Seven tips for companies or organizations seeking or receiving federal funds to fight COVID-19

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Entities working with the Federal Government to address the novel coronavirus (COVID-19) may encounter a number of issues in performance of the contract or award. If not dealt with properly and under the appropriate statutory and regulatory schemes, these issues can have significant financial impacts on the company or organization, hampering its long-term ability to continue serving the public.

The Government has begun to spend significant amounts of funds on addressing the novel coronavirus. A large portion of the spending will be awarded via contracts, grants, or cooperative agreements and has been and will be awarded quickly; many of the recipients of the grants or cooperative agreements are also quickly awarding Federal subawards in the form of grants or contracts. Although a number of the contractors and recipients may be working in familiar funding territory and with familiar Government clients, many will be working in new spaces and with new customers. Further, the situation that the awards are intended to address will continue to evolve and may evolve quickly. Such circumstances (hastily drafted agreements, unfamiliar business relationships, and rapidly changing circumstances) can individually give rise to performance issues and can, in combination, create a perfect storm for issues that result in a financial nightmare for entities who are trying to help the public.

Entities looking to help in the Government’s fight against COVID-19 may be able to anticipate some of the likely issues these circumstances can create and prepare for them. Such proactive measures can help the company or organization avoid having the Government reject its invoices or reimbursement requests and avoid engaging in lengthy and costly Government disputes, investigations, or administrative procedures. Read on for a summary of some of the proactive measures an entity can take.

Federal contracts

1. Get the relevant contract terms in writing now (or as soon as possible).

Given the urgency of the situation, Federal agencies may award contracts through letter contracts. A letter contract authorizes a contractor to “begin immediately manufacturing supplies or performing services” and “may be used when (1) the Government’s interests demand that the contractor be given a binding commitment so that work can start immediately and (2) negotiating a definitive contract is not possible in sufficient time to meet the requirement.”[1] These agreements should be definitized within a set time frame, but there are often delays in such definitizations. Performing before all of the contract terms are negotiated means that the contractor incurs costs without knowing all of the rules of the road for getting paid. Not only does this situation provide the agency with more negotiating power when definitizing those terms, but it also results in significant opportunities for disputes that will last long after the performance ends. Thus, contractors receiving a letter contract should seek to definitize the contract as soon as possible.

2. Be prepared for the Government to exercise its rights under the contract’s Changes clause or the Termination for Convenience clause.

The Government has two powerful tools in its contracting arsenal that are not common in the commercial context—a Changes clause and a Termination for Convenience clause—and given the quickly evolving circumstances related to these awards, it is more likely than usual that the Government will exercise its rights under these clauses. The Changes clause permits the Government to make unilateral changes to the contract and later negotiate a change in payment or time and also provides a mechanism for contractors to be compensated for “constructive changes” to the contract, which are Government-required changes to the contract that do not follow the formal procedures in the clause. The Termination for Convenience clause permits the Government to terminate the contract any time that it “is in the Government’s interest” to do so, resulting in payments to the contractor per the appropriate clause. Even if they are not part of the contract, they will be “read into” them.[2] Thus, contractors should expect that the relevant Changes and Termination for Convenience clauses will apply in their contract and should be prepared for the Government to use them.

Preparation for the Government to use these clauses means preparing for the Government to unilaterally and significantly alter the type or amount of work the company will be doing under the contract. It means that in pricing the various parts of its offer, a contractor should consider how and when the company will incur costs in performing the work. It may also mean that after obtaining a contract, contractors should diligently monitor contract performance for constructive changes. And if a change or constructive change occurs, a contractor must track and document the bases for all costs that it may later need to seek compensation for; without appropriate documentation, it risks not getting paid for its additional costs.[3] A failure to identify constructive changes in a timely manner and to track/document the costs properly can result in diminishing a contractor’s profits, sometimes to the point of performing the contract at a loss.

3. Recognize that a delay the company experiences due to COVID-19 will generally not be compensable.

As COVID-19 continues to change American life, a company’s supply chain and employee availability may be effected. A contractor that enters into an agreement with the Government must be aware that delays caused by such issues may provide some relief from performance requirements, but these delays are generally not compensable.[4] To the extent a company is looking to support the Government in a contract situation where such a delay is possible but would be costly to the contractor, the company should look for ways to address the situation during the solicitation process or prior to award of the contract.

4. Understand the Government’s rights in proprietary/confidential information and intellectual property.

In its business arrangements, the Government obtains or maintains certain rights in information and property that are often times different from the rights that would arise in similar business arrangements in the purely commercial sector. These Government rights may be implicated as early as the pre-award phase. Indeed, certain pre-award communications and actions can result in a company giving its intellectual property to the Government (without payment) if the company is unaware of the governing statutes and regulations.[5] Such a situation could occur now if potential contractors submit unsolicited proposals or prototypes, trial runs, or samples with the company’s proprietary or confidential information in them. Thus, the company must be aware of the Government’s intellectual property scheme before providing such intellectual property or protected or confidential information.

Further, the Government’s intellectual property rights are not consistent across agencies or situations. Although some rights may be negotiated, others will be governed by statutes or regulations that change due to who the buying agency is and the breakdown of funding for the contract. Contractors concerned about their intellectual property rights must ensure that they understand the Government rights that will be applicable to the specific arrangement.

5. Develop the customer base and pricing independently.

As the demand for a company’s supplies or services unexpectedly increases, the company representatives may be tempted to talk more with its competitors. Nevertheless, companies should be wary of letting such discussions stray into collusion and the world of antitrust violations. The U.S. Department of Justice made it clear that it would be looking at contractors’ collusive actions when it instituted the Procurement Collusion Strike Force in November. On March 9, Justice further noted that it would be “on high alert” for collusive practices (like market allocation, price-fixing, and bid-rigging) related to “personal health protection equipment” and “public health products” that are sold to Federal, state, and local governments.

Federal grants

6. Check to make sure the applicable procurement requirements are in solicitations and contracts awarded with Federal funds.

Contracts awarded with Federal funds must comply with the recipient’s regulatory-compliant procurement policies and procedures, but recipients may find themselves awarding contracts outside of their typical contracts. For instance, Public Law 116-123, the “Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020” (“Coronavirus Appropriations Act”), permits Federal grants to be made for the construction, alteration, or renovation of non-Federally owned facilities to improve preparedness and response capability or to produce vaccines, therapeutics, and diagnostics. Recipients of these funds will likely use the grant funds to hire contractors for those services, but recipients that are involved in preparedness and response activities or that produce vaccines, therapeutics, and diagnostics may not normally award Federally-funded construction contracts. Nevertheless, award of those contracts will likely trigger certain 2 C.F.R. 200 (also known as the “Supercircular” or “Uniform Grant Guidance”) competition requirements and require certain contractual provisions applicable to construction contracts (such as those related to wages, affirmative action plans, and the environment).[6] Thus, recipients should ensure that they are following the appropriate requirements for awarding these contracts.

7. Consider the continued COVID-19 impacts on any policy used to charge time and effort to a Federal award.

As almost all companies and organizations encourage or require their employees to work remotely or to cancel work engagements, employees’ time-and-effort recordkeeping and workloads will likely shift; additionally, an employee’s workload may change or be terminated due to a funder’s request or direction. For Federal-award applicants, this may mean that data used to estimate the time and effort that will be charged to the award may be far from accurate as performance of that award progresses. Thus, Federal awardees must keep their award obligations in mind when dealing with shifts in employees’ recordkeeping and workloads.[7] Time-and-effort reporting is already one of the most difficult areas for Federal award compliance, and awardees’ quickly changing policies and employee workloads will only exacerbate the potential for awardees to improperly charge the Government for time-and-effort. Thus, applicants and Federal awardees should ensure that employees are aware of the applicable written policies regarding remote work and should also ensure that they regularly review time-and-effort allocations billed to the Government.

Conclusion

The above provides a brief overview of some tips to address common issues that may occur for contractors and recipients across industries. It is not a comprehensive review of issues companies or organizations seeking or obtaining Federal funds may face in helping the Federal Government address COVID-19.

[1] FAR 16.603-2(a).

[2] See, e.g., G.L. Christian and Associates v. United States, 320 F.2d 345 (Ct. Cl. 1963).

[3] See Nu-Way Concerte Co., Inc. v. Dept. of Homeland Security, 11-1 BCA ¶ 34636, CBCA No. 1411 (Dec. 16, 2010). In this case, a company was awarded a contract to “deactivate” trailers to support the U.S. Federal Emergency Management Agency’s disaster operations in Florida. The contract was originally for $1.2 million and was increased to $9.8 million; the contractor sought an additional $2.4 million for allegedly changed work, and the board of contract appeals denied the claim in full due to a lack of applicable evidence.

[4] See, e.g., FAR 52.249-10, “Default (Fixed-Price Construction)” (prohibiting the Government from terminating the contract for default if there has been an “excusable delay,” which expressly includes epidemics, quarantine restrictions, and acts of the Government).

[5] For instance in Liberty Ammunition, Inc. v. United States, 835 F.3d 1388 (Fed. Cir. 2016), a panel of judges for the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) upheld the trial court’s finding that a U.S. Army major did not have implied actual authority to enter into non-disclosure agreements, which meant that his assurances that the Government would protect the company’s proprietary information were effectively meaningless because the Government was not bound by the terms and conditions of the agreement.

[6] Although the Office of Management and Budget authorized awarding agencies to waive certain procurement requirements for recipients and applicants of awards those waivers are limited. Executive Office of the President, Office of Management and Budget, M-20-11, Administrative Relief for Recipients and Applicants of Federal Financial Assistance Directly Impacted by the Novel Coronavirus (COVID-19) (2020); Executive Office of the President, Office of Management and Budget, M-20-17, Administrative Relief for Recipients and Applicants of Federal Financial Assistance Directly Impacted by the Novel Coronavirus (COVID-19) due to Loss of Operations (2020).

[7] Federal contractors must also keep award obligations in mind while dealing with issues related to changes to remote-working models and timekeeping policies.

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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