Department of Defense Releases Further Guidance for Implementing Section 3610 of the CARES Act
The U.S. Department of Defense (DoD) has released additional information relative to implementation of Section 3610 of the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act. Previous blogs discussed the passage of the CARES Act and the issuance of a class deviation implementing it.
On April 9, the DoD released further guidance and an initial Frequently Asked Questions (FAQs), which will be updated on a regular basis. The guidance and FAQs acknowledge that implementation of Section 3610 will vary based on contract type (i.e., fixed price, cost-reimbursement, time and materials or labor hours) and will require a case-by-case consideration, taking into account "the particular circumstances of each contract."
Section 3610 of the CARES Act, signed into law on March 27, authorized federal contracting officers to reimburse contractors whose contract performance was disrupted by the coronavirus (COVID-19) pandemic for costs associated with keeping their workforce in a ready state. Section 3610 permits reimbursement at the minimum applicable contract billing rates (not to exceed an average of 40 hours per week) for any paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state.
On April 8, the DoD issued Class Deviation 2020-O0013 to the Department of Defense Federal Acquisition Regulation Supplement (DFARS), which established an implementing DFARS clause 231.205-79, CARES Act Section 3610 Implementation. This clause sets forth a new cost principle, effective immediately, for affected contractors whose personnel are unable to work because of the COVID-19 pandemic. Among other things, to invoke Section 3610, a contracting officer will need to modify eligible contracts to include this new DFARS clause in order to provide the basis for reimbursement.
April 9 Guidance and FAQs
The guidance and FAQs reiterate many key elements of Section 3610 itself and the Class Deviation, including that its use is permissive, not mandatory, is subject to the availability of funds and is only available for the period prescribed by Section 3610: Jan. 31, 2020 through Sept. 30, 2020.
The guidance also notes 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. The FAQs address 18 different questions related to eligibility and availability of Section 3610 relief, as well as implementation of Section 3610 and the Class Deviation.
Eligibility and AvailabilityThe guidance and FAQs provide further direction as to the limitations on the use of Section 3610. Specifically, it may be utilized only when:
- employees or subcontractors employees are or were unable to work
- costs are associated with keeping employees in a ready state – which refers to the "contractor's ability to mobilize and resume performance in a timely manner"
- costs were incurred between Jan. 31, 2020, and Sept. 30, 2020
- the contractor has not and cannot be reimbursed by other means
- costs are related to COVID-19 impacts
- funds are available to the agency, under the CARES Act or any other act
The publications elaborate on these requirements. With regard to contractor personnel's ability to work, the DoD acknowledged that many work sites remain open and available, but personnel who are dealing with other challenges, such as increased childcare demands, caring for oneself or a loved one with COVID-19 or following quarantine protocols due to actual or potential exposure, render them "unable to work." The DoD, in echoing earlier guidance, acknowledged that these are scenarios in which an employee may be deemed "unable to work," stating: "employees who did not report to an open work site due to the COVID-19 pandemic may be viewed as being kept in a 'ready' state if all other criteria under Section 3610 have been met."
With regard to other forms of reimbursement, the DoD is putting the onus on contractors to identify and disclose any form of reimbursement relief related to employee leave. This includes any reimbursement provided through state or local programs, loan forgiveness under the Small Business Administration's (SBA) Paycheck Protection Program (PPP), as well as tax credits a contractor is allowed pursuant to the Families First Coronavirus Response Act (FFCRA). As discussed in our earlier blog post, this presents an important strategic decision for contractors and, as discussed more below, requires contractors to track other credits and forms of relief accepted under the CARES Act.
Importantly, reimbursement under Section 3610 is subject to the availability of appropriated funds. Because the overwhelming majority of the appropriations associated with the CARES Act went to agencies other than the DoD, DoD agencies may not have sufficient funds to reimburse contractors their full costs associated with keeping employees in a ready state. However, the CARES Act does permit the use of other available funds, including funds that have been or could be obligated to the contract in question.
The publications provide further guidance on implementation (based on contract type) and timing. The class deviation is effective immediately and is not limited to new contracts or agreements – it potentially applies to contracts or agreements in place from Jan. 31, 2020 through Sept. 30, 2020 (or any part thereof). Further, the deviation is not limited to contracts – Section 3610 provides authority to "modify the terms and conditions of a contract, or other agreement[,]" including other forms of agreements like Other Transaction Authority (OTAs) and grants.
With respect to fixed price, cost reimbursement, and time and materials or labor hour contracts, the guidance provides as follows:
- Fixed price contracts: Contractors must submit a Request for Equitable Adjustment (REA) in order to engage contracting officers in negotiating the reimbursement contemplated by Section 3610. When contracting officers elect to use the permissive authority granted by Section 3610, implementation of an equitable adjustment may be accomplished through the addition of one or more unique contract line item numbers (CLINs) for Section 3610 COVID-19 payments. Further, contracting officers are required to "clarify whether payments under Section 3610 constitute acceptance of the supplies or services that are not being delivered or performed."
- Cost-reimbursement contracts: Cost-reimbursement contractors typically recover costs by submitting vouchers or invoices. In order to properly account and track Section 3610 COVID-19 costs, contractors should charge costs to a separate account and work with contracting officers to "establish appropriate cost procedures." The guidance further instructs, "[t]he information on supporting documentation would be retained for audit, while the interim voucher would be provisionally approved and paid under existing procedures."
- Time and materials or labor hour contracts: As with fixed price contracts, contractors must submit an REA seeking reimbursement of Section 3610 costs. The guidance similarly instructs contracting officers to create a separate line item for reimbursement.
For contracts that are a mix of fixed price and cost type line items, the "cost reimbursement approach is preferable."
Preparing an REA or Voucher
When contracting officers elect to use the permissive authority granted by Section 3610 and the Class Deviation, they may only do so to compensate contractors for actual costs incurred in providing paid leave; the REA cannot be used to recover profit or fees. While the FAQs state advance payments are not permitted, they do not appear to require contractors to wait for the crisis to have lifted before seeking relief under Section 3610. Further guidance is likely necessary on this point, but it appears that the DoD will allow reimbursement for allowable costs under Section 3610 on a rolling basis once an affected contract is modified and the costs are actually incurred.
In preparing an REA or voucher for Section 3610 costs, contractors should establish charge codes to track various impacts (e.g., idled workers, workers on reduced shifts, workers in quarantine, etc.) and prepare contemporaneous narratives, with appropriate supporting documentation describing the employee's situation. Any such supporting documentation should include:
- the circumstances that made it necessary to grant the employee leave, including the extent of the circumstances and why telework or remote work was not feasible
- how leave served to keep the employee in a ready state
- the date the circumstances began and ended
- actions the contractor took to continue contract performance
- for contractors considered part of the essential critical infrastructure workforce, or those required to implement the Continuation of Essential Services Plan, documentation that demonstrates all reasonable efforts were made to continue contract performance
- specific reasons why Section 3610 applies
- a statement that the claimed costs are not being reimbursed under relief programs
Contractors submitting an REA bear the burden of supporting any claimed costs, including any claimed leave costs, with appropriate documentation. Contractors are also responsible for ensuring claimed costs are properly allocated across individual contracts.
- Does the class deviation apply to commercial item contracts?
- The FAQs note that Section 3610 does not prohibit reimbursement under commercial item contracts, but states more guidance is forthcoming on the applicability of Section 3610 to commercial item contracts.
- Why is it important to segregate Section 3610 leave costs?
- While some paid leave is an allowable cost under FAR 31.205-6(m), leave specific to Section 3610 might not be allowable under existing Cost Principles. Therefore, the FAQ cautions that contractors should carefully segregate costs allowable under existing Cost Principles from leave costs allowed under Section 3610 to provide an accurate basis for audit and allowability determinations.
- Should Section 3610 leave costs be charged as direct or indirect?
- Whether the costs of leave should be charged as direct or indirect costs should be discussed with the Contracting Officer. Coordination with the Defense Contract Management Agency (DCMA) through the applicable Divisional Administrative Contracting Officer (DACO)/Administrative Contracting Officer (ACO) is recommended to ensure consistency.
The authority granted by Section 3610 is permissive, not mandatory – meaning the contracting officer is not required to reimburse you for COVID-19 impacts – and further subject to the availability of appropriated funds. However, the FAQs note that contracting officers should be mindful of the Congressional intent of the CARES Act: to reduce the impact of the COVID-19 virus on the Defense Industrial Base and on small business contractors. Contractors bear the burden of supporting any claimed costs, with appropriate supporting documentation, and identifying any other relief accepted under the CARES Act which may reduce reimbursement.
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 your responsible Holland & Knight lawyer or the authors of this alert for timely advice.