When the COVID-19 pandemic took hold in March 2020, various lockdowns were ordered and Americans learned a new term—“social distancing.” Working remotely using videoconferencing platforms became commonplace and, in most cases, productivity did not suffer. Unfortunately, the construction industry could not employ the remote workplace, and projects continued to require hands-on personnel who could not socially distance as a practical matter and were at greater risk for contracting COVID. Workers were fearful for their families and understandably concerned about themselves. As a result, productivity suffered and the country saw shortages of construction workers. Despite this stark reality, the federal government sought to keep its construction projects on track and routinely granted exemptions from federally imposed restrictions by determining that projects were “mission critical.”
Delays to projects were frequent, but contractors were told that although they would be granted time extensions, these extensions would be non-compensable. FAR 52.249-10 (Default – Fixed-Price Construction) and FAR 52.249-14 (Excusable Delays) provide that an epidemic is an excusable delay that, by definition, allows for a non-compensable time extension. While the wording of this clause is clear, it is equally clear that the clause was never intended to bar compensation resulting from the widespread and unprecedented financial impact of a worldwide pandemic, which goes beyond the more localized impact of an epidemic. The government recognized the financial impact to individuals who could not work and literally printed money to fund financial stimulus and extended unemployment compensation. Businesses were offered loans, and even loan forgiveness, to blunt the impacts of the crisis. However, none of this money was used to overcome the non-compensable delay damages suffered by “mission critical” government contractors. This doesn’t seem to be very fair.
The costs related to the pandemic have now been exacerbated by the disruption to the global supply chain, the surge in commodity prices, the recent escalation in fuel prices, and the current high inflation rate. When all of these impacts are combined, they have had a devastating effect on the cost to complete a federal project and have made it almost impossible to estimate how much to bid on an upcoming project. Contract performance has not only become expensive, but in some cases, labor and supply shortages have also made it impractical. While some federal agencies have recently shown a willingness to insert a price escalation clause in pending solicitations, this provides no relief to those who have already incurred unanticipated costs. Our firm responds to questions on a daily basis from contractors who want to know if there is any way to recover the money they have lost. While we have generally not been very optimistic due to the rigidity of the FAR clauses discussed above, there are a few things that should be considered.
What is often forgotten is that in March 2020, the Office of Management & Budget issued a memorandum (OMB Memo M-20-18) recognizing that “Federal contractors play a vital role in helping agencies meet the needs of our citizens, including the critical response efforts to COVID-19. The health and safety of all Americans, including our Federal contractors, remains the top priority.” The memo included frequently asked questions, of which the third is of interest:
- How should agencies address requests for equitable adjustment associated with costs related to safety measures taken by contractors to protect their employees from COVID-19, including costs associated with performance disruptions caused by the government (e.g., closure of an office building) when performance doesn’t allow for telework (e.g., work requires access to secure location, or involves building maintenance)?
Requests for equitable adjustment should be considered on a case-by-case basis in accordance with existing agency practices, taking into account, among other factors, whether the requested costs would be allowable and reasonable to protect the health and safety of contract employees as part of the performance of the contract. The standard for what is “reasonable,” according to FAR § 31.201-3, is what a prudent person would do under the circumstances prevailing at the time the decision was made to incur the cost (e.g., did the contractor take actions consistent with CDC guidance; did the contractor reach out to the contracting officer or the contracting officer representative to discuss appropriate actions).
Agencies may take into consideration whether it is beneficial to keep skilled professionals or key personnel in a mobile-ready state for activities the agency deems critical to national security or other high priorities (e.g., national security professionals, skilled scientists). Agencies should also consider whether contracts that possess capabilities for addressing impending requirements such as security, logistics, or other function may be retooled for pandemic response consistent with the scope of the contract. A number of contract clauses may be helpful in managing COVID-19 issues as they arise. The government may make changes to the contract using the appropriate changes clause that applies to the contract (see FAR clauses 52.243-1 through 52.243-3 or clause 52.212-4(c)). If necessary, generally after considering other alternatives, they may suspend or stop performance through clause 52.242-14, Suspension of Work, and clause
52.242-15, Stop Work Order.
The Department of Defense subsequently issued its own memorandum on “Managing Defense Contract Impacts of the Novel Coronavirus,” which stated:
Where the contracting officer directs changes in the terms of contract performance, which may include recognition of COVID-19 impacts on performance under that contract, the contractor may also be entitled to an equitable adjustment to contract price using the standard FAR changes clauses (e.g. FAR 52.243-1 or FAR 52.243-2). . . . Requests for equitable adjustment must be considered on a case-by-case basis, in consideration of the particular circumstances of each contract, impacts realized from COVID-19, applicable law, and regulations, and inclusive of any relief that may be authorized by laws enacted in response to this national emergency. When reviewing requests for equitable adjustment, contracting officers are to take into account, among other factors, whether the requested costs would be allowable, allocable, and reasonable to protect the health and safety of contract employees as part of the performance of the contract. Equitable adjustments to the contract or reliance on an excusable delay should not negatively affect contractor performance ratings.
From what we have seen, neither the letter nor the spirit of these memoranda has been implemented. The memos appear to provide some flexibility to agencies in evaluating “requests for equitable adjustments on a case by case basis,” and granting relief under the changes or suspension of work clauses. Although we have seen isolated examples where contracting officers have recognized the unfairness to individual contractors by granting requested change orders, most contracting officers have taken the easy way out and have simply deferred to the termination for default clause as a basis to limit relief to a non-compensable time extension. In light of this, we have recommended that “there is no harm in asking” to our clients and, in some cases, contractors have been pleasantly surprised. When our clients have found a sympathetic ear from the government, there has typically been a way to obtain some relief, even if it requires creativity.
Although most contracting officers take the position that they have no authority to consider price escalation unless an economic price adjustment clause is in included in the contract, the clause has generally not been included in federal construction contracts. There has been an increased willingness, recently, to insert the clause in new solicitations and contractors should always make pre-bid inquiries. If an agency refuses to insert the clause after being requested to do so, a bid protest (filed pre-bid) should be considered. Government contracts are not supposed to be gambling contracts that are dependent on unpredictable events.
We continue to hope that the federal government will decide to impose a broader implementation of the OMB and DoD memos by making it clear that contracting officers are authorized to grant relief even when the FAR seems to only allow a non-compensable time extension. There is also the possibility that consideration will be given to taking Extraordinary Contractual Action under FAR Part 50. This section of the FAR, which is authorized by Public Law 85-804, “empowers the President 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.” In other words, this law permits the granting of equitable relief when there is not a basis to grant relief under the terms of the contract. To the extent that agencies persist in taking the position that the excusable delay portion of the termination for default clause prohibits the contracting officer from compensating a contractor for the costs incurred as a result of the pandemic, FAR Part 50 should be considered.
It should be noted that the regulations state that “the fact that losses occur under a contract is not a sufficient basis for exercising the authority conferred by Public Law 85-804,” since there must be a showing that action will facilitate the national defense. The fact that contractors were encouraged, and indeed required, to work during the pandemic because their projects were “mission critical” arguably might qualify as something that facilitated the national defense. We are unaware, however, of whether this theory has been tested by filing an application for relief under FAR Part 50. It seems to be an approach worth exploring.