Delays Resulting from Coronavirus May be both Excusable and Compensable

As the economic crisis caused by COVID-19 evolves and worsens, there are many novel questions that government contractors and government agencies face. Certain FAR clauses that limit a contractor’s right to recover damages need to be revisited, including the clause entitled “Default (Fixed-Price Construction)” found at FAR 52.249-10. Under this clause, delay resulting from an Act of God, such as an epidemic, is excusable, but it is also non-compensable. This holds out the very real possibility of significant financial harm to construction contractors and seems to run counter to the government’s objective of preserving companies so that there will be an economic recovery once the crisis is over.

Currently, Department of Defense agencies are making every effort to treat projects as essential to the national defense and contractors are permitted, and in some cases directed, to continue performance. Since the government wants projects to continue, and government contractors want to keep working, there appears to be a commonality of interest. Contractor employees, however, are increasingly concerned about their personal health and safety and, in some cases, are refusing to report for work. This is compounded by the Permits and Responsibilities clause (FAR 52.236.7), which requires contractors to comply with “State, and municipal laws, codes, and regulations applicable to the performance of the work.” Accordingly, even though the federal government requires work to continue, state and local governments may be requiring people to maintain social distancing and stay at home. Even if exemptions are granted for government contractors working on essential projects, that does not lessen the legitimate concern of workers who are fearful of health risks.

There appears to be an irreconcilable conflict between the government interest and the personal health interests of workers. Although the government would be hard-pressed to terminate a contractor for default because of delay resulting from the pandemic, it is of little consolation to contractors that the delay will simply be excusable while fixed project costs continue without compensation. Although the payroll relief provisions of the CARES Act will help companies with fewer than 500 employees meet payroll expenses, fixed home office and field overhead costs will continue unabated. Most notable within the CARES Act is Section 3610, Federal Contractor Authority, which provides discretion for an agency to modify the terms and conditions of the contract to reimburse paid leave where contractor employees could not access work sites or telework but actions were needed to keep such employees in a ready state. In addition to this welcome payroll relief, we believe that the government should take steps to make coronavirus-related delays both excusable and compensable.

Fortunately, there has been recent movement along those lines. The Under Secretary of Defense released a memorandum on March 30, 2020, with the subject “Managing Defense Contracts Impacts of the Novel Coronavirus,” stating that “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).” This suggests that contracting officers, in fairness, may have the authority to treat a COVID-19 project delay as compensable under the  Changes clause. It is also permissible for contracting officers to issue stop work orders and suspensions of work that are compensable. A contractor who is delayed by the coronavirus crisis should request compensation under the Changes or Suspension of Work clauses. The memorandum further provides that:

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.

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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