Last week, the Department of Defense (DoD) issued Class Deviation 2020-O0021 to provide guidance regarding the process contracting officers will use to review and approve requests for equitable adjustment (REAs) submitted under Section 3610 of the Coronavirus Aid, Relief and Economic Security (CARES) Act. Under Section 3610 and DoD’s implementing cost principle, DFARS 231.205-79, an “affected contractor” is eligible for reimbursement of paid leave to keep its employees or subcontractor employees in a “ready state” if they cannot perform work on a site approved by the Federal Government and are unable to telework during the coronavirus pandemic.
The Government’s reimbursement of paid leave under Section 3610 is discretionary and subject to the availability of funding. Contractors should prepare their REAs in accordance with DoD’s latest guidance to maximize the chances that they will receive reimbursement of paid leave costs under Section 3610. This article provides an overview of the key takeaways from DoD’s guidance that contractors need to know.
DoD amended DFARS 231.205-79 to change the effective date of paid leave reimbursements under Section 3610. DoD’s initial CARES Act implementation guidance authorized the reimbursement of paid leave starting on January 31, 2020, the date a public health emergency was declared for COVID-19. DoD’s latest guidance, however, clarifies that Section 3610 authorizes reimbursement of paid leave starting from the date the CARES Act was enacted, March 27, 2020. DoD’s change to the effective date is consistent with Government-wide guidance issued on July 14, 2020 by the Office of Management and Budget in Memorandum M-20-27.
DoD’s guidance acknowledges that while paid leave costs incurred prior to March 27, 2020 are not reimbursable under Section 3610, DoD may consider reimbursing such costs pursuant to other available contracting authorities. For example, such costs could be potentially recoverable under the “Stop-Work Order” clause at FAR 52.242-15 if the contractor incurred paid leave costs to keep its employees in a “ready state” after it received a stop-work order due to the pandemic.
The authority to reimburse paid leave under Section 3610 expires by law on September 30, 2020. Congress is currently debating whether to extend that cut-off date and industry groups are urging legislators to push the expiration date to December 31, 2021. Unless and until the expiration date is extended, REAs will be limited to paid leave costs incurred between March 27, 2020 and September 30, 2020.
DoD encourages contractors to begin early engagement with their appropriate contracting officer if they intend to submit reimbursement requests. Prior to submitting a formal REA, contractors should communicate with the contracting officer to determine whether funding is available to reimburse the contractor’s paid leave costs. Early engagement discussions should also be used to exchange preliminary information about the contractor’s request, such as the estimated value of the REA and information necessary to support the contractor’s status as an “affected contractor” that is entitled to reimbursement under Section 3610.
DoD has provided checklists for three different types of reimbursement requests: (1) Abbreviated Reimbursement Checklist; (2) Multipurpose Reimbursement Checklist; and (3) Global Reimbursement Checklist. The Abbreviated Reimbursement Checklist applies to reimbursements under a single contract of direct charged employees provided with paid leave when the reimbursement requested is below $2,000,000 in total. The Multipurpose Reimbursement Checklist applies to a single contract if the Abbreviated Reimbursement Checklist does not apply, or to multiple contracts when the Global Reimbursement Checklist is not being used. The Global Reimbursement Checklist applies to reimbursement requests that seek a global reimbursement at a business unit (or segment) level. DoD may decide, at its discretion, to group separate requests together for purposes of settlement.
Contractors should review their current contracts to determine which checklist is appropriate to use. Reimbursement requests may include both cost-type and fixed-price contracts.
A contractor’s REA should include all of its subcontractors’ reimbursement requests for the same time period and the same contracts. DoD guidance emphasizes that contracting officers will only consider subcontractor requests that are submitted through the prime contractor.
The REA should separate the prime contractor’s information from the subcontractor’s information. The REA should also include an opinion of whether the subcontractor qualifies as an “affected contractor” and, if so, an analysis to support the allowability of the subcontractor’s paid leave costs.
The contractor’s actual paid leave costs must be segregated and reported within its accounting system. The Government may audit the contractor’s REA to ensure compliance with Section 3610, Cost Accounting Standards (CAS) for CAS-covered contracts or FAR 31.203 for non-CAS covered contracts.
The REA must include a seven-point representation made by the prime contractor and any subcontractor that submits a request for reimbursement through the prime contractor. Most notably, the required representations include certifications that are intended to prevent “double recovery” of paid leave costs under multiple Section 3610 reimbursement requests or under any credits/loan forgiveness provided in connection with the pandemic such as loan forgiveness granted under the Paycheck Protection Program.
Prior to authorizing a reimbursement of paid leave costs under Section 3610, the contracting officer must make a written determination to establish the contractor’s status as an “affected contractor.” The REA should include a narrative to demonstrate that the contractor qualifies as an “affected contractor” that is eligible for reimbursement. The checklists included with DoD’s guidance provide a detailed description of the types of information that should be included in the REA narrative to support the contractor’s eligibility for reimbursement.
Contractors may seek paid leave costs at “appropriate rates” under the contract for up to an average of 40 hours per week for each affected employee. The REA should describe the methodology used by the contractor to develop the appropriate rates used to calculate the amount of the reimbursement request. DoD guidance states that appropriate rates may include labor rates, overhead, and G&A, but may not include profit or fees.
The CARES Act did not include specific appropriations to pay Section 3610 reimbursement requests. Under the CARES Act, DoD has discretion to use funds that are legally available for use under a contract to pay REAs under Section 3610.
DoD has asked Congress to appropriate funds to pay for Section 3610 requests in the next COVID-19 stimulus package. The Senate Republicans’ proposed legislation, the Health, Economic Assistance, Liability Protections and Schools (HEALS) Act, includes $11 billion to pay for reimbursement requests under Section 3610.
It is unclear whether additional appropriations will ultimately be included in any final stimulus package that is enacted. If additional funds are not appropriated, DoD may be unwilling or unable in some cases to use existing contract funds to pay REAs submitted under Section 3610.
DoD guidance specifies that a bilateral contract modification should be used to memorialize the contracting officer’s decision to pay a Section 3610 reimbursement request. The modification should affirm that the contractor is an “affected contractor” under Section 3610, specify the time period for which paid leave costs are being reimbursed and describe the amount paid to each affected subcontractor. The modification should also incorporate a new standard clause, DFARS 252. 243-7999, which requires the contractor to notify the contracting officer of any credits or loan forgiveness the contractor receives for the same paid leave costs being reimbursed in the modification.
Contractors that are eligible for reimbursement of paid leave costs under Section 3610 should review DoD’s guidance and begin early engagement with their appropriate contracting officer(s). REAs submitted under Section 3610 should be submitted and resolved separately from any other contractual claims that may arise from the pandemic.
In addition to requests for paid leave costs under Section 3610, there will likely be a wave of contractual claims asserted by contractors to recover other COVID-related costs. Such costs may be recoverable under various standard contract clauses including, for example, the “Changes-Fixed Price” clause at FAR 52.243-1 or the “Stop-Work Order” clause at FAR 52.242-15. Contractors should document and pursue these claims as appropriate and ensure that any costs claimed do not duplicate the paid leave costs requested under Section 3610.
If you are interested in learning more, Lucas Hanback and Stephen Bacon are co-presenting a webinar for Federal Publications on the subject of COVID-related REAs and claims on September 15, 2020 at 3:00pm ET.