On April 8, 2020, the Department of Defense (“DoD”) issued a Class Deviation authorizing contracting officers to use a new cost principle – DFARS 231.205-79, CARES Act Section 3610 Implementation – to permit the reimbursement of certain leave-related costs incurred by contractors in accordance with Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (Pub. L. 116-136). Additional clarification regarding the application of the new cost principle was issued on April 9, 2020, through the publication of a “living” FAQ document intended to answer critical questions for contractors. While the FAQ information does not clarify the Government’s position on all potential issues associated with the implementation of Section 3610, it does provide a blueprint that contractors seeking reimbursement should follow.
Applicable to FAR-based contracts as well as Other Transaction Authority (OTA) agreements, the Class Deviation is premised on the DoD’s position that while Section 3610 “is permissive, not mandatory,” it is important to ensure that the DoD and its contractors “remain a healthy, resilient, and responsive total force.” With that duty in mind, contracting officers have been vested with wide latitude and seemingly broader discretion to ensure the ongoing balance between the expenditure of federal dollars and maintenance of contractor resiliency. Accordingly, the cost principle does not apply to every contractor, but only to those whom the cognizant contracting officer establishes – in writing – are:
- “Affected” contractors;
- Employees or subcontractors who cannot perform work on a government-owned, government-leased, contractor-owned, or contractor-leased facility or at any other place of performance specifically identified in the contract for performance, due to closures or other restrictions (including federal, state, and local orders having the effect of law); and
- Employees who are “unable to telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020, for Coronavirus (COVID–19).”
Guidance provided after the issuance of the Class Deviation states that a company seeking to establish “affected contractor” status should describe: (1) the actions taken to continue performance; (2) the circumstances necessitating employee leave; (3) an explanation as to why telework or remote work was not feasible for the affected employees; and (4) how the leave served to keep employees in a ready state. In addition, contractors that are considered part of the essential critical infrastructure workforce (as discussed here) and/or those that have been directed to implement the Continuation of Essential Services Plan in affected contracts, must also “demonstrate that all reasonable efforts were made to continue contract performance.”
If the contractor convinces the contracting officer that the foregoing elements are satisfied, reimbursement may be available if the claimed costs are properly supported with “appropriate documentation” – meaning that they need to be “segregated and identifiable in the contractor’s records.” In particular, the costs of paid leave – including sick leave – taken between January 31, 2020, and September 30, 2020, are allowable as direct charges to the contract at established contract billing rates notwithstanding contrary provisions in the FAR and DFARS. Limited to up to 40 hours per employee/week, the costs for such leave must also be “incurred for the purpose of” either keeping contractor employees and subcontractor employees in a “ready state” (meaning a contractor’s ability to mobilize and resume performance in a timely manner) and/or “protecting the life and safety of Government and contractor personnel against risks arising from the COVID-19 public health emergency.” Notably, leave costs associated with contractor employees who did not report to an open work site for reasons associated with the COVID-19 pandemic (e.g., for lack of child care) may also be reimbursed when such absences are accompanied by the appropriate documentation.
The proper segregation and identification of the specific cost impacts created by COVID-19 are essential to aid the Government’s determination regarding “compliance with all terms” of Section 3610 in a manner that provides the DoD with “a sufficient audit trail.” To this end, the DoD has acknowledged that costs can properly be charged as either indirect or direct costs and has specifically stated that the issue should be “discussed and resolved” on a contract-by-contract basis. Perhaps in an effort to frame these forthcoming discussions, the DoD has recognized the propriety of charging the leave costs to a newly created “Other Direct Costs (ODC) COVID-19” cost pool, while also stating that it “may be more appropriate to charge these costs through indirect pools” in other situations. In sum, these waters are muddy. What is clear, however, is that the permissibility of such costing will be highly contract-specific and will require communication with the cognizant contracting officer and the proper channels at the Defense Contract Management Agency. Further guidance on how best to record these costs is expected shortly.
The Deviation notes that any costs claimed under the affected contract must be reduced by any applicable credits received pursuant to Division G of the Families First Coronavirus Response Act and any other compensation received under the CARES Act or law specifically identifiable with the pandemic response – e.g., the Paycheck Protection Program and the Small Business Administration’s Economic Injury Disaster Loan Program (with ongoing analysis of both programs and their respective guidance available at the McCarter & English Coronavirus Resource Center). The intent of this limitation is to ensure that contractors do not receive duplicate payments relating to the same costs. In addition, the new cost principle is expressly inapplicable to leave costs that would be “incurred in the normal course of the contractor’s business,” and contractors are similarly prohibited from receiving advance payments under the Deviation.
The promises inherent in the Deviation and the application of the cost principle dim somewhat in comparison to the number of questions the Deviation raises, the most prominent of which ponder the malleable standards pursuant to which contracting officers will choose to apply the cost principle and the appropriate manner in which contractors can be granted relief. The guidance included in the “living” FAQ document continues to grow, and it should be checked regularly, as additional and specific information is anticipated and will be forthcoming. In the meantime, it is imperative that contractors remember that actions taken in response to the pandemic must be thoroughly documented in a reasonable and clear manner. The underlying theme of much of the Government’s statutory and regulatory responses to date has focused on the importance of documenting, in an easy-to-follow manner, the impacts of the pandemic on those the Government is paying. Contractors should pay attention. It is only a matter of time until the Government puts down the carrot and picks up a stick.