CARES Act May Provide Financial Relief for Contractors Impacted by COVID-19 if They Remain in a Ready State

The economic impact of COVID-19 has been felt across almost all industries in the United States, and Government contractors are no exception. Many do not have the financial capacity to absorb and recover paid sick leave resulting from COVID-19 in the normal course of business. Fortunately, some may be eligible for relief under § 3610 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Section 3610 states in part that Government funds:

[M]ay 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.

Agencies are now authorized under § 3610 to reimburse contractors for paid employee leave incurred to keep employees or subcontractors in a “ready state” during the national emergency declared in response to COVID-19. At present, this reimbursement authority extends to COVID-19-related employee leave costs incurred between January 31 and September 30, 2020.

Department of Defense Issues Guidance to Help Agencies and Contractors Apply § 3610

On April 8, 2020, less than two weeks after the passage of the CARES Act, the Department of Defense (DOD) issued a new cost principle (DFARS 231.205-79) through a class deviation implementing the CARES Act. The new cost principle provides a framework for agencies exercising authority to reimburse COVID-19 standby leave costs under § 3610.

DOD is also issuing “implementation guidance” addressing § 3610 (in a FAQ format), which it most recently updated on April 24, 2020. Collectively, these authorities clarify certain conditions that contractors should keep in mind when seeking relief under § 3610:

• Reimbursement authority extends only to work on a site that has been approved by the Federal Government. An approved work site is “the contractor’s location and any other places of performance specifically identified in the contract” (FAQ 6). DOD states that approved facilities may include multiple work sites or locations, including facilities at which contractor administration services are performed in support of a contract. This indicates that a contractor may be entitled to recovery for worksites that may not be the location where goods or services are physically produced, such as construction worksites or manufacturing facilities.
• The new cost principle is inapplicable when employees (including subcontractor employees) were able to work, including remote or telework (FAQ 1). DOD guidance supports providing leave reimbursement for employees failing to report to open work sites due to public health reasons or family care issues.
• The CARES Act allows for reimbursement of leave, including sick leave, at the minimum applicable contract billing rates not to exceed an average of 40 hours per week. DOD guidance suggests that where a contract does not currently include “contract billing rates,” that one could be added to a firm fixed price contract under § 3610 authority. DOD also suggests that adding a reimbursable line item to the contract is preferable.
• There may be cases where work sites are open and accessible but, for public health reasons or family care issues, contractor employees cannot be in the workplace and cannot otherwise work remotely. Contractor employees who do not report to an open work site may be viewed as being kept in a “ready state” if all other § 3610 criteria are met. However, contractors must support claimed costs, as well as identify any applicable credits that are allowed under either the CARES Act or Division G of Public Law 116–127 that would reduce reimbursement. (FAQ 7, 17).

How Can Contractors Make a Persuasive Reimbursement Request?

The text of § 3610 frames reimbursement in terms of agency discretion (“funds made available . . . may be used by such agency to modify . . .”) and DOD guidance expressly states that reimbursement is not mandatory. However, Congress and DOD have also both expressed a clear intent to provide relief for contractors during this unprecedented time.

And while the CARES Act does not relieve contractors from the obligation to support their claims, contractors should expect the exercise of reasonable discretion by contracting officers to provide contractor relief on a case-by-case basis.

• DOD guidance suggests a balancing of an agency’s fiscal constraints against harmful impacts of COVID-19 on the defense contracting industry as part of a “ready force” with contractors able to mobilize and resume performance in a timely manner. This suggests that reimbursement requests demonstrating both contractor needs and Government benefits will fare better than other requests. Keeping that context in mind throughout the reimbursement process may give your proposal an edge over other proposals if an agency must make a tough decision driven by fiscal constraints.
• Contractors should also take advantage of DOD publications intended to educate and guide defense contractors performing reimbursable contracts. One such publication is DCAA Manual No. 7641.90, which is published by the Defense Contract Audit Agency (DCAA) to assist Government contractors through the DCAA audit process, which most often arises in the context of cost reimbursable contracts. This manual provides insights, guidance, and forms that a contractor can incorporate into an effective reimbursement request.

Contractors should also remain mindful that False Claims Act exposure could arise if they request or retain duplicate recoveries. While the False Claims Act is not the subject of this writing, careful coordination of recovery efforts within an organization and scrupulous application of accounting standards should be the rule for any Government contractor - seeking reimbursement under the CARES Act is no exception.

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.