Federal Contractors’ Guide to Coronavirus Contract ImpactsMarch 24, 2020 – Alerts
The virus that causes COVID-19, commonly referred to simply as "the coronavirus,” will unfortunately affect multiple aspects of American life for the foreseeable future. While the estimated impact of the virus changes by the day, the recent guidance by the federal government is that mandatory virus protocols could be in effect for eighteen months or more.
Federal contractors have been, and will continue to be impacted by the virus and all of the aftereffects that follow, such as suspensions of work, performance delays, extra costs, contract terminations and the like. To make matters more challenging, the government has failed to issue comprehensive guidance to contractors on how to systematically and consistently deal with the coronavirus’ impacts on federal contracts. Therefore, contractors are left to rely upon their contract terms and the Federal Acquisition Regulation (FAR) provisions incorporated into their contracts to interpret those provisions on a contract-by-contract basis to determine what relief is available for coronavirus impacts.
This Federal Contractors’ Guide to Coronavirus Contract Impacts provides an overview of the relevant FAR provisions that may apply to coronavirus impacts, the actions the government may take on federal contracts due to the impacts, the rights contractors have under the applicable FAR provisions, and the “best practices” that contractors should implement to provide the best opportunity to obtain time extensions and attempt to recover extra costs caused by coronavirus impacts.
Actions the Government May Take Due to Coronavirus Impacts on Contracts and Contractor Remedies for Those Actions
The FAR provides the government a host of contract actions and remedies that it can apply in the “best interest” of the government to protect itself from downside contract risks caused by the coronavirus. As a general rule, the government is not in the business of losing money on federal contracts and contracting officers are obligated to save money when and where possible. Unfortunately, government actions intended to be in the “best interest” of the government are generally to the detriment of the contractors performing on federal contracts. Therefore, it is important for all federal contractors to have a fundamental understanding of what steps the government can take under the FAR when managing coronavirus impacts, and what remedies contractors have in response to these government actions.
A. Postpone/Cancel Procurements and Delay Contract Awards
Prior to a contract being awarded by the government, it has nearly unfettered discretion to delay the issuance of a request for proposals or invitation for bids, delay the evaluation of proposals or bids, or delay the award of a contract where it is in the best interest of the government to do so.
This inherent authority of the government is summed up succinctly by FAR 1.602-2 (Responsibilities), which states that “Contracting officers are responsible for ensuring performance of all necessary actions for effective contracting, ensuring compliance with the terms of the contract, and safeguarding the interests of the United States in its contractual relationships. In order to perform these responsibilities, contracting officers should be allowed wide latitude to exercise business judgment.” FAR 1.601-2.
Contracting officers are able to use this authority to make broad and sweeping changes to procurements before an award has been issued. Therefore, it is likely that many procurements will be pushed back, suspended or cancelled in their entirety due to the adverse effects of the coronavirus on the government’s needs and procurement plans.
While many contractors will feel the adverse effect of these procurement impacts, contractors generally do not have a right to a prospective government contract or the right to recover costs associated with preparing a bid or proposal when a procurement is delayed or canceled. Put another way, absent a showing of procedural defects or bad faith on the part of the government, it is nearly impossible to force the government to procure goods or services in a manner inconsistent with the government’s exercised discretion. See Snowbird Indus., Inc., B-226980, (1987) (Courts and the GAO will not question government procurement decisions “absent a clear showing that the determination was arbitrary or capricious.”).
While contractors should not be dissuaded from lobbying the government to continue with procurements as planned and as scheduled before the virus impact, the simple fact is that contractors have a heavy burden to show that the government committed procurement error or acted in bad faith when postponing, cancelling, or delaying procurements for the benefit of the government.
B. Suspend or Stop Work
After the award of a contract, a contracting officer has the authority to suspend or stop contract performance at any time for the “convenience of the government,” which gives the government nearly unfettered discretion to suspend, delay, or stop contract work for coronavirus impacts.
Suspensions of work are covered by FAR 52.242-14 (Suspension of Work), which states that: “(a) The Contracting Officer may order the Contractor, in writing, to suspend, delay, or interrupt all or any part of the work of this contract for the period of time that the Contracting Officer determines appropriate for the convenience of the government.”
Work stoppages are covered by FAR 52.242-15 (Stop-Work Order), which states that: “The Contracting Officer may, at any time, by written order to the Contractor, require the Contractor to stop all, or any part, of the work called for by this contract for a period of 90 days after the order is delivered to the Contractor, and for any further period to which the parties may agree. The order shall be specifically identified as a stop-work order issued under this clause. Upon receipt of the order, the Contractor shall immediately comply with its terms and take all reasonable steps to minimize the incurrence of costs allocable to the work covered by the order during the period of work stoppage.”
In general, all suspensions or stoppages of work should be implemented by the contracting officer by written order to the contractor. Upon receipt of such an order, the contractor must take prompt and reasonable steps to mitigate any additional costs to be incurred on the project, protect the work performed to date and coordinate with the contracting officer for further instruction on issues such as demobilizing, pending material deliveries, return of government-furnished equipment and any other logistical or administrative issues that result from the suspension or stoppage of work.
A suspension of work is substantially similar to a work stoppage, with the exception that the FAR does not set a designated time for a suspension of work, whereas the FAR sets a 90-day time period for a work stoppage. Once the 90-day duration for a work stoppage has been met (absent any agreed upon extensions to that 90-day period) the government must:
- Cancel the stop-work order; or
- Terminate the work covered by the order either for convenience or default. FAR 52.242-15(a).
While the government tends to look at suspensions of work and work stoppages as “no cost” impacts on the contractor, the opposite is true in that suspensions and stoppages tend to cause contractors to incur significant and unforeseen contract delays and extra costs. Contractors have the ability to seek to recoup these delays and extra costs from the government, but must do so in the manner called for by the FAR and face significant limitations on the costs that can be recovered.
In general, all suspensions and stoppages enable a contractor to obtain a time extension for the period the suspension or stoppage runs. All such delay should be considered “excusable delay” and not counted against the contractor for the purposes of performance completion, liquidated damages or any other performance metric that could be used to adversely affect a contractor. See FAR 52.249-14, which states that “Except for defaults of subcontractors at any tier, the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor.”
Contractors will find it more challenging to recover their extra costs resulting from a suspension or work stoppage, but it is prudent for all contractors to submit their extra costs to the government, either as a request for equitable adjustment or as a claim, to attempt to recover the extra costs incurred due to the suspension or stoppage.
For a suspension of work under FAR 52.242-14, a contractor is entitled to recover its “cost of performance of this contract (excluding profit) necessarily caused by the unreasonable suspension, delay, or interruption” if:
- The suspension, delay, or interruption is “for an unreasonable period of time;"
- The suspension, delay, or interruption was caused by an “act of the Contracting Officer in the administration” of the contract; or
- The suspension, delay, or interruption was caused by the “Contracting Officer’s failure to act within the time specified in this contract,” i.e., by the contracting officer’s failure to act within a reasonable period of time to implement or lift the suspension; and
- The contractor provides the contracting officer reasonable notice of the cost impacts of the suspension, delay, or interruption of work, generally, no later than 20 days after the negative impacts are known by the contractor.
In sum, to recover costs due to a suspension of work, a contractor must show that the contracting officer acted unreasonably, suspended the contract work for an unreasonable period of time or failed to act within a reasonable period of time to impose or lift the suspension. While this is generally a high burden to overcome, contractors should track all costs caused by the suspension and prepare to submit to the government for reimbursement if the government has failed to act reasonably in handling the suspension.
For a work stoppage under FAR 52.242-15, a contractor is entitled to recover its additional costs incurred due to the stoppage once the stoppage is lifted or cancelled if:
- The stop work order results in an increase in the contractor's cost allocable to the performance of any part of the contract; and
- The contractor asserts its right to the cost adjustment within 30 days after the end of the stop work period.
In general, the ability to seek costs related to a work stoppage is more contractor-friendly than doing so under a suspension of work, and again, contractors should track all costs caused by the stoppage and prepare to submit to the government for reimbursement in accordance with FAR 52.242-15.
In situations where the stop work order is not lifted or cancelled, and the contract is terminated for either convenience or default, a contractor must seek its remedies under the appropriate termination provision of the FAR.
C. Termination for Convenience
The government has the right to terminate all or part of a contract for convenience if in the best interest of the government. This provides the government a near unfettered ability to terminate contracts for coronavirus impacts or for a host of many other reasons.
Terminations for convenience are primarily covered by FAR 52.249-2 (Termination for Convenience of the Government (Fixed–Price)) (although other similar termination provisions are contained within the FAR). Specifically, FAR 52.249-2 states that “[t]he Government may terminate performance of work under this contract in whole or, from time to time, in part if the Contracting Officer determines that a termination is in the Government’s interest. The Contracting Officer shall terminate by delivering to the Contractor a Notice of Termination specifying the extent of termination and the effective date.”
Upon receiving a termination for convenience notice, contractors must take the following steps in accordance with the FAR:
- Stop work as required by the notice;
- Issue no further subcontracts or orders for goods or services;
- Terminate all subcontracts and orders if they are related to the terminated work;
- Settle all outstanding liabilities with approval of the government;
- Transfer title of any materials, products, or work to the government as directed;
- Complete any unterminated work;
- Take any action necessary or directed to protect and preserve the work and the government’s interest in the work.
To the extent terminated for convenience, a contractor is entitled to request the costs incurred as the result of that termination through a Termination for Convenience Settlement Proposal, which must be submitted to the government within one year of the termination date. In general, a contractor is entitled to recover the following costs related to a termination for convenience:
- The costs incurred for performance up until the date of termination, including all initial and preparatory expenses related to that work;
- Reasonable profit and overhead on those costs;
- The costs of settling and paying termination settlement proposals for any subcontractors; and
- Accounting, legal, clerical, and other expenses reasonably necessary for the preparation of termination settlement proposals and supporting data.
Most Termination for Convenience Settlement Proposals are fairly complex and difficult to prepare due to the cost assumptions and allocations that must be made in order to prove to the government a contractor’s right to its costs. Therefore, contractors should obtain the assistance of a cost consultant and legal counsel experienced in preparing a Termination for Convenience Settlement Proposal before submitting to the government.
D. Termination for Default
The government has the right to terminate all or part of a contract for default if a contractor is unable to perform the contract as required. However, it would be unexpected for any contracting officer to terminate a contract for default due solely due to coronavirus impacts.
Terminations for default are covered by FAR 52.249-10 (Default (Fixed–Price Construction)), which states that “If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed.” Other termination for default provisions are found in FAR 52.249-8 (Default (Fixed-Price Supply and Service)) add FAR 52.249-9 (Fixed-Price Research and Development)).
However, the government cannot terminate a contractor for default in the event that the reasons for the default were sufficiently outside the contractor’s ability to control. Specifically, FAR 52.249-10(b)(1) states that a termination for default should not be issued where:
"The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers . . ." (emphasis added)
The contractor must also provide the government notice within 10 days of any delays or impacts adversely affecting its performance.
It is unlikely that the government will terminate a contract due to a contractor’s failure to perform due to coronavirus impacts. However, to the extent that such a termination does take place, the contractor is only entitled to the costs incurred to deliver the completed and accepted work, and the contractor is not entitled to reasonable profit or overhead on the terminated work.
A contractor’s remedy for an improper termination for default is to challenge the government’s termination for default and attempt to convert it to a termination for convenience, which if successful, entitles the contractor to the costs of the work performed, plus reasonable profit and overhead, and the administrative costs incurred to settle the termination.
E. Proceed with the Contract Work as Required
A contractor has, at all times, a duty to proceed with contract performance, unless a suspension of work, a stop work order or a termination notice is issued. This means that if the government does not ask a contractor to stop or delay work, or terminate the contract, the contractor will be required to complete performance on time and on budget, despite any impacts it may face as a result of coronavirus. That said, contractors do have several remedies and protections for continued contract performance that may be adversely impacted by the coronavirus.
First, contractors are entitled to seek excusable delay under the FAR’s force majeure clauses that effectively extend the contract completion date to compensate for unforeseen and unanticipated impacts. FAR 52.249-14 (Excusable Delays) states that:
"Except for defaults of subcontractors at any tier, the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance, the failure to perform must be beyond the control and without the fault or negligence of the Contractor."
— FAR 52.249-14(a) (emphasis added).
In general, FAR 52.249-14 enables a contractor to claim excusable delay, i.e., non-compensable delay, for coronavirus impacts to the extent the contractor can show that the delays were “beyond its control and without the fault or negligence of the Contractor.” These force majeure impacts are the same as those addressed in FAR 52.249-10 (Default (Fixed–Price Construction)), which states that contractors cannot get default terminated due to such impacts.
Second, contractors may not be held liable for the excess costs of performance caused by coronavirus impacts under FAR 52.249-8(c) (Default (Fixed-Price Supply and Service), which states that “the Contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor” which includes “(1) acts of God or of the public enemy . . . (5) epidemics, (6) quarantine restrictions . . .” as long as the contractor can demonstrate that the failure to perform was “beyond the control and without the fault or negligence of the Contractor.”
In general, past epidemics and quarantine restrictions have been viewed by courts and boards as reasons to issue excusable delays and to negate excess costs caused by a contractor, however it imperative that contractors be able to definitively prove that in this instance – the coronavirus – is the primary cause of any delayed performance or extra costs. Failure to show that the epidemic at issue caused the impacts will result in no relief for a contractor. See e.g. Ace Elecs. Assoc., ASBCA No. 11496, 67-2 BCA ¶ 6456; Crawford Dev. & Mfg. Co., ASBCA No. 17565, 74-2 B.C.A. (CCH) ¶ 10660; Asa L. Shipman's Sons, Ltd., GPOBCA No. 06-95.
F. Change the Contract Work to Account for Coronavirus Impacts
The government has the right to unilaterally or bilaterally modify a contract if its procurement needs or circumstances change. In general, the contracting officer “may at any time, by written order, and without notice to the sureties, if any, make changes within the general scope of this contract . . .” FAR 52.243-1(a). Changes occur all the time on federal contracts and routinely result in disputes between the contractor and the government regarding the impacts and costs related to those changes, and changes related to coronavirus will be no exception to that rule. The standard FAR changes clauses are found at FAR 52.243-1 (Changes – Fixed-Price) to FAR 52.243-4 (Changes).
If the government makes changes to contract work to compensate for coronavirus impacts, whether the changes are direct changes (by written/direct orders from the contracting officer) or constructive changes (an informal directive from the government resulting in contract changes), a contractor has the ability to seek compensation as a result of those changes. Specifically, “[i]f any such change causes an increase or decrease in the cost of, or the time required for, performance of any part of the work under this contract, whether or not changed by the order, the Contracting Officer shall make an equitable adjustment in the contract price, the delivery schedule, or both, and shall modify the contract.” FAR 52.243-1(b).
Many contracts will likely be suspended or the subject of a stop work order due to coronavirus impacts, which will require contractors to seek extra costs under the specific suspension of work (FAR 52.242-14) and stop work (FAR 52.242-15) provisions of the FAR. However, it is foreseeable that contracting officers will implement changes to contract scopes of work, schedules and contract milestones without implementing formal suspensions or work stoppages, which will enable contractors to seek time extensions and extra costs incurred as a result of these changes.
A contractor must assert its right to the extra time or costs within 30 days from the date of receipt of the written change order, or within 30 days of the change if no written order is issued, i.e., if the change is a constructive change. FAR 52.243-1(c). Therefore, it is imperative that contractors provide prompt notice to the contracting officer of any potentially compensable change that may occur on a contract to protect its rights for compensation down the road. A simple notice of the change, along with the contractor’s position on entitlement and the quantum (extra costs) due as a result of the change is sufficient.
Contractor Best Practices
Contractors must take affirmative and diligent steps to protect their rights under a contract and the applicable FAR provisions to seek time extensions and extra costs due to coronavirus (and related government) impacts to a contract. The following best practices should be followed by contractors when analyzing coronavirus impacts to their work:
A. Provide Timely Notice of all Coronavirus Impacts: All of the FAR provisions addressed above require contractors to provide notice to the contracting officer of a potential contract impact, schedule delay, or extra cost. These delays generally run from 10 days to 30 days in duration, and it is recommended that contractors provide notice as soon as possible, even if not all of the key facts are known at the time. A notice can always be supplemented once additional information is obtained by the contractor, but a contractor should not wait to get all pertinent facts prior to giving notice. Written notice should be provided as early as possible.
B. Keep Comprehensive Project Records: Oftentimes, the party with the most complete and comprehensive set of records regarding contract performance has the upper hand in litigating contract disputes. Contractors should strive to have better and more detailed records on a contract than the government keeps to ensure that it can prove both entitlement to extra time or costs, and the quantum that should be paid to the contractor should litigation occur. While keeping contemporaneous records on a project can be burdensome, those records are worth their weight in gold in the event a dispute arises with the government. Contractors should specifically record delays and extra costs caused by each specific impact they encounter on a project to be able to parse through those impacts when the time comes and obtain relief from the government.
C. Keep Performing During Impacts: Contractors must continue to perform their contract duties unless suspended, ordered to stop work or terminated from the work. If there is any doubt in a contractor’s mind as to whether they have been suspended, subject to a stop work order, or a termination, the contractor should continue to perform until it receives clarity on the issue from the government. Failure to continue to perform contract duties, even though due to impacts outside of the contractor’s control, can lead to default termination and government efforts to recoup costs from the contractor.
D. Exercise Good Faith: Contractors should exercise good faith in all dealings with the government and continue performance even when full performance may be impossible. Courts and boards routinely reward contractors who exercise diligence and effort to achieve deadlines and milestones that may be otherwise unobtainable, and will routinely give the benefit of the doubt to a contractor that exercises good faith as opposed to a contractor that does not. Going the extra mile to try and perform under difficult circumstances is sometimes viewed as the same as actually performing.
While it is the hope of all that the coronavirus impacts will be relatively short-lived and contractors can get back to work in the very near future, the impacts of the coronavirus on federal contracts will be felt for months, if not years. Therefore, contractors must be diligent in analyzing, managing and providing notice of any impacts, no matter how small, related to the coronavirus (or any other impacts for that matter) to best protect their rights and remedies to seek time extensions and extra costs. Contractors who implement the best practices set out above will put themselves in the best possible position to obtain relief as needed through requests for equitable adjustments or claims down the road.
Doug Hibshman is a Partner in Fox Rothschild LLP’s Washington, DC office and a member of the Federal Government Contracts & Procurement; Construction; Litigation; Privacy & Data Security; Mergers & Acquisitions; White-Collar Compliance & Defense; Health Law; and Architecture, Engineering & Design Professional Firms practice groups. He represents national and international clients in the defense, health care, engineering, information technology, construction, manufacturing and services industries on complex contract, compliance and litigation issues. Doug assists clients with understanding and complying with federal contract terms/conditions and compliance requirements, including assisting clients prepare and manage requests for equitable adjustments and claims related to various contract impacts. Doug can be contacted at [email protected] or (202) 461-3113.