As the circumstances of social distancing and business interruption continue, federal contractors and subcontractors may find themselves in difficult financial situations as their employees are forced to sit idle due to facility closures or state-wide quarantine orders.
Though receiving less attention in recent weeks than the Paycheck Protection Program and the considerable supplemental appropriations for health care and other industries, the CARES Act also contains some relief for federal contractors. Specifically, it provides statutory authority for federal contracting agencies to offer performance flexibility and certain continuing payments. Section 3610 of the CARES Act authorizes (i) federal agencies to use available funds to modify contracts, or “other agreements” to (ii) reimburse contractors for paid and sick leave provided by the contractor to its employees or subcontractors (iii) so that they may remain in a ready state to perform when regular contract performance can recommence.
Under the language of the CARES Act, this authority may be invoked by the federal contracting agency when “(i) a contractor[‘s] . . . employees or subcontractors cannot perform work” (ii) “on a site that has been approved by the Federal Government, including a federally-owned or leased facility, due to facility closures or other restrictions,” and (iii) “who cannot telework because their job duties cannot be performed remotely.” These terms entail a degree of ambiguity but have been recently interpreted by some agencies to include the Department of Defense (“DoD”).
Guidance issued by DoD instructs that the term “ready state” means “a contractor’s ability to mobilize and resume performance in a timely manner.” Further, DoD guidance instructs that a “site that has been approved by the federal government” means “the contractor’s location and any other places of performance specifically identified in the contract . . . includ[ing] any contractor or subcontractor facility at which contract administration services are performed in support of those contracts . . . [and] may include multiple work sites and/or locations.”
DoD has further interpreted the requirement that a contractor’s employees or its subcontractors are unable to perform work or telework expansively, to include employees on leave because they (i) have contracted COVID-19, (ii) are under quarantine, (iii) are on leave to care for others who have contracted COVID-19 or are under quarantine orders, or (iv) cannot work or telework due to child care issues resulting from school closures.
How Will Contractors be Reimbursed:
The reimbursement amount potentially available under Section 3610 authority (i) is limited to the minimum applicable contract billing rates, and, in no case, may exceed an average of 40 hours per week. Further, payments may be made only for costs incurred between January 31, 2020 and September 30, 2020 and must be offset by the amount of any applicable tax credits claimed by the contractor under Division G of the Families First Coronavirus Response Act (“FFCRA”) and CARES Act. Finally, if a federal contractor receives a Paycheck Protection Program loan under Section 1102 of the CARES Act, and uses the loan for payroll costs, the federal contractor cannot charge the same payroll costs to a federal contract under this authority.
The mechanism by which contractors are reimbursed under Section 3610 will likely depend on the type of contract. Although guidance on how contractors can request reimbursement may vary between agencies, DoD guidance is again a useful reference point. For fixed-price contracts and time and materials contracts, DoD instructs that an affected contractor submit a Request for Equitable Adjustment (“REA”) to negotiate adjustments to the contract price or delivery schedule. If a contract modification is authorized by the contracting officer, a new “line item” or “line items” for “COVID-19 Labor Force Retention” will be added at a fixed-price (not to include any additional profit) based on hours, days, or other appropriate units of measure. The DoD guidance also instructs that if such a contract modification is provided, the contractor would submit monthly invoices under these new line items with (i) supporting documentation to identify and explain why claimed hours could not be worked and (ii) a statement that these costs are not being reimbursed under other authorities. If the contractor’s employees cannot be allocated to a specific contract, contractors are to work with their respective contracting agency to negotiate and agree upon a reasonable allocation of costs.
For cost-reimbursement contracts, the DoD guidance instructs that contractors should charge 3610 costs to a separate account to be described as “Other Direct Cost – COVID 19.” Though the DoD guidance does not directly address this point, most likely, a contract modification will be necessary even on a cost reimbursement contract to add a new line item for these costs. Contractors should consult their contracting officers regarding necessary mechanics in their individual situations. We encourage contractors to obtain written authorization before adding these costs to those treated as allowable under their existing cost-reimbursement contracts.
Finally, for contracts that include both fixed-price and cost-type contract line items, DoD guidance instructs that the cost-reimbursement approach should be used.
While this new authority provides great flexibility, reimbursement is discretionary and is subject to the availability of funds on the part of the federal contracting agency. Accordingly, federal contractors should prepare a business case analysis supporting their REA. Moreover, preparation and retention of supporting documentation will be important, because contractors will bear the burden of supporting any claimed costs. As such, federal contractors should document, among other things, (i) why and when a covered facility was closed, (ii) which employees were impacted, and (iii) why the impacted employees are unable to perform under the contract via telework.
For more information on this post and the various forms of relief available to federal contractors and subcontractors due to the COVID-19 pandemic, as well as all other government contract matters, please do not hesitate to contact FTLF attorneys:
Scott S. Sheffler, email@example.com; or
Joseph P. Loman, firstname.lastname@example.org.
 The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, Pub. L. 116-136 (Mar. 27, 2020) available here.
 Id. § 3610 (emphasis added). This authority applies not just to contracts, but also to Other Transactions (commonly “OTAs”). Additionally, according to the DoD’s recently issued Frequently Asked Questions concerning § 3610 implementation, this provision also applies to contracts performed outside of the United States. DoD Implementation Guidance for Section 3610 of the CARES Act, Frequently Asked Questions (“FAQ”) available here.
 Id. § 3610 (emphasis added).
 On April 8, 2020, the Department of Defense (“DoD”) issued a Class Deviation implementing § 3610. It is available here. In addition, on April 9, 2020, DoD’s Acting Principal Director, Defense Pricing and Contracting, issued further guidance implementing §3610. Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (“DoD DPC Memo”) available here. On April 21, 2020, the General Services Administration (“GSA”) also issued a class deviation to the General Services Administration Regulation (“GSAR”) implementing § 3610. It is available at https://www.gsa.gov/cdnstatic/CD-2020-12_0.pdf.
 DoD FAQ, Question # 18.
 DoD FAQ, Question # 6.
 DoD FAQ, Question # 7.
 While not defined, it appears that the DoD has interpreted this to mean the leave rates the contractor would have paid its employees but for COVID-19. DoD FAQ, Question # 27.
 CARES Act, § 3610.
 Pub. L. 116-127 (Mar. 18, 2020).
 CARES Act, § 3610.
 DoD DPC Memo at 2.
 Id. at 3.