DOD Issues Much-Needed Information Addressing Implementation of Section 3610 of the CARES Act

Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, provides the possibility of welcome financial relief for many federal contractors struggling to stay afloat during the COVID-19 pandemic. Subject to certain prerequisites and constraints, Section 3610 permits agencies to reimburse, at “the minimum applicable billing rate not to exceed an average of 40 hours per week any paid leave, including sick leave, a contractor provides to keep its employees in a ready state” during the COVID-19 public health emergency declared on January 31, 2020, through September 30, 2020. However, Section 3610—which consists of just two (fairly long) sentences—raises numerous questions that contractors have been attempting to address in the two weeks since enactment. Thankfully, DOD has taken significant steps in the past few days to answer many of those questions.

Class Deviation 2020-O0013

On Wednesday, April 8, DOD issued a Class Deviation 2020-O0013 to FAR Part 31 and DFARS Part 231 authorizing contracting officers to use language in a two-page attachment—“DFARS 231.205-79, CARES Act Section 3610 Implementation”—as a “framework” for implementing Section 3610. The Deviation is a “cost principle,” and specifies that costs of paid leave (including sick leave) are allowable at the appropriate contract rates, and may be charged as direct rates, if appropriate (subject to the prerequisites and constraints in Section 3610). The Deviation also clarifies and elaborates on Section 3610 in important ways. For example, Section 3610 states that the maximum authorized reimbursement must be “reduced by the amount of [tax] credit a contractor is allowed pursuant to division G of Public Law 116-127 and any applicable credits a contractor is allowed under” the CARES Act. The Deviation expands this constraint by reducing allowable costs “by the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with the [January 31, 2020 COVID-19] public health emergency.” The Deviation further specifies that costs are limited to those that are incurred as a consequence of granting paid leave as a result of the COVID-19 national emergency and that would not be incurred in the normal course of business. The Deviation provides other information that is essential for any DOD contractor considering pursuing Section 3610 relief, including that costs must be segregated and identifiable in the contractor’s records in a manner providing a sufficient audit trail.

The Memorandum accompanying the Deviation also provides helpful information, including a paragraph explaining that contracting officers must “consider the immediacy of the specific circumstances of the contractor involved” in implementing Section 3610. That paragraph notes that some contractors (e.g., those who may be unable to conduct any business during the pandemic) will have a more immediate need for relief than others.

Implementation Guidance for Section 3610

One day after issuing the Deviation, DOD issued a Memorandum (“Memo”) providing “Implementation Guidance for Section 3610 of the [CARES Act].” The Memo indicates that contractors usually include employee leave in calculating indirect rates and “[t]herefore, leave is included in any fixed price, or labor hour rate (under Time and Materials or Labor Hour contracts), or as an element of cost on cost-reimbursement contracts.” The Memo then notes that the Deviation “establishes a new cost principle that will allow recovery of such costs where appropriate.”

Next, the Memo provides important guidance on implementing Section 3610 under fixed-price contracts (including those with incentive provisions), cost-reimbursement contracts, Time and Materials or Labor Hour contracts, and contracts with a mix of fixed-price and cost-type line items. This section of the Memo includes information concerning the mechanics of providing reimbursement under different types of contracts, including steps covering invoices and vouchers. DOD contractors should familiarize themselves with this information before approaching their customers about possible reimbursement under Section 3610. Although agencies are not required to reimburse contractors under Section 3610—reimbursement is left to the discretion of the government—contractors can initiate dialogue with their contracting officers about potential relief and negotiate contract modifications if the customer is willing to provide reimbursement. You can enhance your ability to obtain relief by being familiar with the Section 3610 information issued by DOD and preparing a proposal that eases the burdens on COs by illustrating compliance with that information.

Frequently Asked Questions

And that information includes “Frequently Asked Questions” (FAQs) concerning DOD’s Section 3610 Implementation Guidance. The FAQs offer valuable insights into the Section 3610 reimbursement process, including that contractor requests for determination of “affected contractor status that would make the new cost principle applicable” should describe the contractor’s action taken to continue work under the contract, the circumstances that required the contractor to grant employee leave, an explanation of why it was not feasible for employees to perform via telework or other remote work, and how the leave served to keep employees in a “ready state.” The FAQs provide a wealth of additional information, noting (for example) that Section 3610 reimbursement is available under both FAR-based contracts as well as Other Transaction Authority agreements. Also, consistent with the fact that DOD should be negotiating reimbursement with contractors, the FAQs note that the issue of whether the allowable costs of leave should be charged as direct or indirect should be discussed and resolved between the contractor and the contracting officer. Finally, it is important to note that the FAQs are a work in progress and will be expanded as new issues are asked and answered. As such, you should check frequently for new iterations of the FAQs, which currently can be found here.

In closing, the possibility of relief under Section 3610 should be welcomed by all contractors, especially small businesses. It is imperative though—in part to diminish down-stream audit risks—that contractors review the government’s Section 3610 memoranda, guidance and other materials, so that they can be properly prepared to negotiate reasonable and clear contract modifications.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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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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