What COVID-19 contracting guidance tells us and what we still need to know

In his latest commentary, attorney James Fontana explains what the growing number of agency contract guidance are saying and what else the market needs to know.

Since my last commentary, there have been a few new agency communications related to COVID-19. Here are some of the notable ones:

  • April 17: OMB issued another memo (a follow-up to its March 20 memo) providing guidance to agencies on understanding and applying reimbursement of contractor paid leave under Section 3610 of the CARES Act (see my April 3 commentary). Not to be outdone by the Defense Department’s April 8 and 9 memos and class deviations, OMB is parroting Section 3610 by informing agencies that they should consider reimbursing paid contractor leave to keep employees in a “ready state.” But I think we already knew that. Refreshingly, this memo recognizes that small businesses “may face the most difficult economic hardships” caused by COVID. It also encourages contracting officers to work with both small and non-small businesses in understanding the required documentation needed to support COVID-related costs. By the same token, OMB advises that such reimbursements remain subject to the availability of funds. The memo also points to the importance of tracking payments by agencies to prevent double dipping – that is receiving duplicative payments under Section 3610 and other COVID-related relief measures such as the Paycheck Protection Program. That may be easier than we think considering that the PPP already ran out of money and the next congressional tranche of money is likely to trounce to zero in no time. Nonetheless there are FAR provisions that may already require that any PPP amounts received, even if later forgiven, would be subject to a credit to the Government. (See FAR 31.201-1).
  • April 20: OMB and the Office of Personnel Management (OPM) issued a joint memo outlining plans to return government and contractor employees to their worksites while still encouraging agencies to maximize teleworking. The basis for this return to some semblance of normalcy is based on state and regional assessments of the pandemic in various geographic areas and other considerations such as continuing school and day care closures, and continuing restrictions related to facility access, public transportation and other mission concerns. The planned resumption follows the three-phased guidelines to states recently outlined by the White House. Agencies are also authorized to “consider new work arrangements for the immediate future to support resumption of normal activities.”
  • April 21: The General Services Administration (GSA) issued a memo and class deviation to the GSA Acquisition Regulation, or GSAR, implementing Section 3610 of the CARES Act. The memo creates a process for COs to determine (1) contractor eligibility for paid leave reimbursement, (2) whether it’s in the Government’s best interest to keep the contractor in a “ready state,” and (3) the appropriateness of reimbursing contractors for the paid leave. However, the memo makes it clear that “[p]aid leave authority is discretionary not mandatory.”
  • April 16: DHS issued a notice summarizing Section 3610. The notice directs COs to “work closely with their contractors to determine the applicability of” reimbursing paid leave, and emphasizes the need to “segregate and report any amount billed” for these costs. There’s nothing new or creative about this notice, but at least its concise.

Some may feel a tad inundated with the multiple memos, class deviations, and agencies trying to one-up each other on this issue. Much as they all are valiant efforts to inform contractors of their respective takes on Section 3610, several parts of that provision need further clarification.

There is still no mandate to reimburse contractors for paid leave and there is still no clear guidance on defining such terms as “ready state” or how to clearly identify those employees who cannot telework because their job duties cannot be performed remotely during the COVID crisis.

Finally, there remains the matter of addressing other non-payroll costs that could be incurred and how agencies should treat these costs beyond the typical FAR 31 cost analyses that keep us lawyers and accountants fully employed.

Let me explore another reason why this issue is important. According to George Mason University’s Center for Government Contracting (full disclosure I sit on its advisory board), over 40 percent of people who work for the U.S. Government (about 3.7 million people) are private contractors. About 25 percent of federal contract dollars ($120 billion) are awarded annually to small businesses. Federal procurement spending in the Washington, D.C. area totaled $660 billion from 2008 through 2016. 

In short, the economy and especially the Washington area’s economy depends heavily on the government contracting industry.

Unlike the commercial sector, as we all know, government contractors face an array of mind-bending and stringent acquisition statutes, regulations, auditing standards, agency policies and the like in providing their services to their agency customers, especially those regulating cost increases that could otherwise cripple a contractor even in normal times. These laws are very arguably ill-suited to deal with this or any pandemic and the immediate financial stress it’s causing.

Inevitably, COVID-19 will cause unanticipated and immediate increases in contract costs well beyond what Section 3610 was intended to cover. Some contractors (including subcontractors) have sufficient short-term cashflow, credit worthiness or business interruption insurance to deal with this crisis. Many others, and especially small businesses, do not.

One wonders how many small businesses in this industry can wait until agencies vet their REAs and audits before COVID makes them insolvent?

Despite Congress and executive branch attempts to assuage the fears of the government services industry during this crisis, CARES Section 3610 is not a stimulus measure with checks in the mail within days. And like many hastily drafted statues, it is hardly a model of clarity. 

Obviously, federal contractors are not alone in this crisis. Other commercial service contractors as well as product vendors are also in jeopardy. We should, however, consider that government contractors and their subcontractors provide vital and often mission-critical services to both federal and state agencies. These contractors help keep the military, law enforcement, social and health care services and other essential government functions operational on a daily basis. A damaged government services industry caused by this induced economic coma courtesy of COVID-19 could seriously impair the government’s ability to provide these critical services and further devastate an already devastated D.C.-area economy.

Many of us in this business have learned early on that government acquisition personnel and their vendors don’t always sing from the same sheet of music. Like I said these acquisition regulations are complicated and some down-right ambiguous.

Because of COVID-19’s expected costs, there will be more competition for fewer federal dollars to cover these costs. There will be disagreements when it comes to deciding what costs will be paid, how and when they will be paid, and whether they are fairly attributed to COVID-19 under those grinding government standards.

There will be costly disputes, and some of those disputes will pour into the courts. What this industry does need is less encouragement from Congress and procuring agencies and more concrete assurances of adequate and immediate funding to directly cover credible and properly documented COVID-related costs increases. Section 3610 and all of these agency missives, though definitely steps in the right direction, do not give many federal contractors reason to be overly optimistic.

Stay safe.