. However, the desire to urgently secure available relief should not outweigh compliance considerations. To avoid the harsh and lasting consequences associated with contractor noncompliance, it is crucial that even in the midst of a public health and economic emergency, contractors familiarize themselves with the obligations and requirements imposed by the specific relief they apply for and ensure that they have compliance functions in place to monitor their use of relief funds. 

[1] The Federal Acquisition Regulation (FAR), specifically FAR Part 9.4, governs suspension and debarment as it relates to "procurement" transactions – contracts and subcontracts. "Nonprocurement" transactions, such as loans, loan guarantees, grants, and cooperative agreements are governed by the Nonprocurement Common Rule codified at 2 C.F.R. Part 180. Exclusions under 2 CFR Part 180 and 48 CFR Part 9.4 have reciprocal effect, meaning if a federal agency excludes a person or entity from participating in nonprocurement transactions under 2 CFR part 180, that person or entity is also ineligible for federal procurement transactions and vice versa. See 2 C.F.R. § 180.140; 48 C.F.R. § 9.401. 

[2] See FAR 9.406-3(d)(3); 2 C.F.R. § 180.850. 

[3] FAR 9.406-2; 2 C.F.R. § 180.800. 

[4] FAR 9.406-4; 2 C.F.R. 180.865. 

[5] 2 C.F.R. § 180.700. 

[6] 2 C.F.R. § 180.700(a).