Defense Contracting Officers Get New Guidance for Compensating Industry Partners Hit by COVID-19

Key Takeaways

• Despite legislation authorizing the DOD to compensate contractors for costs incurred during the COVID-19 crisis, no funds have been appropriated to pay for those costs.
• Contractors may eventually recover costs not related to paid leave on cost-reimbursement and incentive contracts.
• Industry partners will not be held responsible for missing deliverable milestones, but they are still responsible for delivering requirements at the originally contracted price.
• Contractors working fixed-price contracts may need to absorb increased costs related to COVID-19 response unless they can justify a need for reimbursement that satisfies the government.  

Defense contracting shops received new guidance last week from the office of the Director of Defense Pricing and Contracting (DPC). Specifically, the DPC issued a memorandum clarifying some of the issues surrounding compensation for contractors forced to stop work due to the novel coronavirus (COVID-19) public health emergency. Titled “Guidance for Assessment of Other COVID-19 Related Impacts and Costs,” the DPC noted that while “DoD Contractors may have already incurred, and will likely continue to incur, delays and costs associated with their response to the COVID-19 pandemic … to date, no funds have been appropriated specifically for reimbursement of these costs.”

The lack of funds comes even though CARES Act Section 3610 (effective April 8, 2020!) provided “a means for affected contractors to request reimbursement of costs incurred for paid leave granted to their employees during the COVID-19 pandemic.” To remind readers, the reimbursement applied specifically to expenses forced on contractors when employees were unable to work due to the public health emergency. The DPC informed contracting officers that consistent with the CARES Act they may modify contracts or other agreements to reimburse up to 40 hours per week of paid leave costs.

The DPC also anticipates that contractors may face further unplanned costs as they return to normal operations and are required to take steps needed to ensure employee safety. These steps may include purchasing personal protective equipment, deep cleaning services, plastic or other barriers, work space rearrangements to maintain social distancing, etc. “Where allowable and allocable,” states the DPC memo, “these costs may be recovered [by contractors] on cost-reimbursement and incentive contracts.”

Contracting officers were also informed that contractors are not liable for missed delivery requirements if delays were forced by the health crisis. That said, “there is no statutory, regulatory, or contractual entitlement to an adjustment to contract price for schedule delays that are attributable to excusable delays.” In other words, although the crisis may have forced an industry partner to miss a deliverable milestone, it is still responsible for eventually delivering the requirement at the original contracted price.

Lastly, the DPC cautioned contracting officers about compensating contractors under fixed price contracts, writing, “Unlike contractors performing under cost-type contracts, contractors under fixed-price contracts generally must bear the risk of cost increases, including those due to COVID-19 (e.g., costs associated with PPE, social distancing, and supplier delays and inefficiencies).” The DPC nevertheless granted contracting officers “the discretion, subject to the availability of funds, to modify contract” pricing. This step could provide some industry partners with relief. Just be aware that concerning cost-type contracts “Any resulting changes in contract price must be substantiated by the contractor and determined by the contracting officer to be required to perform the contract as modified, and must be driven exclusively by the change(s) directed by the Government.” Above all, contracting officers are cautioned to “only execute contract actions that result in fair and reasonable prices for the supplies or services provided and are determined to be in the best interests of the Government.”