Navigating the COVID-19 Challenge — Delays, Changes and Cost Recovery Under Federal Contracts

March 26, 2020

The stakes associated with successful performance by federal contractors are higher than they have ever been in a non-wartime setting. In areas ranging from pharmaceutical and medical supply, to construction, to logistical and technical support, the federal government faces an urgent need to procure goods and services to mitigate and overcome the COVID-19 pandemic.

Read on for a discussion of issues important to federal contractors in this challenging environment, as well as an exploration of avenues for addressing delays, changes, and potential recovery of increased performance costs that may be incurred as the crisis continues to unfold.

Delayed Performance

When confronting challenges traceable to the COVID-19 pandemic, federal contractors should determine whether their contracts may contain clauses that provide schedule relief for “excusable delays.” The Federal Acquisition Regulation (FAR) contain multiple clauses that address delays in performance, with different clauses applicable to different contract types — for example, FAR 52.249-14 (cost reimbursement and time and material contracts), FAR 52.249-8 (fixed-price supply and service contracts) and FAR 52.212-4 (commercial item contracts). The underlying rationale of these clauses is that contractors and subcontractors should not be held responsible for delays caused by events or circumstances that are not their fault and are beyond their control.

Fortunately for federal contractors facing delays in performance attributable to COVID-19 (including delays traceable to COVID-19 countermeasures), these FAR clauses specifically reference “epidemics” and “quarantine restrictions” as examples of the types of events that may give rise to an excusable delay. See FAR 52.249-14(a); FAR 52.249-8(c) and (d); FAR 52.249-9(c) and (d); and FAR 52.214(f). The relief afforded by these clauses may also extend to delays caused by a subcontractor’s default, and this avenue of relief is likely to be of considerable importance to federal contractors in the coming months, owing to the high probability of supply-chain disruptions traceable to COVID-19. See FAR 52.249-14 and FAR 52.249-8 and -9.

The foregoing clauses effectively relieve contractors from liability for excess costs incurred by the government as a result of delays in the contractor’s performance. Contractors should be aware, however, that this relief may not be available if the subcontracted supplies and services were obtainable from other sources on a timetable that would have allowed the contractor to meet the contract schedule. See FAR 52.249-14(b); FAR 52.249-8(d); and FAR 52.249-9(d). Under cost reimbursement and time-and-material contracts, contractors must also comply with instructions from a contracting officer to order or purchase supplies or services from alternative sources, and a failure to do so may preclude the contractor from obtaining schedule relief for an excusable delay. See FAR 52.249-14(b).

All of the clauses discussed above provide forms of schedule relief, but they do not independently provide a mechanism for a contractor to recoup any increased costs it might incur as a result of the delay. The theory is that, where a delay is the fault of neither the federal government nor the federal contractor, each party should bear its own costs. Nonetheless, as discussed below, there are a variety of COVID-19 scenarios under which actions taken by the government may directly or indirectly provide avenues for contractors to recover increased costs incurred as result of the government’s actions.

Contract Changes and Cost Recovery

The FAR contains standard clauses addressing changes in the scope of contract work. In any scenario where these clauses are implicated, contractors should deem it a top priority to communicate in a proactive fashion with the contracting officer, as many of the remedies discussed below are conditioned upon timely notice to the contracting officer concerning changes in scope or potential delays in performance.

It is easy to imagine scenarios in which COVID-19 quarantining restrictions and similar measures lead to orders or actions from the contracting officer that have the effect or intent of stopping or suspending work. If circumstances warrant it, the contracting officer is empowered under FAR 52.242-15 to issue a stop-work order. To the extent the stoppage ultimately results in a net increase in the cost of performance, or an inability to comply with the original contract deadlines, the contractor is entitled to seek a schedule adjustment and compensation for any increased costs. The contractor must assert its right to relief under this clause within 30 days of the date the work stoppage ends. See FAR 52.242-15(b)(2).

Even where a contracting officer has not officially issued a stop-work order, the effect of government-imposed quarantines, or travel or facility-access restrictions, may entitle contractors to seek relief under the Suspension-of-Work clause found at FAR 52.242-14. This clause authorizes an adjustment in price if the work is “unreasonably” delayed “(1) by an act of the Contracting Officer in the administration of this contract, or (2) by the Contracting Officer’s failure to act within the time specified in this contract (or within a reasonable time if not specified.)” See FAR 52.242-14(b). This clause may allow for recovery in situations where the contracting officer restricts access to the site of performance, fails to provide government-furnished resources, or delays necessary approvals or acceptance of work (all plausible in light of the COVID-19 pandemic).

In addition to the foregoing, even where work is not stopped or suspended, compliance with instructions and directives relating to COVID-19 mitigation and suppression may well alter the nature or scope of a contractor’s work in a manner that increases the cost of performance. In these situations, the standard FAR “Changes” clauses will apply: FAR 52.243-1 (fixed price), FAR 52.243-2 (cost reimbursement), FAR 52.243-3 (time and materials) and FAR 52.243-4 (construction). These clauses permit adjustments to the contract price where the government changes the work to be done under the contract, either through formal modification or “change orders,” or through conduct that has the effect of changing or altering contract performance (i.e., a “constructive change”). When dealing with the COVID-19 challenge, potentially compensable changes may arise under various scenarios, including quarantine restrictions, mandatory remote-work policies, and directives requiring contractors to procure and use various types of medical and safety-related equipment meant to protect contractor and agency personnel from COVID-19 exposure.

Sovereign Acts Doctrine

Federal contractors facing potential changes in their scope of work or cost increases associated with the COVID-19 challenge need to be aware of the potential significance of the “sovereign acts” doctrine. In brief, the sovereign acts doctrine is a legal rule that distinguishes between the United States in its contracting capacity, and the United States in its capacity as the federal sovereign, authorized to make generally applicable public policy, and to impose obligations that apply in equal measure to contractors and non-contractors. See Conner Bros. Constr. Co. v. Geren, 550 F.3d 1368, 1371 (Fed. Cir. 2008). (“[T]he United States when sued as a contractor cannot be held liable for an obstruction to the performance of the particular contract resulting from its public and general acts as a sovereign.”) If the federal government raises a successful sovereign acts defense, the federal contractor can still obtain schedule relief (i.e., time extensions), but will not be entitled to monetary compensation for claims brought pursuant to the various FAR clauses discussed above. See Garco Constr. Inc. v. Secretary of the Army, 856 F.3d 938, 945 (Fed. Cir. 2017).

When considering the potential impact of the sovereign acts doctrine, federal contractors should seek to obtain and document specific instructions from agency contracting officers concerning steps the contractor (and impacted subcontractors, if any) is obliged to take in relation to COVID-19 mitigation and suppression measures. In many cases, given that contract performance may be deemed an essential activity necessary to support federal agencies in continued execution of their missions, contracting officers will have discretion concerning whether and to what extent general quarantine and social distancing measures should apply. Rather than making assumptions or unilaterally deciding to implement such restrictions, federal contractors should seek to have the contracting officer clarify any areas of possible ambiguity, and provide specific, written instructions concerning the steps the contractor should take. This approach can help ensure clarity on health and safety measures to be implemented for the common good, while also providing a basis to draw appropriate distinctions between general public health measures and specific contract-related instructions that may later give rise to a claim for recovery of increased performance costs.

Additional Assistance Available

The Government Contracts team at McGuireWoods has decades of collective experience in assisting federal contractors and subcontractors on issues arising from delays and contract changes. Based strategically in the Washington, DC area, our government contracts practice leverages McGuireWoods’ strong defense and national security credentials in providing full-service government contracting services at every step in the procurement process. Our attorneys counsel clients ranging from small businesses to the nation’s largest government contractors on issues arising under the Federal Acquisition Regulation and its agency-specific supplements, and our team regularly assists clients in negotiating significant federal contracts and contract modifications. We also have the deep experience necessary to defend our clients’ interests in bid protests, in litigation with the government and other contractors, and in investigations and regulatory enforcement actions involving a wide range of federal agencies, inspectors general, and federal law enforcement personnel. Our work involves day-to-day government contract counseling as well as representation in the most high profile and high stakes government contract transaction, litigation, and investigation matters. We provide these services to a broad array of clients operating in a variety of industries and sectors, including defense, national and homeland security, intelligence support, technology, construction, health care, aerospace, and energy. For more information on McGuireWoods’ government contracts practice.