CARES Act and the impact on contracting costs

The newly minted CARES Act has plenty that will impact government contractors and one area to pay attention to is how allowable costs will be handled.

President Trump signed the Coronavirus Aid, Relief and Economic Security Act on March 27. Other than the employee retention and other relief available to all businesses that I’ll leave to my colleagues, here’s what that means and what it doesn’t mean for federal government contractors.

First, generally, CARES provides about $3.8 billion for the Defense Health Program (i.e., R&D, test and evaluation and operation and maintenance), about $1 billion for defense purchases pursuant to the TRICARE program and an additional $1 billion for Defense Production Act purchases, as well as funds to improve information technology services at numerous federal government departments.

These appropriations may relieve the tension in the government technology and other services business who may be falling behind because of delayed contract awards due to COVID-19.

Second, it gives various federal agencies and state/local governments significant financial assistance in countering COVID-19. That might be good for contractors providing those directly related COVID-19 goods or services, but it may also benefit other contractors such as those providing supporting or ancillary IT products and services, program management and facility operations-type services (i.e., much of what is the GovCon business around the Beltway).

Third, CARES provides funds to allow agencies to amend contracts, without legal consideration (meaning requiring something of value in return), to require the government to reimburse paid leave paid from Jan. 1 through Sept. 30. The reimbursement cannot exceed an average of 40 hours per week per employee and cannot exceed the contract’s minimum billing rates.

Also, to be considered for the reimbursement, the employee or subcontractor employee (1) cannot perform work on most government facilities due to closures or access restrictions; and (2) must be unable to telework because his or her job duties cannot be performed remotely during the emergency.

So far, this relief extends to Sept. 30. There are also some offsets for any credits received under CARES or the prior Families First Coronavirus Response Act. Put another way, Congress is agreeing to reimburse contractors to keep employees “in a ready state” if the employee is unable to work at certain federal facilities or telework because their duties cannot be performed remotely.

But alas, this relief is not mandated by CARES, but rather it is within the agency’s discretion. And CARES doesn’t address other non-employee cost increases caused by COVID. That really means that any COVID related contract cost increase still need to pass muster under current FAR Cost Principles and the contract modification will still need formal contracting officer approval.

As I said in my last commentary, keep detailed documentation of your costs and efforts to minimize them for purposes of invoking the FAR Changes and Excusable Delays clauses.

The employee paid leave provision deserves particular accolades because it strikes at the very issue threatening contractor financial viability, on top of other challenges facing other American business. Many employers have limited or no paid leave. And not everyone banks -- and I bet the HR people would say few bank -- their paid leave or PTO. That extra leave may very well relieve much financial stress for these employees as well as financial stress on employers, and have more of a positive impact on productivity later on.

Much of that is because the cost of that stress may be outweighed by the benefits CARES or other COVID-related relief measures may provide. Equally important is that teleworking is not as easy as it sounds, especially for people with little children, or a caregiver, or foremost those who have the virus.

And I’m saying this not just as a lawyer advising clients about these matters but also being personally familiar with some of the employees’ plights. For example, the one where both spouses with little children are direct charge government contractor personnel and a caretaker for the elderly, also in the business.

All are teleworking with added family duties 24/7 because most if not all of the day care or elderly care centers are closed. So, CARES is a positive step for government contractors.

Some may be worried about those who abuse the paid leave. And I agree. I’ve seen this and conducted many internal investigations of alleged time reporting fraud and misuse of employee leave. True, abusers should be dealt with, but we have a bigger problem here. And this may be analogous to a shutdown (see my March 16 commentary) where the Congress shunned contractor employee paid leave, but it’s now much more serious.

Regarding the non-mandated or discretionary contract modifications, likely you will still need to submit a Request for Equitable Adjustment, or REA; don’t wait for the contracting officer to come to you. More importantly, the lack of more definitive guidance or relief from Congress regarding these contract “mods” should be of major concern, especially for small businesses, as COVID-related REA denials could financially harm these companies and have an adverse impact on the sector as a whole.

Cutting to the chase: why not soften the “allowability” standards under the FAR Cost Principles to facilitate REAs or later claims for those contractors having sufficient documentation to show that it did its best (aka made good faith efforts) to mitigate those costs?

Add to that an extra requirement at the REA stage to “certify” that the request is in good faith and the supporting data are accurate and complete. This is already required for REAs under DOD contracts. Here, the “reasonableness” of the costs will be essentially assumed; they should still be allocable to the contract, properly recorded and otherwise meet government accounting standards. Is this too draconian? Is it too vague?

I suspect a good many government lawyers are advising that it’s crazy to essentially hand out money like that. But then again, isn’t that what the CARES Act and its putative next chapter are intended to do? And I’ll add that after all this is a national and international emergency. A plausible reason against measures like this can be that there would be too much reliance on the good faith of the contractor. And of course they don’t call us “Beltway Bandits” for nothing.

The cynic in me wonders if that’s what some in Congress had in mind. And besides, each case is dependent on its own facts as we lawyers like to say. A better and more fundamental reason in favor of a more lenient allowability standard is that there are most certainly going to be COVID-related REAs. Period. And more than we may imagine, not to mention subsequent formal claims and appeals – which are often very expensive legal processes.

This is the worst plague since the 1918-20 Spanish Flu that reportedly killed tens of millions worldwide. And if these REAs prove to be in bad faith then that’s a matter for the agency inspectors general and DOJ. In any event, after 35 years as a GovCon lawyer I continue to believe that the vast, and I mean vast, majority of those in this business are good, honest and dedicated people. Those very few who aren’t will be needing more people like me.

I hope some of this makes its way into the Son (or Daughter) of CARES.

Stay safe.


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