As we summarized on March 31, 2020, CARES Act Section 3610 throws an immediate lifeline to qualifying firms whose workforce has been displaced by coronavirus COVID-19 shutdowns. On April 8, 2020, the U.S. Department of Defense (“DOD”) issued Class Deviation 2020-O0013 authorizing contracting officers to immediately use a new cost principle, DFARS 231.205-79, to implement section 3610; and on April 9, 2020, the Office of the Under Secretary of Defense issued Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act and Frequently Asked Questions. This blog post summarizes the new Federal Acquisition Regulation Supplement (“DFARS”) clause and guidance.
What is the purpose of CARES Act Section 3610 and DFARS 231.205-79?
Deviation 2020-O0013 establishes a new cost principle that will allow recovery of employee leave costs related to the COVID-19 pandemic where appropriate. The Class Deviation recognizes that “contractors are struggling to maintain a mission-ready workforce due to work site closures, personnel quarantines, and state and local restrictions on movement related to the COVID-19 pandemic that cannot be resolved through remote work.” To that end, contracting officers are instructed to use DFARS 231.205-79 “to appropriately balance flexibilities and limitations” and are directed to “consider the immediacy of the specific circumstances of the contractor involved and respond accordingly. The survival of many of the businesses the CARES Act is designed to assist may depend on this efficiency.”
What “flexibilities” are contracting officers authorized to consider under CARES Act Section 3610 and DFARS 231.205-79?
The Class Deviation authorizes contracting to any of the following four actions:
- enable the contractor to stay in a ready state (i.e., able to mobilize in a timely manner) by treating as allowable the paid leave costs a contractor incurs to keep its employees and subcontractor employees in such a state;
- use any “funds made available to the agency” by Congress to reimburse contractors for workers’ lost time, not otherwise reimbursable, between January 31, 2020, and September 30, 2020, if the contractor provides leave to its employees or subcontractor employees for COVID-19-related interruptions;
- modify contracts to provide for reimbursement of allowable paid leave costs, not otherwise reimbursable, without securing additional consideration; and
- provide such reimbursement on any contract type.
What costs are potentially recoverable?
Section 3610 authorizes reimbursements if a contractor’s employees or subcontractor employees:
- cannot perform work on a government-owned, government-leased, contractor-owned, or contractor-leased facility or site approved by the federal government for contract performance due to closures or other restrictions; and
- are unable to telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020, for COVID–19.
Reimbursement is authorized only:
- at the appropriate rates under the contract for up to an average of 40 hours per week; and
- for contractor or subcontractor payments made for costs incurred, not otherwise reimbursable, not earlier than January 31, 2020, and not later than September 30, 2020.
How will implementation of section 3610 vary based on contract type?
According to the Implementation Guidance issued on April 9, 2020, section 3610 should be implemented as follows based on the contract type at issue:
- Fixed Price contracts: Contracting officers are instructed to negotiate equitable adjustments to the price and delivery schedule to recognize the impact of any COVID-19-caused shutdowns, excluding profit. Contracting officers are directed to establish separate contract line items for section 3610 COVID-19 payments. If a contractor’s workforce is shared across multiple contracts, contracting officers are directed to coordinate on a reasonable allocation of costs, ideally through the Administrative Contracting Officer. However, section 3610 does not allow acceptance of services that have not been delivered under fixed price contracts.
- Cost-reimbursement contracts: Contracting officers are instructed to work with contractors to establish appropriate cost procedures. “[T]he recommended approach is for costs to be charged to a separate account, such as “Other Direct Cost – COVID 19.”” Interim vouchers will be provisionally approved and paid under existing procedures, and supporting documentation retained for audit.
- Time and Materials or Labor Hour contracts: The guidance recommends “creation of a separate line item for this reimbursement under section 3610 authority should enable segregation of these costs, upon receipt of a request for equitable adjustment.” Interim vouchers will be provisionally approved and paid under existing procedures, and supporting documentation retained for audit.
- Mixed contracts: The guidance cautions that “contractors can only recover once for section 3610 covered impacts.” Therefore, “when a contract has a mix of fixed price and cost type line items, recovery need not be addressed separately for each contract type. In most cases the cost reimbursement approach is preferable.”
What information is required to support claimed costs?
The Implementation Guidance states that section 3610 provides considerable discretion to treat paid leave as an allowable cost. However, contractors bear the burden of supporting any claimed costs, and for identifying credits that may reduce reimbursement under section 3610, with appropriate documentation. In addition, the Class Deviation requires that “contracting officers secure representations from contractors regarding any other relief claimed or received stemming from COVID-19, including an affirmation that the contractor has not or will not pursue reimbursement for the same costs accounted for under their request, to support their requests for reimbursement under section 3610.” Requests for reimbursement under the new cost principle “should describe the actions the contractor has taken to continue performing work under the contract, the circumstances that made it necessary to grant employee leave, an explanation of why it was not feasible for employees to continue performance via telework or other remote work, and how the leave served to keep employees in a ready state.”
What limitations apply to recovery under section 3610?
- Section 3610 is contingent upon the availability of funds and no adjustment to the contract or approval of a request for equitable adjustment should be made without sufficient funds.
- The government must reduce the maximum reimbursement authorized by the amount of credit the contractor is allowed pursuant to division G of the Families First Coronavirus Response Act (Pub. L. 116–127) and any applicable credits the contractor is allowed under the CARES Act or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020, for COVID–19. To the extent contractors receive compensation from other provisions of the CARES Act, or other COVID-19 relief scenarios, including tax credits, contracting officers must avoid duplication of payments.
What should I keep in mind as I seek costs?
The availability of funds under section 3610 is a lifeline to many contractors, who might not otherwise survive this disruptive period. As contractors seek these necessary costs, we recommend keeping the following pointers in mind:
- Assume that these costs will, at some point, be questioned. Accordingly, it is prudent to take steps now to specifically identify and capture these costs separately for accounting purposes.
- Expect that you may be required to show whether you received or could have received credits from another section of the CARES Act or from other legislation that should have lowered your entitlement under section 3610. Accordingly, you should document your current efforts to seek other potentially available credits and reimbursements.
- Assume that costs of keeping contractor personnel idle will be questioned for reasonableness. Document the rationale for maintaining employees in a ready state as well as efforts made to mitigate costs.
Try to record like costs consistently across all of your contracts, in order to avoid a situation where the same costs are treated as direct under one contract and as indirect under another contract.
As COVID-19 issues permeate virtually all aspects of commerce nationally and internationally, we stand ready to help. Blank Rome’s Coronavirus (“COVID-19”) Task Force includes interdisciplinary resources across every business sector from insurance recovery to HR.