Contractors Should Prepare for the Coronavirus
With the novel coronavirus (COVID-19) spreading outside of China at an ever-increasing rate, government contractors should prepare for possible service and payment interruptions. In addition, the administration is considering utilizing the Defense Production Act (DPA) in order to marshal resources needed to fight the virus. This blog will explore these potential challenges below.
Interruptions to Contract Performance
Even though the disease has been slow to spread in the United States thus far, the coronavirus has caused lockdowns and quarantines across Asia and is now in more than 50 countries around the world. Many impacted countries have contained workers performing on government contracts.
Contractors often face challenges when there is unscheduled interruptions of contract performance, no matter whether the cause is a weather event, a government shutdown or a potential pandemic. Here, the challenges are multifaceted. First, contractors are increasingly reliant on a global supply chain, and many companies are facing issues sourcing products from countries where the virus (or fear of the virus) has interrupted manufacturing patterns. Second, in areas of the world where the disease is spreading, contracting agencies may shut down workplaces, effectively prohibiting a contractor to perform. Third, contractors must consider the health of their employees and make decisions that could risk revenue or performance of a contract.
A few frequently asked questions regarding these issues are below.
What happens if supplies/services are unavailable because of the virus?
For all of the potential performance interruptions, contractors should review their contracts to see what, if any, latitude for performance delays are available. While most commercial contracts have a force majeure clause that excuses performance under extreme circumstances,including pandemics, government contracts do not typically utilize this kind of commercial language. Instead, contracts usually contain Federal Acquisition Regulation (FAR) and other agency-specific regulations. Here, many, but not all, government contracts contain the government's version of a force majeure, FAR 52.249-14 - Excusable Delays. This FAR clause, if inserted into the contract, provides that delays may be excusable if not at the fault of the contractor. Such circumstances include:
if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance, the failure to perform must be beyond the control and without the fault or negligence of the Contractor.
Notably, the government still reserves the right to terminate the contract if there is a delay; it is just that the termination may be for convenience instead of default.
Further, all commercial contracts should contain FAR 52.212-4(f), which provides that:
Excusable delays. The Contractor shall be liable for default unless nonperformance is caused by an occurrence beyond the reasonable control of the Contractor and without its fault or negligence such as, acts of God or the public enemy, acts of the Government in either its sovereign or contractual capacity, fires, floods, epidemics, quarantine restrictions, strikes, unusually severe weather, and delays of common carriers. The Contractor shall notify the Contracting Officer in writing as soon as it is reasonably possible after the commencement of any excusable delay, setting forth the full particulars in connection therewith, shall remedy such occurrence with all reasonable dispatch, and shall promptly give written notice to the Contracting Officer of the cessation of such occurrence.
Contractors should take note that this clause requires them to notify their contracting officer "as soon as it is reasonably possible" and mitigate any potential impact.
With or without this clause, contractors would be wise to be in frequent communication with their government counterparts to set expectations and develop a plan.
What happens if a government worksite or personnel is unavailable?
This is somewhat analogous to situations some contractors faced during the shutdown: they had funding for their contract, but a government worksite or critical government employee was unavailable. Here, contractors should communicate in advance with agencies and determine the fallout if either is unavailable.1 Perhaps there are tasks that can be completed without a worksite available, and those can be saved for that possibility.
Contractors may also be entitled to wind-down and start-up costs if performance is not possible due to the government's unavailability.
What are the government's payment obligation if a contractor is unable to perform?
Government payment obligations will be directly tied to the type of contract. For instance, if the contractor has a firm-fixed priced contract that provides payment upon completion of a deliverable and the contractor has completed the deliverable, the contractor should be paid. If the contract is one for time and materials, however, and individuals did not work because of the virus, the government may have the right to reduce its payments to the contractor. There are a number of potential outcomes, and all of these things would require a careful review of each government contract.
How are subcontracts impacted?
Contracts between prime contractors and subcontractors are considered commercial contracts, even if they contain FAR/DFARS or other clauses. Prime and subcontractors should review their agreements to determine their rights and obligations. As noted above, most commercial contracts contain a force majeure clause that excuses delay. Those same clauses, however, also often allow prime contractors to seek goods and services elsewhere if a subcontractor cannot fulfill their obligations for an excused reason.
What should contractors do now?
Contractors would generally be best served by:
- taking inventory of their contracts and personnel on those contracts, and drafting an action plan to meet both contract demands as well as health and safety concerns
- documenting all wind-down and start-up costs, and creating separate accounting categories for those costs
- deciding whether employees on impacted contracts can be reassigned or be asked to take paid vacation or overdue training
- documenting all actions and communicating with all parties involved
- mitigating costs whenever possible
- in the event of performance impossibility, seeking recovery of expenses as soon as possible
The Defense Production Act (DPA)
Besides the issues noted above, the outbreak of the coronavirus has also spiked demand for personal protective supplies like masks as well as other medical supplies and medicines. As manufacturers of these products wrestle with keeping up with market demand, they should be aware that the U.S. government has legal authority to step to the front of the line ahead of other customers to meet procurement needs associated with emergency preparedness, response and recovery activities. Under the authority of the DPA, the U.S. Department of Commerce has established the Defense Priorities and Allocation System (DPAS). Federal agencies with authority to issue DPAS-rated orders include the U.S. Department of Defense, U.S. Department of Homeland Security (FEMA is the lead agency) and U.S. Department of Energy.
Businesses who provide supplies or services that may be subject to DPAS-rated orders from the U.S. government in response to the coronavirus outbreak should ensure their personnel are aware of the DPAS rating process and a business's obligations upon receipt of a rated order. When a business receives a DPAS-rated order, it must accept the order if it normally sells the ordered material or service and can satisfy the delivery terms. Businesses may reject DPAS-rated orders for reasons specified in the regulations, and they have a limited window of time to do so.
Upon acceptance, the business must provide priority treatment ahead of other customers to fulfill the order, when necessary, to meet the government's specified delivery or performance dates. Most rated orders are designated as "DO," which take priority over all unrated orders in the businesses pipeline. DX-rated orders have the highest priority and take priority over DO-rated orders.
If necessary to ensure on-time performance of a DPAS-rated order, the business must reschedule unrated orders in its pipeline that are received from other commercial and government customers. Businesses must also place DPAS-rated orders with their subcontractors and suppliers to expedite delivery of materials and components required to ensure on-time fulfillment of a rated order.
Compliance with DPAS orders is important because willful failure to perform is a criminal violation that subjects the people involved in the violation to imprisonment of up to one year and a fine of up to $10,000.
There is still a lot of uncertainty with how serious the virus will be and its impact on contractors. We will continue to provide updates where appropriate.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact the author or your responsible Holland & Knight lawyer for timely advice.
1 While there is no threat of a furlough because of the coronavirus, it is possible that government employees will not be at their worksites and/or have remote access to information and data necessary to properly supervise a contract.