As the marketplace slows in response to the worldwide spread of COVID-19, companies are (or should be) breaking out their contracts and subcontracts to see what they say to protect themselves from current and future problems. Here are the critical provisions.

All Contractors and Subcontractors

All companies should review their contracts and subcontracts for force majeure clauses. The critical issues related to these clauses are outlined in two articles posted to our Coronavirus Task Force website. The articles can be found here and here, and the task force webpage is here.

Federal Government Contractors and Subcontractors

Federal Government contractors and subcontractors face unique challenges.

• Performance Delay, Suspension, and Termination – With or Without Communication. The Government generally retains significant rights to unilaterally delay, suspend, stop, change, or terminate work. And, as opposed to typical commercial contract customers, your Government customer may have bigger fish to fry in these uncertain times: containing the pandemic. This higher priority, combined with some contracting officers’ (COs) struggles to establish work-from-home protocols, means that you may not yet have heard from your customers—the Government or your prime contractor—or that directions may have come to you sporadically or from sources without the proper authority. We discuss below steps you can consider taking, as a prime contractor or subcontractor, to protect your rights and limit exposure.
• If the Government has been silent with respect to a potentially affected contract. Contracting Officers may be too busy on other matters to provide you with guidance, or may not be aware that certain critical pathways for your work are being obstructed by Government office closures, public meeting prohibitions, or other actions taken by agency customers and public health authorities. In these cases, each contractor should check their federal contracts for FAR 52.249-14 (Excusable Delays), 52.212-4(f) (for commercial item contracts), or 52.249-8 and -9 (Default for fixed-price supply, service, and R&D contracts). Each clause excuses non-compliance with a contract requirement when caused by an event beyond the reasonable control of the contractor, such as a “quarantine” or “epidemic.” The commercial item clause (52.212-4(f)) requires notification to the CO as soon as reasonably possible after commencement of a delay. The other clauses (52.249-8, -9 and -14) do not specify a time to notify the CO of an anticipated default, but it is nonetheless a best practice to do so quickly and in writing.
  
  Because instructions from agency customers and public health officials are still evolving, contractors are facing difficult decisions to implement total office closures and strict personnel-distancing protocol, or to keep offices open for rotating or limited staff in places where local authorities have not mandated closures. A variation in approaches between contractors may lead to disputes with the Government regarding whether a certain default was the genuine result of the coronavirus epidemic, or was the product of an overly zealous protective measure. Furthermore, the Government will no doubt be on high alert—now and in the future—for contractors attempting to use the excusable delay or default clauses as a smoke screen for inadequate performance unrelated to the epidemic.
  
  In order to maximize a contractor’s chance of success on a future excusable delay or default claim, we recommend that contractors provide written notice as soon as possible to their COs that there is an expected delay or other non-conformity with contract requirements. We also suggest that contractors explain their rationale for the default being “excusable” (i.e., why it is caused by the epidemic). This should give the Government the opportunity to concur with the contractor. Even if the Government does not concur, early notification creates a record of the contractor’s position, and tends to show that it is acting responsibly to help the Government mitigate harm caused by a potential delay or default. And, after the initial notice, contractors should continue to document exactly how contract performance is being impacted (i.e., employee absences or illnesses), and should document any measures taken to overcome the impacts.
  
  In short, contractors should not assume that delays or defaults will be excused simply because of the existence of the coronavirus. Each contractor needs to be prepared to affirmatively demonstrate to the Government that the epidemic directly caused the performance issue, that its claims are factually accurate and supported, and that it is, at all times, acting as a responsible contractor.
• If the Government directs you to reduce or cease work under your contract. Where the Government has taken proactive measures in response to the epidemic, the action generally takes the form of stop work orders or contract modifications extending deadlines. Step one—make sure the person who is giving you direction has the authority to do so; and step two, if the direction is not in writing, get confirmation in writing. In addition, keep in mind that the FAR provisions allowing for excusable delays/defaults do not generally allow for the contractor to recover their costs associated with such events. The policy here is to allocate the risk of catastrophic events fairly to both parties. The Government accepts a delay to performance with all the downstream consequences caused by such delay, while the contractor has to spread out performance over a longer time period, which generally means having to absorb more overhead and direct costs as salaried staff remain on the job longer.
  
  However, in certain cases the contractor can recover a portion of its costs associated with a delay. For example, FAR 52.242-15 (Stop-Work Order) allows the Government to stop performance for up to 90 days. If the CO issues such an order and later lifts the order, the contractor can be entitled to an “equitable adjustment in the delivery schedule or contract price, or both . . . if [t]he stop-work order results in an increase in the time required for, or in the Contractor's cost properly allocable to, the performance of any part of this contract.” Further, contractors should refer back to their experiences during Government shutdowns in recent years—in some cases it is possible to recover costs where the Government directed the contractor to stop work, even though no formal stop-work order was issued.
  
  Alternatively, if a contracting officer suspends work in accordance with FAR 52.242-14 (Suspension of Work), the suspension can extend beyond 90 days, and if the suspension is deemed “unreasonable” in duration, the contractor may be entitled to its increased costs arising from the unreasonably long suspension. However, given global concerns over the spread of the coronavirus, we anticipate that contractors may face pushback in pursuing claims under this clause. COs may take the position that a lengthy suspension due to an epidemic should be deemed “reasonable” even if it continues for many months. Note also that the clause states that a contractor cannot recover its delay costs if the “suspension, delay or interruption” would have happened even if the Government had not issued a formal suspension order.
  
  We are also seeing deductive modifications being issued under prime contracts. Rather than suspend the work, some COs are lopping off portions of work that cannot be performed during this period of national quarantine. The advantage of this strategy for the Government is that it avoids contractors carrying costs that could be claimed after a stop work order is lifted or a contract is terminated for convenience. But deductive modifications can still give rise to a claim for certain costs, such as overhead that would have been absorbed had the full contract scope been performed.
  
  Typically, however, we are seeing contracting officers asking to enter into mutual modifications to extend deadlines or alter performance requirements. These modifications are usually for “no cost,” and as long as the contractor negotiates their terms carefully, a mutual agreement to modify a contract is almost always preferable to a unilateral or constructive modification that leads to a request for equitable adjustment or a dispute. Where no such negotiated solution is possible, we advise that contractors document the change to the contract, inform the Government of the change in accordance with the applicable FAR clause, and begin to segregate the associated costs for eventual presentation to the Government. Contractors must always keep in mind that in the event of a dispute, they bear responsibility for demonstrating the accuracy, completeness, and recoverability of their costs.
• Subcontracting – Additional Responsibilities and Risks. If you are a prime contractor, before you pass down the directions (explicit or implicit) or the impacts you are experiencing, read your subcontract. Have you flowed down clauses that are the equivalent to the prime? Create a record that you are implementing the direction of the Government on your subcontractor. A record that you are voluntarily imposing delays, changes, or terminations on your subcontractor could result in exposure to the subcontractor for these costs. As a subcontractor, review the subcontract, understand the clauses and what the prime contractor can do, and document the directions being provided—assess whether you will be able to recover from the prime only or whether you may be able to proceed, if necessary, with a sponsored claim to the Government. Your chances of recovery, or partial recovery, may depend both on the clauses and the contemporaneous records you maintain.
• Remember the Government’s Rights to Audit and Investigate. Responding to swift-moving directions and related developments arising from the coronavirus situation may make it seem as if there is little or no time for “normal” record-keeping, contract administration, subcontract administration, and accounting. Wrong. As we have seen from contracting during war time and during disasters, there will be Government audits and investigations. At that time, the urgency contractors and subcontractors are experiencing now may largely be irrelevant in the eyes of many auditors and investigators, who will focus on contractual language and legal obligations. So, let’s be careful out there.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.