CARES Act Contractor Relief

The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, which was signed into law on March 28, contains a provision aimed at contractors and provides the potential for compensation due to facility closures or other restrictions due to the ongoing coronavirus (COVID-19) pandemic. The provision isn't long; here is the text with key items highlighted:

SECTION 3610. FEDERAL CONTRACTOR AUTHORITY.

Notwithstanding any other provision of law, and subject to the availability of appropriations, funds made available to an agency by this Act or any other Act may be used by such agency to modify the terms and conditions of a contract, or other agreement, without consideration, to reimburse at the minimum applicable contract billing rates not to exceed an average of 40 hours per week any paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, including to protect the life and safety of Government and contractor personnel, but in no event beyond September 30, 2020. Such authority shall apply only to a contractor whose employees or subcontractors cannot perform work on a site that has been approved by the Federal Government, including a federally-owned or leased facility or site, due to facility closures or other restrictions, and who cannot telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020 for COVID–19:

Provided, That the maximum reimbursement authorized by this section shall be reduced by the amount of credit a contractor is allowed pursuant to division G of Public Law 116–127 and any applicable credits a contractor is allowed under this Act.

Summary:

Many contractors are grappling with the issue this section addresses: an inability to perform contracts due to facility closures, or other government (federal, state and local) restrictions. As discussed below, this new provision of law gives contractors a potentially useful tool, along with other clauses in the Federal Acquisition Regulation (FAR) and contract terms and conditions, to seek continued payment during periods of work disruption. Here's our initial break down of the text:

• A contractor may be "reimbursed" for the cost of keeping certain employees "in a ready state." Presumably this means on payroll, although the act does not use that term, but given that this provision is included in the Labor title of the act, it appears Congress's intent is to have these funds be used to keep employees on the payroll. Contractors should be prepared to demonstrate they used these funds to maintain readiness, i.e., by continuing to compensate their employees. It is important to note that while FAR provisions, such as those related to suspension of work, already give some support for maintaining readiness, this provision makes entitlement to reimbursement for that purpose more clear.
• The potential for reimbursement arises only when access to an approved worksite (contractor or federal) has been curtailed due to COVID-19 restrictions and only if the affected employees cannot telework. Contractors will need to document 1) that the worksite is a federally owned or leased site, or that it has been approved by the government; 2) that work at the facility as actually been disrupted as a result of COVID-19; and 3) that telework is not an option (more on this one below).
• Compensation is limited to the "minimum established contract billing rates" and capped at 40 hours per week. Paid leave, including sick leave, is reimbursable but will be reduced to the extent of any tax credits taken. Note: By prescribing "billing rates" (as opposed to wage or labor rates) this appears to permit a claim for loaded labor rates as set forth in the contract. Arguably, "billing rate" could even include a monthly lump sum, but that is not entirely clear. Absent agency guidance, contracting officers may interpret the term "billing rate" differently, so be prepared for more rigid interpretations. If a contract is firm fixed price (lump sum) and does not have billing rates, per se, it is likely that loaded labor rates would need to be established consistent with cost principles.
• As a process matter, a contract "modification" will probably be required, meaning the contractor will likely have to present a Request for Equitable Adjustment for amounts it believes it is owed, and the contracting officer should issue a contract modification to reflect the negotiated adjustment in contract price associated with maintaining contractor and subcontractor employees in a ready state. But note in some cases, there may not be an adjustment in contract price at all; optimally, a contractor would continue to be compensated at the stated contractual rates.
• The provision also requires contractors to mitigate the effect of the disruptions by allowing employees to telework if they can. This duty to mitigate is consistent with other bases for cost recovery during work suspensions, stoppages or delays. Contractors should document their mitigation efforts, including factors that make mitigation impossible.

Section 3610 presents an important potential remedy for contractors and should be considered in concert with other FAR-based and contractual remedies, such as suspension of work/stop work orders, contract changes clauses and excusable delay clauses. Please see our previous blogs, alerts and webinars on these issues.

DISCLAIMER: Information contained in this alert is for the general education and knowledge of our readers and is not intended to constitute legal, tax, accounting or investment advice. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.