We are navigating in uncharted waters when it comes to the effect of coronavirus on federal contracting. There have been economic crises before—The Great Depression of 1929-1939, the oil crises of 1973 and 1979, Black Monday in 1987, the subprime mortgage crisis of 2007-2010, the ongoing European sovereign debt crisis, among many others. Even as far back as AD 33, there was a financial panic that was the result of the mass issuance of unsecured loans by Roman banking houses. What these economic disasters all have in common is that not one of them was the result of a virus outbreak. On the contrary, they all resulted from economic chaos brought about by poor financial policy, over-spending, and greed.
The current pandemic is affecting our lives and the lives of everyone in the world in ways that we did not and could not predict. There is no doubt that life will return to normal one day, but we do not know when. We also do not yet know how severe the impact will be on our economy. The federal government is discussing the payment of hundreds of billions of dollars in bailouts for businesses and direct payments to American citizens. This is happening in what is just the first week of what almost amounts to a national quarantine that is effectively requiring almost everyone to stay at home and practice “social distancing.” The President recently stated that this situation could last until July or August. If this is the case, it will have a crippling effect on the personal health of many people and the economic health of almost everyone.
The FAR Addresses Delays Resulting from Epidemics
Against this dire backdrop, the issue of how this will affect federal contracting seems rather mundane. Nevertheless, in the hope that this crisis will pass sooner rather than later, contractors need to be aware of their contractual obligations and the risks they face. One thing is certain, federal contracts do not contain clauses that anticipate a crisis of this magnitude. The most likely effect of the crisis is that contract performance will be delayed. The concept of excusable delay is recognized in the Federal Acquisition Regulation and FAR 52.249-14, “Excusable Delays,” which provides the following:
(a) 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. Default includes failure to make progress in the work so as to endanger performance.
While the clause specifically lists “epidemics” as an excusable cause of delay, it simply means that a contractor will be given a time extension. It does not, however, provide compensation for the cost of maintaining a workforce, the cost of materials and equipment that will not be used, or the ongoing home and field overhead expenses. The contractor, while not at risk for default, is at risk for the cost of the resulting delay. (It should be noted that it is highly unlikely that the government would threaten to terminate a contractor impacted by the virus for default, and, in fact, the language quoted above from the Excusable Delay provision in the FAR is repeated in the Termination for Default clause at FAR 52.249-10). As a result, while FAR 52.249-14 does provide some relief for delayed projects, that relief is likely to be insufficient and will leave contractors searching for alternative theories of recovery.
In the case of an extended delay, it is possible that the government may cancel contracts by deleting all remaining work. This is not the same thing as a Termination for Convenience in which the contractor is entitled to recover reasonable costs incurred up to the time of the termination (FAR 52.249-2). Under a cancellation approach, contractors would have no choice other than to file claims to attempt to recover costs incurred, but they would have little chance of success unless the delay was the fault and responsibility of the government.
The Suspension of Work Clause
In the short term, the government will likely attempt to keep projects moving. The problem is this may not be possible in the long run as workers are required to stay at home and businesses close. Hopefully, some contracts will simply be suspended under the Suspension of Work clause (FAR 52.242-14), and contractors will be entitled to recover their costs (but not profit). If the government does not issue a written suspension order, but the contractor believes that the project has been constructively suspended, it is important to provide prompt notice. The Suspension clause states that “A claim under this clause shall not be allowed (1) for any costs incurred more than 20 days before the Contractor shall have notified the Contracting Officer in writing of the act or failure to act involved . . .” (FAR 52.242-14(c)). However, in the absence of a government-directed suspension of work, the agency will likely apply a limitation in the clause that states:
However, no adjustment shall be made under this clause for any suspension, delay, or interruption to the extent that performance would have been so suspended, delayed, or interrupted by any other cause, including the fault or negligence of the Contractor, or for which an equitable adjustment is provided for or excluded under any other term or condition of this contract. (FAR 52.242-14(b)).
Absent an express suspension, the government can be expected to take the position that epidemics, although they are excusable delays, are not compensable causes of delay.
Extraordinary Contractual Actions
It is difficult to imagine that the government is going to simply apply the protections and limitations in government contracts that would be employed to limit government liability under normal circumstances. Since it is in the national interest to preserve the industrial base of this country, including the construction industry, large scale cancellation of contracts is unlikely. While cancelling contracts might save the government money in the short term, the government may avoid such actions to support contractors, particularly those that operate in industries that are crucial to national security and commerce. It will not be surprising if legislation is enacted to at least partially compensate contractors for the financial impact of delayed performance. In fact, in a little known part of the FAR, entitled “Extraordinary Contractual Actions” (FAR Part 50), the President is empowered “to authorize agencies exercising functions in connection with the national defense to enter into, amend, and modify contracts, without regard to other provisions of law related to making, performing, amending, or modifying contracts, whenever the President considers that such action would facilitate the national defense.” This has often been referred to as “extra-contractual relief,” meaning that it is intended to provide relief that is not otherwise available under the terms of the contract. While applications for extraordinary contractual relief have been granted during wartime, we are arguably involved in a war against a virus that has the potential to be even more devastating than military warfare. Thus, FAR Part 50 may be the best, and only, way to ultimately deal with the limitations of the contract and to ensure that government contractors are fairly compensated. Unfortunately, FAR Part 50 is not a preventive regulation and is something that can only be applied after the financial damage has occurred.
In the meantime, there are certain things that we recommend contractors consider to protect their rights and to preserve their financial well-being:
- If performance is delayed because of the unavailability of labor, materials, and equipment, you should immediately provide notice of a suspension of work. At the very least, this may preserve your right to recover costs during an inevitable period of government indecisiveness.
- If there are creative ways to safely continue work, but at an increased cost, request an immediate, forward-priced, equitable adjustment under the Changes clause. (FAR 52.243-4).
- If it appears that there may be a lengthy non-compensable delay in contract performance, request a Termination for Convenience. This will facilitate compensation for costs incurred and will “stop the bleeding” going forward. Recognize, however, that unless the project is one that the government can afford to postpone until another time, there may be considerable reluctance to grant a Termination for Convenience. Nevertheless, if the request is made, and the government does not respond favorably, or at all, you may be entitled to the costs you incurred during the period of government indecisiveness.
- Maintain detailed records of any increased costs or delays. While this can be difficult to do in times of crisis, it will help ensure maximum recovery for any impacts.
- Carefully review the flow-down provisions in your subcontracts and the terms of your subcontract agreements. Whether you are a prime or a subcontractor, there may be subcontract force majeure provisions that require notice or that need to be read in conjunction with federal contract flow-down provisions. Legal advice should be sought on matters of subcontract interpretation.
- To this end, our firm has prepared a packet of forms to assist contractors in complying with notice requirements. While not specifically applicable to federal contracting, these forms may be useful in complying with the requirements of subcontract agreements. This information is available upon request.
We sincerely hope that the impact of coronavirus is limited to the greatest possible extent and that effective treatments and a vaccine are developed soon. In the meantime, because of the great variety of federal contracts and the different actions that are likely to be taken by federal agencies in response to the crisis, contractors will likely require specific advice on a case-by-case basis. As the situation continues to unfold in unpredictable ways, feel free to reach out to our Cohen Seglias Government Contracting attorneys for assistance and guidance. We stand ready to counsel you during this difficult time.