Column: CARES Act Sect. 3610 - Confusion and Shifting Sands

      Defense Pricing and Contracting recently issued draft requirements for contractors requesting funds under Section 3610 of the CARES Act.

      These requirements contain some departures from previous guidance and define several points that previously were left up to a contracting officer’s discretion. Here are some of the key areas in which the guidance either clarified or, in some cases changed, existing practice.

      First, the new guidance prescribes a lengthy checklist intended to ensure that the contractor provided enough information to allow a determination of whether it is an "affected contractor," and to support the amount of relief the contractor is requesting.

      The checklist requires copious supporting information and documents, including information about the contractor’s accounting system, non-government business, and duties of any employees claimed as indirect costs. The guidance says contracting officers can request more information than what was included in the checklist and puts no restrictions on what the contracting officer may request.

      The guidance also states that contracts may be modified to include a firm-fixed-price line item, so the contractor may be paid in a lump sum for all requested reimbursements, regardless of contract type.

      It also clarifies that a single contract line item in a single contract may be used to reimburse the affected contractor for all its COVID-related costs across multiple contracts, to ensure that the contractor is not effectively double-paid for COVID costs across multiple contracts.

      Indeed, some of these changes signal a shift in focus to reducing costs—from Congress to the White House and even agencies themselves. This is clear from the complexity of the checklist.

      Finally, to put an even finer point on the primacy of cost savings, the guidance states that "in no event shall the reimbursement include profit or fee on paid leave costs."

      This requirement appears to be in direct contradiction of the substance of Section 3610, because Section 3610 specifically states that contractors should be reimbursed "at the minimum applicable billing rate" under their contracts—not costs.

      Thus, the new guidance ignores the "minimum applicable billing rate" requirement in favor of imposing a new, more limited, basis of only cost recovery—which, of course, does little to stave off closing of small businesses whose owners are barely able to pay for personal expenses from profits—some of which are far from the extravagance that is falsely claimed by many detractors of the hard working federal contracting community.

      Another area needing clarification is the basis of one of the most frequently-asked questions we receive: What is the potential conflict between state shelter-in-place orders and federal contract performance requirements?

     State shelter-in-place orders come with various enforcement mechanisms, some of which include large fines and even imprisonment. This is true in, for example, California, used here to demonstrate the application of a relatively strict shelter-in-place order. However, even the more restrictive states like California make a few exceptions to the shelter-in-place orders, most notably in the area of "critical industries."

      In general, each employee’s specific job duties control whether an employee is in a critical industry, and thus is exempt from California’s Shelter In Place Order. However, that order has a convenient loophole linking it to the federal interpretation of "critical infrastructure sectors." Specifically, it points to the CISA website, which states that there are 16 critical industry sectors: Chemical; Commercial Facilities; Communications; Critical Manufacturing; Dams; Defense Industrial Base; Emergency Services; Energy; Financial Services; Food and Agriculture; Government Facilities; Healthcare and Public Health; Information Technology; Nuclear Reactors/Materials/Waste; Transportation Systems; and Water and Wastewater Systems;

      So, if you have employees in California, and their work falls tidily into one of the above sectors, they will be able to continue working more or less as usual (while practicing social distancing, as required in the order). However, if it does not fall into one of these sectors, then you and your employees may have to choose between violating state law and defaulting on a federal contract.

      Regarding California law, according to Cal. Gov. Code § 8665, anyone who "violates any of the provisions of this chapter or who refuses or willfully neglects to obey any lawful order or regulation promulgated or issued as provided in this chapter, shall be guilty of a misdemeanor and, upon conviction thereof, shall be punishable by a fine of not to exceed one thousand dollars ($1,000) or by imprisonment for not to exceed six months or by both such fine and imprisonment."

      There is a single case that cites to this penalty provision (See Martin v. Municipal Court, 196 Cal. Rptr. 218, 219 (Cal. Ct. App. 1983).) In that case, the individual in question was notified of an order, and then was warned of noncompliance with the order. Following the warning, the state demanded the individual comply, and then arrested him and charged him with a misdemeanor when he did not. The point of the case was to determine if this individual could still be charged with noncompliance with the order following expiration of that order. The individual was convicted because while the order expired, the statute authorizing the misdemeanor charge did not.

      Accordingly, employees who violate the order could potentially be charged with a misdemeanor for any violation. It is unclear from this solitary case whether the employer would be vicariously liable. (The other statutory authority the order cites (Cal. Gov. Code §§ 8567 and 8627) similarly has no clarification regarding individual versus corporate liability, and neither does the case law that cites thereto.)

      Regarding breach of a federal contract, the usual termination for default provisions would apply, unless there is some other provision in an individual contract. TEVET would be in default of its contracts if it failed to perform, per the default clauses in FAR 52.249-xx (or FAR 52.212-4(g), if the contract is for commercial items).

      However, the termination guidance in FAR Part 49 indicates that the government should take into account "applicable laws and regulations," which arguably include state law.[2] Further, the Office of Management and Budget (OMB) previously issued a memo stating that the government should work with contractors to implement telework policies and other applicable procedures.

      Thus, while your contracts absolutely could be terminated for default if you choose to comply with state law instead of the terms of your contracts, the OMB guidance seems to be pushing the government away from such terminations, and you would have a good argument for conversion to a termination for convenience. Of course, we would rather avoid termination at all, but there are options if the worst does happen.

      So while many stay-at-home orders wane, it is possible a second phase of the pandemic occurs this fall and, as such, contractors should be aware of these conflicts in case things tighten up again in the future.

Please visit the PilieroMazza COVID-19 Client Resource Center at https://bit.ly/2zyN93E to access further resources.

      This column was reproduced with permission from PilieroMazza PLLC.

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Column: CARES Act Sect. 3610 - Confusion and Shifting Sands

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