On January 21, 2022, the General Services Administration (“GSA”) Office of Inspector General (“OIG”) informed the Federal Acquisition Service (“FAS”) that ongoing monitoring by the OIG found that the FAS failed to properly monitor the sale of products for compliance with the Trade Agreements Act (“TAA”) during the COVID-19 response. Previously, in April 2020, GSA relaxed compliance with the TAA for a limited number of Federal Supply Classes (“FSCs”) to aid the government’s response to the COVID-19 pandemic. The applicable FSCs included those covering N95 masks, cleaners and disinfectants, disposable gloves, and hand sanitizers. After several extensions, the TAA exception policy expired on April 30, 2021.
The OIG identified two deficiencies in FAS’ implementation of the TAA exception policy. First, the OIG found that FAS failed to properly track the addition of non-compliant products to contracts. As a result, after expiration of the exception policy, there was no effective way for GSA to remove the non-compliant products from contracts. Second, the OIG found that GSA improperly permitted the addition of non-compliant products to GSA contracts. For example, some products that were added were unrelated to the government’s response to the pandemic; some products were added to GSA contracts prior to the effective date of the TAA exception policy; and, remarkably, in one case, a product was added to a contract that identified North Korea as its country of origin.
In our previous blogs, we discussed the multiple government enforcers and regulators charged with authority to oversee the application, eligibility, and use of COVID relief funds. Here, we address how to know whether you or your company is under investigation or review or being considered for same. Sometimes it is obvious—for example, when the Federal Bureau of Investigation (“FBI”) along with other agencies raid your offices. Other times, the signs are subtle.
The federal government has an arsenal of tools it uses to gather information for investigations and audits. These tools are not new and are not specific to COVID relief funds. However, some of the “new” entities created by COVID relief legislation (e.g., the Special Inspector General for Pandemic Recovery (“SIGPR”)), as well as the coordination of agency inspectors general on the Pandemic Response Accountability Committee (“PRAC”)), can use those same old tools to hone in on recipients of COVID-related funding.
Below are some practical tips to understand whether you are being investigated based upon investigative tools used by the government.
In our last post on this topic, we touched on how the acceptance, use, and forgiveness of Paycheck Protection Program (“PPP”) loans can be viewed in the context of a Defense Contract Audit Agency (“DCAA”) audit. This post focuses on audits and investigations involving PPP loans. Close scrutiny of PPP loans is not a prediction; it is reality. The Small Business Administration (“SBA”) has announced it will audit all PPP loans in excess of two million dollars following a lender’s submission of a borrower’s loan forgiveness application, and it reserves the right to “spot check” any PPP loan of a lesser amount at its discretion. The Department of Justice has already charged multiple individuals with PPP fraud. And this is just the beginning of what many think will be a tidal wave of enforcement activity involving PPP loans.
Overview of the PPP
The PPP is the largest relief measure for small businesses under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The government has made available nearly one trillion dollars in PPP relief funds through four separate funding measures ($349 billion via the CARES Act; $310 billion via the PPP and Health Care Enhancement Act; $284 billion via the Consolidated Appropriations Act of 2021; and $7.25 billion via American Rescue Plan Act of 2021).
The PPP makes available guaranteed SBA loans to small business that meet certain eligibility requirements. In addition, PPP loans can be forgiven fully if used properly to cover specified business expenses such as payroll, rent, utilities, mortgage interest, and other limited uses. As of April 11, 2021, the SBA had approved more than 9.5 million loans totaling more than $755 billion using more than 5,400 lenders.
This is the third in a series of posts regarding what we believe will be an onslaught of government investigations and audits of COVID relief funds and contracting. Previously, we identified likely categories of programs, contracts, and companies the government might investigate or audit. Below, we discuss the Defense Contract Audit Agency’s (“DCAA”) current direction, interests, and initiatives related to contractors’ receipt of COVID relief funds and the impact an uncertain business environment may have on government contract pricing and costing forecasts.
COVID Relief Funds
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) funding opportunities come with unique government contract compliance requirements and financial reporting obligations. The funding is not “free” and may result in financial consequences to unwary contractors. DCAA knows this and will be conducting audits to test contractors’ compliance with unique relief fund requirements. Contractors unaware of these accounting and reporting requirements risk DCAA questioning or denying costs.
In January 2021, DCAA issued an audit alert to its regional offices pertaining to COVID relief legislation and regulation.[1] The audit alert includes frequently asked questions and answers (“FAQs”) concerning contractors’ request or receipt of COVID relief funding. Originally released last summer, the FAQs have been revised and expanded several times. The FAQs telegraph DCAA’s position on various instances where COVID relief funding intersects with or impacts government contract cost accounting and compliance.
This is the second in a series of posts regarding what we believe will be an onslaught of government investigations and audits of COVID relief funds and contracting. Previously, we identified the government offices that will be conducting the investigations and performing the audits. Below, we identify three categories of programs, contracts, and companies we believe are more likely to be investigated or audited.
Programs/Contracts
The first group of companies ripe for audits are those accepting COVID relief funding and contractors performing large COVID-specific contracts, as well as contractors performing traditional government contracts that entail certain COVID-related twists impacting performance.
Companies accepting COVID relief funds are likely at the top of auditors’ lists for several reasons. First, because of the magnitude of funds at issue. Second, due to the complex and ambiguous eligibility, use, and reporting requirements. For example, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and supplemental legislation appropriated funds to reimburse eligible healthcare providers for healthcare-related expenses or lost revenues attributable to COVID. Receipt of funds was easy. Most recipients’ funds were automatically deposited into their bank accounts. But healthcare provider recipients have not yet been required to file reports attesting to the proper utilization of the relief funds. Relief funds recipients in other non-healthcare industries may also be affected. Certain monies received under the CARES Act also involve ongoing and downstream reporting requirements by companies regarding statutory limitations on compensation paid to certain employees and the receipt of a variety of potential tax credits. Thus, recipients’ use of funds has not been tested, and it is unlikely that all usage has been in compliance with the ambiguous requirements and multiple rounds of agency guidance and interpretations.
This is the first in a series of blog posts concerning the audits and investigations related to the contracts and grants awarded, and relief funds provided, in response to the COVID-19 pandemic. As of February 2021, pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which created the Paycheck Protection Program (“PPP”) and supplemental funding such as the Families First Coronavirus Response Act, the United States government has made available an estimated four trillion dollars in relief funds to businesses and individuals, and the Biden administration is proposing roughly two trillion dollars more.
In addition to the relief funds, the Government has easily awarded more than billions in pandemic-related contracts for everything from vaccines to PPE to hand sanitizers. These levels of funding and spending are unprecedented and have been made at breakneck speed (for the government). Based on these factors and lessons from the past, audits of relief recipients and contractors to confirm appropriate use of government funds are inevitable. And the government has said as much. Of course, if an audit reveals potential wrongdoing or malfeasance, relief recipients and contractors should expect follow-on investigations and enforcement activity.
This first post identifies the myriad of entities that are or will be reviewing—and potentially investigating—relief recipient and contractor representations made to obtain, and subsequent use of, government funds.
A top-of-mind issue for contractors right now is whether Section 3610 of the CARES Act will expire on September 30, as it is currently set to do. As discussed here and here, Section 3610 authorizes reimbursement of certain contractors who are unable to access their work sites and unable to telework during the pandemic—a critical stopgap designed to keep contractor workforces in a “ready state.”
On September 22, the House of Representatives passed a Continuing Resolution that would fund the government through December 11, 2020, and included in the Continuing Resolution an extension of Section 3610 through that same date. Whether the Senate will approve the Continuing Resolution remains to be seen, but we are cautiously optimistic that Section 3610 will be extended in light of the House’s support.
Of course, as we previously discussed here, there are other potential bases of recovery for contractors beyond Section 3610. However, each basis comes with its own set of limitations, and, thus, the sweeping relief provided through Section 3610 remains critically important. Section 3610, in turn, comes with its own limitations—including that there is no dedicated funding behind it, it is discretionary, it only provides relief for a subset of costs stemming from the pandemic, and, even if extended, it will remain a temporary measure.
We will continue to monitor this important topic and provide updates as they occur.
On August 6, 2020, President Trump issued another Executive Order (“EO”) that will likely have dramatic and long-lasting effects on the pharmaceutical industry.[1] The impact of the EO may be far greater than currently anticipated. It is well-considered, well drafted, and structured in a way that is likely to survive if there is a change in Administration. The EO will have a greater and immediate impact on Medical Counter Measures (“MCMs”) for chemical, biological, radiological, and nuclear threats, and emerging infectious diseases than on Essential Medicines. The inclusion of Critical Inputs (i.e., active pharmaceutical ingredients (“API”)) and starting materials potentially makes the impact far reaching, especially when coupled with the significant funding from the federal government to support onshoring efforts as a result of the COVID-19 pandemic. Continue reading “Executive Order Regarding Domestic Production and Purchase of Essential Medicines: A Lot to Unpack and More Than Meets the Eye”
The financial relief offered to contractors under Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is limited to contractors who: 1) cannot perform work at their approved sites due to site closures, and 2) cannot telework. For contractors that do not meet these two conditions, the traditional Request for Equitable Adjustment (“REA”) and claims processes are still available and may permit recovery of some cost increases due to COVID-19.
Below we provide a brief refresher of key considerations for contractors considering COVID-related REAs or claims. Of course, the particular facts and terms of each contract will ultimately determine whether cost increases are recoverable.
What Types of Costs May Be Recovered?
Costs stemming from COVID-19 may be recoverable under several Federal Acquisition Regulation (“FAR”) clauses:
The Changes Clause (g., FAR 52.243-1): A wide array of costs may fall under the Changes clause, such as costs stemming from government direction to alter or stagger work hours, provide additional personnel, use more costly procedures, use procedures requiring additional training for personnel, provide personal protective equipment, or perform additional cleanings. A recent Department of Defense Memorandum is instructive as to how such costs are likely to be viewed, advising that contracting officers should consider whether such costs are “reasonable to protect the health and safety of contract employees as part of the performance of the contract.”
The Stop Work Order Clause (FAR 52.242-15): Costs stemming from the government’s direction to stop work will generally be recoverable under this clause. As discussed in our previous blog post, this may include the cost of “idle time” where employees are unable to access work sites, potentially providing some relief to contractors who are not covered by Section 3610 of the CARES Act. Arguably, this clause should cover situations in which employees cannot work due to government-required quarantine procedures or government-caused delays, even if the work site is technically open—though this remains an open issue.
The Government Delay of Work Clause (FAR 52.242-17): Where the government causes a delay, the costs stemming from such a delay, such as increased material costs, may be recoverable under this clause.
Notably, while the Excusable Delays clause (e.g., FAR 52.249-14) excuses a contractor’s failure to perform for reasons including “epidemics” and “quarantine restrictions,” this clause does not provide financial relief, but rather, provides a basis for excusing what might otherwise give rise to a termination for default.
What Is the Difference between an Equitable Adjustment and a Claim?
A claim is a formal written demand subject to the detailed procedures set forth in the Contract Disputes Act (“CDA”). Once a claim is made, the Contracting Officer must issue a final decision within 60 days (or, for claims over $100,000, provide a firm date by which a final decision will be issued), which may be appealed to the Boards of Contract Appeals or the Court of Federal Claims. Claims must include a “sum certain”—i.e., the amount of damages being claimed—and claims of $100,000 or more must be certified by the contractor as current and accurate.
An REA is generally considered less adversarial than a claim and is not subject to a formal disputes process. There is no set timeline for resolution of an REA; however, if an REA is not resolved satisfactorily, it can be converted into a claim.
In the context of COVID-related costs, there are advantages and disadvantages of both options. The less formal REA process provides agencies more leeway as they work to coordinate internally on how to address costs relating to COVID-19, which may ultimately be to the benefit of contractors. However, the claims process puts the government “on the clock” and, thus, may result in a faster response. Note that contractors are entitled to interest that accrues while a claim is pending, but not while an REA is pending. As for legal costs, they are allowable when incurred to support an REA, but are unallowable when incurred in support of a claim.
Timing Considerations
Whether a contractor ultimately submits a request for equitable adjustment or claim, it must notify its Contracting Officer of the delay, disruption, or right to an adjustment, with different deadlines depending upon which clause applies. For example:
FAR 52.242-15 (Stop Work Order Clause) requires contractors to assert their right to an adjustment within 30 days after the end of the period of work stoppage;
FAR 52.242-17 (Government Delay of Work) requires contractors to notify the Contracting Officer within 20 days of the act or failure to act giving rise to the delay; the contractor must also assert the amount of the claim in writing as soon as practicable after the termination of the delay or interruption, but not later than the day of final payment under the contract; and,
FAR 52.243-1 (Changes) requires the contractor to assert its right to an adjustment within 30 days from the date of receipt of a written change order. There is an exception “if the Contracting Officer decides that the facts justify it,” where the request is made before final payment of the contract.
Claims are also subject to a six-year statute of limitations.
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.
Despite COVID-19 article overload—and understandable fatigue—there is no doubt that there will be substantial audit activity related to COVID-19 contracts and receipt of relief funding. All of the ingredients for a Perfect Storm are present: unprecedented federal and state spending causing significant government budget deficits, coupled with hyper-partisan politics, and the creation of multiple government audit functions. Add in revenue-stressed government contractors perhaps focusing less on compliance, with a workforce working remotely, and you have everything necessary for a Perfect Storm. Let’s face it, the press and politicians are—or will be—on the lookout for relief funds and sweetheart contracts awarded to companies with cozy relationships with the executive branch, contracts that didn’t provide the intended benefit, and contracts and relief funds that have otherwise already received media attention.
There is nothing you can do to prevent an audit, but you can be prepared. Below are some very general guidelines you can follow now to make your life easier in the future if you do become the target of an audit or potential audit.
Memorialize Everything. Too many things are happening too fast. Information that you think you will remember (so you don’t bother to write down or don’t write down with sufficient detail) will be forgotten. Audits can occur two, three, or even five years after the fact. Memories fade. Employees retire or move on.
Ensure You Have Contracting Officer Approvals. Only contracting officers have warrants and only they can authorize changes to contracts that affect dollars, schedule changes, deliverables, and requirements. If you didn’t get contracting officer approval at the time, go back and request approval (in writing) now.
Establish Commonsensical and Clear Labeling. At some point in time, you have moved to a new home and someone has told you to take an extra 30 seconds to add more detailed descriptions on your boxes. For example, while the label “closet” seemed adequate when packing-up, it is not useful when you are looking for bed sheets to sleep on at midnight for the first night in your new home. The same is true with government contracts. Simply labeling a folder or e-mail “HHS contract” is better than nothing, but it is not very helpful when trying to locate a specific conversation or contract modification.
Centralize Contract Files for a Later, Easy Location. It is of no value to maintain documents and records if you cannot find them. Establish standard operating procedures (“SOPs”) so that someone walking in off the street two years from now can read them and easily understand where files are located.
Archive E-mails to Avoid Automatic Deletion Programs. Company information technology systems are overwhelmed. As a result, many companies have implemented programs that automatically delete e-mails after a certain period of time. Design an SOP so that relevant government contracting e-mails are archived in a manner to avoid deletion.
Perform Periodic Internal Spot Reviews. Simply having a compliance policy and procedures are no longer enough. You need to periodically confirm that the policy and procedures are being followed—and are effective. Conduct periodic spot checks and memorialize the results. Remember, the only thing worse than not having a compliance program, is having a program and not following it.
Conduct Exit Interviews and Laptop Ghosting. Know how to find former employees. Don’t simply accept a former employee’s laptop, clean it, and reissue it to another employee. Take the extra time to ghost the laptop and save the contents in a place that you can locate at a later date (again, think two years from now). In addition, take the time to interview departing employees and, among other information, determine the location (hard and soft copy) of relevant government contracting files.
It makes no sense to work hard to win these contracts, help a state or the federal government respond to the COVID-19 national emergency, and record revenue today to only years later have to give back the money you earned because you don’t have documents in your contract files to substantiate information requested by an auditor. To be clear, auditors may be very nice people, but they don’t care that you did a great job and helped an agency achieve its mission. Auditors have a job to do. They have checklists to follow. If the required documents are not provided or available, they cannot and will not check the box. Rather, they will tell you to provide your explanation to the next level of review. Take the time now and follow the above guidelines to protect yourself. You will hate it now and claim that there just isn’t enough time in the day but, if and when you get that audit request, you will be thankful.
