The COVID-19 global pandemic and the United States’ response to the national emergency are having significant impacts on the government contractor community, shaping the way contractors perform their current contractual obligations and the way contractors will negotiate future contracts, task orders, and modifications. Prior alerts have addressed the terms within existing contracts that may help prime contractors recover increased costs associated with COVID-19. For contractors preparing proposals or negotiating new contracts, however, the landscape is now much different. While there is an opportunity to play an active role in ensuring your contract interests are adequately protected going forward, significant risks await the unwary.
This client advisory, which is part of Dentons’ ongoing series covering COVID-19 issues affecting contractors, highlights key considerations for negotiating new contracts and modifications and outlines strategies that may be employed to protect against the uncertainties that exist in the current environment.
Understand the contract or subcontract type being negotiated and, in particular, the risk tradeoffs of flexibly priced contracts versus fixed price contracts. As discussed in our prior advisory, cost reimbursement contractors face much less risk in the current environment, where the potential cost and schedule risks of the pandemic are uncertain. This is precisely the type of uncertainty regarding contract outcomes that cost reimbursement contracts and other flexible price arrangements are designed to address and shift more risk to the government. Fixed price contracts and subcontracts, however, are designed to place the maximum risk on the seller for reasonably foreseeable risks. Accordingly, now that the pandemic is a known fact, those considering a fixed price contract must proceed with caution.
Understand that the government may assert the basic FAR excusable delay clause has limited applicability to new government contracts because COVID-19 is now a known fact. Most government contracts include a clause that excuses performance for delays that are beyond the control of the contractor. The FAR contains a number of excusable delay clauses that are applied based on contract type. See e.g., FAR §§ 52.249-14 (cost reimbursement and time and material); 52.249-8 (fixed price); 52.249-10 (construction); 52.212-4 (commercial items); 52.216-10 (cost-plus incentive fee). While these clauses do not provide financial assistance in the event of an excusable delay, they should help most contractors avoid default based on delays stemming from COVID-19 under contracts executed before the pandemic was known. The applicability of these clauses to contracts awarded after the pandemic was a known fact becomes less clear. The government may argue that when a potential risk exists at the time of award, any impact to the contract stemming from that risk may be foreseeable and inexcusable under the FAR delay clauses. In order to protect against this risk, contractors should consider including disclaiming language in their proposals and, to the extent possible, negotiate a reopener or other special clause that makes clear that the full impact of COVID-19 is not foreseeable and the contractor does not assume such risks to schedule or cost. In order to be vigilant, contractors likely should not rely solely on excusable delay clauses to fully address these issues for new government contracts.
Consider how the contingencies cost principle affects contractors’ ability to include the costs of unforeseeable events in their proposals. How COVID-19 may impact future contract performance is certainly contingent on a number of factors, many of which cannot be accurately predicted at this time. Prudent contractors negotiating contracts may be inclined to include extra costs into their proposals to guard against these risks. While this may be appropriate in certain circumstances, contractors should anticipate government resistance based on the Contingencies Cost Principle at FAR § 31.205-7. Contingencies are possible future events or conditions with a presently indeterminable outcome. FAR § 31.205-7(a). Costs related to contingencies that “may arise from presently known and existing conditions, the effects of which are foreseeable within reasonable limits of accuracy,” should be included in estimates of future costs. Id. at (c)(1). However, costs related to contingencies “that may arise from presently known or unknown conditions, the effect of which cannot be measured so precisely as to provide equitable results to the contractor and to the Government,” should be excluded from the cost estimate and disclosed separately in order to facilitate appropriate negotiations. Id. at (c)(2).
Because COVID-19 is a presently known condition with an impact that likely cannot be measured with accuracy at this time, the government may take the position that any contingency, management reserve, or other cost associated with potential impacts arising from COVID-19 are unallowable and must be excluded from cost estimates. To protect against this risk, contractors should seek the inclusion of reopener clauses in their contracts that permit the parties to reopen cost or price negotiations based on future COVID-19 related events. Alternatively, if the government is unwilling to include a reopener clause in a contract, contractors should request a higher profit rate to guard against increased cost and risks.
Monitor indirect cost rates carefully and make adjustments to forward pricing rates and billing rates as necessary. Terminate existing Forward Pricing Rate Agreements (“FPRAs”). Contractors’ indirect cost rates may increase significantly due to COVID-19. For example, shifting performance efforts into subsequent periods due to delays may change the size of the relevant cost allocation base for the current fiscal year, or increasing employee benefit costs by providing additional paid sick leave may increase indirect cost pools. Any combination of these two types of events will increase indirect cost rates. In order to protect against the risk of a quick change to indirect rates, contractors should carefully monitor how COVID-19 related issues are impacting rates and take appropriate action, including, but not limited to, terminating FPRAs and updating forward pricing rates and billing rates.
Prepare for a potential increase in sole source contracts and/or limited bid protests. FAR § 6.302-2, Unusual and Compelling Urgency, permits the government to avoid full and open competition when the government’s need for supplies or services is an unusual and compelling urgency. If the government does utilize a full and open procurement competition, be aware that the government may override the automatic stay of performance in GAO bid protests, pursuant to FAR § 33.104(c)(2) (automatic stay may be avoided when “contract performance is in the best interest of the United States” or “urgent and compelling circumstances that significantly affect the interests of the United States will not permit waiting for the GAO's decision”).
Contractors should expect extraordinary circumstances as a result of the global pandemic, including rapid procurement processes for new government contracts, variable (and likely increased) contract performance costs, and disrupted contract performance schedules. Vigilant and proactive contractors may be able to create contractual protections, especially when entering into new government contracts, that may minimize financial repercussions of COVID-19.