COVID-19 – Government Contractor Compliance and Financial Considerations

Craig StetsonWritten by: Craig Stetson, Partner

As the sustained acceleration of the coronavirus (COVID-19) continues across the US and abroad, government contractors will face significant and rapidly changing challenges and disruptions impacting various aspects of day-to-day operations, performance, delivery and compliance requirements under their federal government prime contracts or subcontracts.   

Government contractors confronting contractual performance and compliance challenges arising from COVID-19, and the implications arising from the various governments’ initiatives to contain the spread of COVID-19, should be aware of applicable contractual obligations, rights and remedies and take proactive actions to mitigate potential financial and compliance risks in conjunction with same.

Many insightful articles, alerts and blogs have been written since COVID-19 entered the US.  The majority of these communications were written and published by government contract attorneys across a wide variety of law firms and highlighted contractors’ contractual responsibilities and / or remedies available to address a variety of possible adverse outcomes rooted in COVID-19 and its effect on government contractors’ operations.  Various Federal Acquisition Regulation (FAR) clauses exist across various contract types that may be relevant; including just a few, 52.242-14 Suspension of Work, 52.242-15 Stop Work Order, 52.242-17 Government Delay of Work and 52.249-14 Excusable Delays.

Our purpose here is not to address the legal aspects associated with possible disputes or cost impacts and recovery thereof; rather to identify five key actions government contractors should be aware of to assist with mitigation efforts associated with potential financial and compliance risks arising from the current COVID-19 environment. The actions discussed below generally apply to all contract types; i.e., fixed-price, cost-reimbursement and time-and-materials, and do not necessarily favor a particular contract type.

  1. Program Management and Oversight – contractors should scrutinize contractual performance to identify discrete events that may have adverse financial implications, e.g., existing or anticipated supply chain disruptions, delays in or impossibility of performance, personnel impacts resulting from idle time or furlough initiatives, changes in scope at the direction of the government or prime contractor, etc. Clear identification and documentation of these potential discrete events will form the baseline for development of entitlement arguments required to justify the opportunity to recover additive and unforeseen costs or seek other contractual relief.
  1. Documentation – contractors will need to prepare or gather and maintain applicable written documentation to support the delay, disruption and other unanticipated changes realized during contractual performance. The documentation of these unforeseen events, whether directed from the customer or developed internally, are critical in support of entitlement arguments seeking recovery of related cost impacts, adjustment to schedules or related excusable delays.  Written documentation should be as detailed as possible; including, for example, the root cause giving rise to the unforeseen event, when the event arose and for what expected duration, personnel impacted, suppliers impacted, etc.  The lack of adequate written documentation clearly explaining the prodigy of relevant events may limit or deny contractors’ efforts to recovery or relief
  1. Discrete Cost Accumulation and Change Order Accounting – contractors will need to discretely capture unanticipated and increased costs and time incurred related to unforeseen or out-of-scope events potentially arising from COVID-19. Contractors may be entitled to recovery of increased costs associated with these events, some of which are noted above; however, contractors will be required by the government (contracting officer and/or the DCAA) or their prime contractor to reasonably support through accounting or other records the basis of the calculation of these increased costs.  The ability to segregate and capture costs at a change order level is a critical requirement and, also, a criteria contractors must demonstrate to the government for purposes of determining the adequacy of the accounting system; and, furthermore, may be required contractually via specific FAR clauses at 52.243-1 Changes-Fixed-Price, 52.243-2 Changes-Cost-Reimbursement and 52.243-6 Change Order Accounting.  If contractors do not maintain adequate accounting records to segregate and support claimed costs within a reasonable basis, recovery of such claimed costs will be greatly at risk.
  1. Communication and Notice – contractors are strongly encouraged to communicate with customers, government or otherwise, as early as possible and periodically when known or anticipated contractual performance or delivery challenges arise. Communication should be written and provided to the government or prime contractor customer on a periodic basis and clearly articulate the status of current events as well as anticipated challenges to be faced during remaining contractual performance.  Contractors should include in the written communication mitigation or workaround efforts seeking to maintain compliance with contractual performance and delivery requirements.  Further, several FAR clauses require contractors provide time-based notice to the customer upon knowledge of specific situations that may cause delays, disruptions or incurrence of additional and unforeseen costs.
  1. Supply Chain Management – contractors should actively coordinate with subcontractors, vendors, suppliers, etc., to identify potential supply chain delivery issues that may affect prime contractors’ ability to meet contractual performance requirements. Communication and coordination with the supply chain should be clearly documented and used to support possible cost recovery or relief efforts with the government, as applicable.  As there is no privity of contract between the supply chain and the government, the responsibility for addressing and dealing with subcontractor, vendor or supplier challenges or performance issues arising from COVID-19 is that of prime contractors.  Increased costs or schedule disruptions borne by the supply chain, and ultimately impacting the prime contractor, may be recoverable as an element of the prime contractors’ recovery or relief efforts with the government; however, the prime contractor must consider and adequately address all the activities discussed above.

The current and unknown business environment resulting from COVID-19 is unprecedented.  The uncertainty and pervasive nature of its impacts on government contractors is not fully known and likely will evolve over the near term.  Contractors should not assume the government will take an empathetic view on contractors’ request for increased cost recovery or other contractual relief.  Contractors should consider the activities discussed above and remain diligent and transparent to maximize the opportunity to successfully invoke applicable contractual rights.  Also, contractors should seek legal counsel and support to realistically assess what contractual remedies exist and in what circumstances they apply.

Contact Capital Edge Consulting for more information:

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