Contracting Officers Can Pay You Even If the Contract Is Shut Down!

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Yesterday, we discussed the emergency loan programs and loan forgiveness opportunities for small businesses in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). However, it is critical to understand that there other avenues for relief that do not have to wait for SBA or private lenders to start processing such loans. Specifically, OMB Memorandum M-20-18 gave Contracting Officers (“CO”) broad authority and specifically states that all contracting personnel should “feel fully empowered to use acquisition flexibilities.” Further, Section 3610 of the Act, entitled “Federal Contractor Authority,” specifically states that COs have authority to continue paying contractors in order to maintain employment for contractor personnel, even if the contract is subject to a stop work order or other delay.  Again, this is true even if no work is being performed on the contract. 

More specifically, the CARES Act states that:

…funds made available to an agency by this Act or any other Act may be used by such agency to modify the terms and conditions of a contract, or other agreement, without consideration, to reimburse at the minimum applicable contract billing rates not to exceed an average of 40 hours per week any paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, including to protect the life and safety of Government and contractor personnel, but in no event beyond 9/30/2020. Such authority shall apply only to a contractor whose employees or subcontractors cannot perform work on a site that has been approved by the Federal Government due to facility closures or restrictions, and who cannot telework because their job duties cannot be performed remotely during the public health emergency for COVID-19.

While the wording of this provision is not entirely clear for every contractual circumstance, this allowance by Congress, combined with the clear guidance from OMB that all COs should feel “fully empowered” to exercise all contracting flexibilities, gives every contractor a strong argument to support continued payment on contracts which have been suspended in some way due to the COVID-19 crisis. Even if you are working on a Firm-Fixed Price (“FFP”) contract, or a contract where payments are made via deliverables or some similar method, the Act gives COs authority to modify the contract to transform any standard payment or negotiated amounts to per hour contract billing rates for all of your employees. In fact, the Act, along with the OMB guidance, gives COs near unfettered discretion to craft a fair and reasonable alternative on a contract-by-contract basis to ensure employees are working and a company’s bills are being paid throughout this crisis and without reliance upon the SBA 7(a) loans or other emergency disaster loans.

It should also be noted that the Act uses the phrase “minimum applicable contract billing rates” when describing the amount to be reimbursed to contractors. It does not state that only direct costs paid to the employee are to be reimbursed. Therefore, there is a good argument that the amounts to be reimbursed under the Act are the actual contract rates, if such rates are already in the contract, including all indirect costs and even profit. As noted above, the Act and the OMB memorandum gives COs the ability to add negotiated rates to a FFP or other deliverable-based contract that does not have hourly rates. These too should be “contract billing rates” and not merely the direct costs paid to the employee.

All this said, there is an open question about how owners—especially small business owners who rely on monthly or bi-monthly income streams to pay their bills and feed their families—are supposed to be paid if COs attempt to take a position that profits are disallowed. Again, I note that the law itself does not disallow profits, or limit reimbursements just to costs, so COs are more than capable of continuing to pay the fully loaded rates to contractors and, given the immense impact this is having on everyone (from the lowest level employee to the highest executive), it is only fair and reasonable that the phrase “minimum contract billing rates” includes the actual fully loaded rate negotiated for a contract or a fully loaded rate to be negotiated for contracts that are not Time and Materials or Labor Hour type contracts. Of course, as we know more or the details are fleshed out, we will continue to update our clients.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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