Overview
For additional guidance, please refer to Steptoe's COVID-19 Resource Center.
For 2020, the phrase "March Madness" takes on a different meaning. Instead of the NCAA basketball tournament, we are facing a national emergency due to COVID-19, as declared by President Trump on Friday March 13, 2020. Not only does COVID-19 present a serious public health crisis, but the nation's efforts to contain the virus are already having deleterious impacts on US businesses across a number of sectors.
Federal contractors and subcontractors are, of course, not immune from those adverse impacts, as their ability to successfully and timely perform will be adversely affected by a quarantined workforce, teleworking, decreased to non-existent trade and production, and other supply chain disruptions. To help federal contractors and subcontractors navigate these adverse impacts on contract performance, this advisory provides a summary of contractual remedies that might be available to address delays in, or changes to, contractual performance caused by the coronavirus outbreak.
Non-Monetary Remedies for Excusable Delays
Federal contracts may include clauses that provide a basis to excuse a failure to perform, or a delay in contract performance, arising from the COVID-19 public health emergency. Specifically, these clauses provide that a contractor will not be deemed in default of its contractual obligations where that failure "arises from causes beyond the control and without the fault or negligence of the Contractor." See FAR 52.249-14 (cost reimbursement and time & materials contracts), FAR 52.249-8 (fixed price contracts), and FAR 52.212-4 (commercial items). The enumerated list of excusable causes includes epidemics, quarantine restrictions, and acts of the government in its sovereign or contractual capacity. Delays resulting from COVID-19, which has been declared a public health emergency by US officials and the World Health Organization, are likely contemplated by the excusable causes for "epidemics" and "quarantine restrictions."
Although "sovereign acts" are not defined in the excusable delay clauses, the Sovereign Acts Doctrine – which is inherent in every government contract – considers "sovereign acts" as government actions directed at the public in general, including any act of the executive or legislative branches undertaken for the public good. Government acts directed at the contractor are acts of the government in its contractual capacity, which is also a permissible cause for excusable delays. See United States v. Winstar Corp., 518 U.S. 839, 896 (1996). In sum, current or future actions undertaken by the US government for the public good or directed at a specific contractor could form the basis for an excusable delay to contract performance. Thus, if contractual performance is disrupted or incomplete due to direct government acts, or actual or residual effects from COVID-19, then a contractor might be able to avoid a contract default through one of these excusable delay causes.
Although these clauses provide a basis for a contractor to seek a time extension for performance or to excuse delays, they do not entitle the contractor to receive additional compensation.[1] Further, the inclusion of excusable delay clauses does not provide a complete safe harbor for contractors struggling to satisfy their contractual obligations. Even if COVID-19 may fit within one of the listed excusable causes, this does not mean that the clause automatically applies. Contractors must provide written notice to the Contracting Officer as soon as it is reasonably possible after the commencement of any excusable delay. To obtain relief, contractors also must demonstrate, with contemporaneous documentation, how performance was adversely impacted, what additional (and reasonable) steps were taken to performand, and that delays were not attributable to another cause. See Crawford Dev. & Mfg. Co., ASBCA No. 17565, 74-2 B.C.A. ¶ 10,660 ("We are not convinced that the flu epidemic contributed materially to [contractor's] performance delay").
Compensable Remedies for Government-Caused Delays
As the circumstances surrounding the government’s response continue to evolve, Contracting Officers may seek to delay work by issuing stop-work orders or may otherwise suspend performance (either formally or informally). In those cases, contractors should consider if the contract includes the right to pursue a price adjustment for government-caused delays. Whether a delay is compensable depends upon "the cause of the delay, the nature of its impact on the contractor, and the contractual provisions, dealing with the compensation for delays." John Cibinic, Jr., et al., Administration of Government Contracts, Ch. 6, II. Compensable Delays (5th ed. 2006).
Contractors must play close attention to the instructions issued by Contracting Officers and the provisions in their contracts in order to understand their rights to be compensated for increased costs and to preserve their entitlement to recovery. As an initial matter, contractors should ensure that they immediately comply with the instructions contained in any stop or suspension order received, communicate those instructions to their subcontractors, and ensure their subcontractors’ compliance so as not to jeopardize any potential recovery.
Compensable delay is governed by several different FAR clauses. A contract's type dictates which provision applies, and thus the nature of relief available to the contractor. The relevant clauses are discussed below:
FAR 52.242-14, Suspension of Work (Construction Contracts) & FAR 52.242.17, Government Delay of Work (Supply or Services Contracts). Both of these clauses permit the Contracting Officer to order the contractor to suspend, delay, or interrupt contract work for the convenience of the government. Even in the absence of a formal order, Courts and Boards have found that a constructive suspension may arise where informal action (or non-action) by contracting officials is the cause of the suspension or delay. Under these clauses, the contractor may be entitled to a price adjustment (excluding profit) for government-caused suspensions or delays if contract performance was delayed for an unreasonable time and resulted in the contractor incurring increased costs of performance. In the absence of a formal suspension order, the contractor also must timely notify the Contracting Officer of the act or failure to act that is the basis for the contractor's delay claim.
FAR 52.242-15, Stop-Work Order (Supply or Services Contracts). This clause permits a Contracting Officer to require a contractor to stop all, or any part, of the contract work for a period of 90 days (and for any further period to which the parties may agree). The Stop-Work Order does not include an unreasonable delay limitation, and entitles the contractor to seek an "equitable adjustment" (including profits) in the event that the stop-work order results in "an increase in time required for, or in the Contractor's cost properly allocable to, the performance of any part of this contract." Contractors are required to assert their rights to an adjustment within 30 days after the end of the work stoppage period.
Remedies for Changes in Performance
Contractors also should consider if one of the FAR’s standard "Changes" clause is available to provide relief to recover increased performance costs or to extend the time for contract performance (or both). See, e.g., FAR 52.243-1 (Fixed-Price); FAR 52.243-2 (Cost Reimbursement); FAR 52.243-3 (Time-and-Materials); FAR 52.243-4 (Construction). Those clauses grant the government the unilateral right to make "changes" to the contract "within the general scope of the contract." Depending the clause, these can be changes to the method, manner, or description of services to be performed, time of performance, or place of performance. The clauses also entitle the contractor to pursue an equitable adjustment where such government-ordered changes cause increases in performance costs or time.
Relief under the Changes clause is not limited to formal change orders. Courts and Boards have long recognized that a contractor is entitled to relief under the doctrine of constructive change for increased costs or performance time due to informal orders or other actions by the government. See, e.g., Pan Artic Corp., 77-1 BCA ¶ 12,514 (Apr. 22, 1977) (constructive change where government altered manner of performance which prevented contractor from realizing expected savings that were already reflected in price to government).
Unlike the excusable delay clauses, the Changes clause does not specifically reference "sovereign acts" by the government. Therefore, for the Changes clause to apply, contractors should consider whether there is a contract-specific act or direction by contracting officials that caused an increase in the cost or time of performance. Alternatively, contractors should consider whether other terms of the contract provide a basis to argue that the government agreed to be liable for the consequences of its sovereign acts.
Contractors also should consider certain limitations on the government's right to unilaterally direct contract changes. The Changes clause, for example, applies only to changes within the scope of the contract and does not permit "cardinal changes," such as attempts by the government to change the nature of the work so much that it is beyond the scope of the contract. Contracts for commercial items also require mutual agreement on changes, providing that changes "may be made only by written agreement of the parties." FAR 52.212-4(c).
Conclusion
As contractors navigate the potential performance impacts caused by the national response to COVID-19, the following steps may assist in evaluating and preserving potential contractual remedies:
- Documentation: Because contractors must demonstrate entitlement to relief under these clauses, contractors and subcontractors should establish measures to identify, compile, and preserve relevant evidence, including the tracking of specific cost or performance impacts, and the steps taken by the contractor to address the adverse impact. Documentation should also include company policies implemented in response to COVID-19 that may have affected performance – e.g., teleworking, severance, reductions in hours, liberal leave, etc.
- Timely Notice: Contractors should emphasize early identification of potential adverse impacts (delays, suspensions and changes) and provide the government timely notice of the potential for seeking relief under these clauses, to include compliance with specific timelines for providing written notice of a potential claim, as identified in the relevant clause.
- Minimize Adverse Past Performance: In addition to the obvious benefits of potential relief under these clauses, the tracking of adverse impacts and timely notice of those impacts may be helpful to demonstrate that the contractor is not the cause of any performance problems (or at least not the sole cause). At a minimum, this context may soften the blow of adverse past performance reviews.
- Subcontract terms: Consider whether or not the prime contract flowed down these FAR clauses and what other contractual remedies might be available for addressing downstream impacts caused by the COVID-19.
- Be Proactive: Depending on the specific facts, contractors should consider proactively addressing potential issues with contracting officers. Contractors are often in the best position to identify and propose solutions to minimize the adverse effects of COVID-19 and government contracts can be mutually modified (within reason).
As always, Steptoe & Johnson LLP is available to assist with all of your Government Contracts related needs. Stay safe everyone!
[1] For some cost-plus-incentive-fee contracts, the applicability of an excusable cause for delay could provide monetary relief in calculating the incentive fee. To determine the payable fee based on comparing the actual “total allowable cost” to the initial “target cost,” FAR 52.216-10(e)(4)(i) provides that the “total allowable cost” does not include allowable costs arising out of, inter alia, “[a]ny of the causes covered by the Excusable Delays clause to the extent that they are beyond the control and without the fault or negligence of the Contractor or any subcontractor.”
