How the Coronavirus Will Affect Government Contractors
The novel corona virus, COVID-19, is continuing to spread across the United States and the federal government’s response to the virus is still developing. The global spread of COVID-19 may have a significant impact on government contractors—contract schedule and performance may be impacted by a myriad of circumstances including a strain on the supply chain, closures of military bases or other federally operated locations, and workforce reductions from those who are sick or quarantined. In this uncertain time, government contractors should prepare for the potential impacts that COVID-19 may have on their current federal contracts.
Although many commercial contracts contain a force majeure clause that protects against unforeseen or unavoidable events, federal contracts use the phrase “excusable delays”. Many government contracts contain clauses such as FAR 52.249-8 (for Fixed-Price Supply and Service contracts), FAR 52.249-10 (for Fixed-Priced Construction contracts) and FAR 52.249-14 (for Cost Reimbursement contracts, or FAR 52.212-4(f) for commercial contracts) which excuses a contractor’s failure to perform if the failure arises from causes beyond the contractor’s control and without the fault or negligence of the Contractor. Such causes include acts of God, epidemics, and quarantine restrictions. If COVID-19 continues to spread, it is likely that it would be a considered a “cause beyond the contractor’s control” that would create an excusable delay. In the event of an excusable delay, a contractor is not held in default for failing to perform and is entitled to a time extension.
For fixed-price supply and service contracts, FAR 52.249-8 provides that a contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the contractor’s control (again including epidemic and quarantine restrictions). If the government terminates for a delay that is later found to be excusable, the termination will be treated as one for convenience.
However, an excusable delay on a fixed-price contract will result in an extension of time but does not entitle a contractor to compensation for additional costs caused by the delay. Both the government and the contractor will bear their own costs associated with an excusable delay.
If you anticipate that you will not be able to perform your contract because of COVID-19, you should immediately notify your contracting officer and explain the circumstances causing the delay. You should also make sure to diligently document the reasons for and causes of the delay and the impact it has on your ability to perform.
Suspension of Work or Stop Work
As circumstances around COVID-19 change and develop, the government may decide to stop or temporarily suspend work under federal contracts as permitted by FAR 52.242-14 and 52.242-15. These provisions allow a contracting officer to stop all, or part, of the contract work at the government’s convenience.
If you receive a stop work or suspension of work notice you should comply with the directions contained in the order. However, government contractors are entitled to seek an equitable adjustment for costs resulting from a suspension or stop work notice.
Defense Production Act
Since the outbreak of COVID-19 in the U.S., demand for personal protective equipment like masks and other medicines has skyrocketed. If these or other supplies become scarce, the government may exercise its rights to put its procurement needs ahead of other consumers as required to address the COVID-19 outbreak. The Defense Production Act allows the government to prioritize its own needs with the use of rated orders under the Defense Priorities and Allocation System (DPAS). A DPAS rated order requires a supplier to fulfill the government’s order before those of its commercial customers.
Contractors who provide services or supplies that may be subject to such prioritization should be aware of the requirements when fulfilling a DPAS rated order. The Department of Defense, the Department of Homeland Security (which includes FEMA) and the Department of Energy are all authorized to issue DPAS rated orders. Failure to comply with DPAS rated orders may result in criminal penalties.
COVID-19’s impact on the US economy is still unknown, although the number of reported cases continues to increase. There is still significant uncertainty as to how severe the impact of the virus will be on government contractors. Contractors should be sure to review their contracts for any provisions that may provide some relief in the event their contract’s schedule or performance is severely impacted. In addition, contractors should be sure to be in communication with contracting officers as to any virus-related circumstances that may impact contract performance.
This document is intended to provide you with general information regarding the impact of a potential or actual coronavirus pandemic. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact your regular Oles Morrison Rinker & Baker LLP attorney.