By Scott A. Freling, Michael Wagner and Peter Terenzio of Covington & Burling
It goes without saying that the COVID-19 pandemic has significantly affected the Department of Defense (“DoD”) and the defense industrial base. And while Congress has taken steps to mitigate these impacts, the sheer scale of the pandemic’s effects pose a continuing challenge to both DoD and its contractors. Now a group of major defense contractors has submitted a pair of joint letters to the Pentagon and OMB highlighting the need for further action and the risk to the defense industrial base if such actions are not taken.
As noted in our earlier coverage, Section 3610 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allows federal agencies to reimburse contractors for the costs of providing paid leave to employees who could not work because of facility closures. But it has now been 110 days since President Trump signed the CARES Act into law and 58 days since DoD released draft guidance for reimbursement under Section 3610, and defense contractors are still waiting for the final guidance. Moreover, Congress has not appropriated any additional funds for reimbursement under Section 3610, which could mean that any attempt to reimburse contractors under Section 3610 would result in offsetting cuts to other DoD programs, a concern identified by Under Secretary of Defense for Acquisition and Sustainment Ellen M. Lord in her June 10, 2020 statement to the House Armed Service Committee.
At the same time, and as described in a July 2, 2020 DoD memorandum, contractors have been required to incur significant costs that may not be covered by Section 3610. These include, for example, the costs associated with facility closures, worksite sterilization and personal protective equipment (“PPE”), and social distancing within facilities, all of which are necessary to ensure safe operation during the ongoing pandemic.
To further highlight these concerns, last week, the CEOs of eight major defense contractors sent joint letters to both Under Secretary Lord and acting OMB Director Russell Vought. The eight contractors expressed the concern that, without further appropriations, attempts to reimburse contractors under Section 3610 could significantly reduce the funds available for other DoD programs. They further recommended that additional funds be appropriated so that DoD can assist contractors with the types of costs that may not be covered by Section 3610, including, for example, the costs of PPE and facility sterilization.
Finally, the eight contractors emphasized the significant financial risks that the defense industry could face in the absence of additional appropriations. Without additional funds, the government contractors may be unable to maintain their workforce or hire new employees. Prime contractors who support many tiers of the defense industrial base may be unable to support the many small but critical subcontractors that make up the defense supply chain, which may result in production slippages and delays in delivering products or services to the government end-user, increased costs, or even the failure of some suppliers.
We will continue to monitor updates in this area as Congress considers additional COVID-19 stimulus legislation and DoD works to finalize its Section 3610 guidance on how defense contractors can seek to recover some of their COVID-19 costs.
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