Can I Recover the Added Costs of Work Caused by COVID-19?

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As the fallout from COVID-19 continues, federal contractors in every industry are seeing significant impacts on their ability to perform, ranging from scheduling delays to supply chain interruptions and increased costs of performance.  We previously addressed the rules and regulations governing excusable delays, which permit a contractor to avoid default if a failure to perform arises from causes beyond its control.  This next post addresses key FAR provisions that may entitle a contractor to a price adjustment or other recovery due to changes in contract requirements as a result of the pandemic.

Key to all of these potential areas of relief is communication with your Contracting Officer.  If you are facing changed conditions that make performance difficult, or if the government is seeking added requirements, you can help put your company in a better financial position by understanding your contractual rights and providing appropriate notices to the Contracting Officer.

Stop Work Clause

In some cases, it may be appropriate to stop work while quarantines or social distancing requirements are in effect, especially for contracts that require interaction with the public.  In those situations, the stop work clause at FAR 52.242-15 may provide protection, allowing for both a schedule adjustment and compensation for costs associated with performance delays if the Contracting Officer, in his or her discretion, issues a stop-work order.  To pursue a schedule and compensation adjustment in this circumstance, a contractor would need to assert its rights under this clause within 30 days “after the end of the period of work stoppage.”  See FAR 52.242-15(b)(2).

Changes Clause

Even if the Contracting Officer does not issue a stop-work order, contractors facing coronavirus-related delays and disruptions could pursue an adjustment to the contract price under other clauses.  Most notable here are the standard FAR Changes clauses: FAR 52.243-1 (fixed price), FAR 52.243-2 (cost reimbursement), FAR 52.243-3 (T&M), or FAR 52.243-4 (construction).  The Changes clause permits an adjustment to contract price when the government changes the work to be performed under the contract, either through formal orders or through other conduct (so-called “constructive changes”).

Consider, for example, a situation in which the government imposes quarantine restrictions in response to coronavirus and these restrictions interfere with the ability of a contractor or subcontractor to perform.  Depending on the facts of the case, such restrictions may constitute a constructive change that, if appropriately presented and supported, may entitle a contractor to a contract price adjustment — particularly where the contractor could establish that any increased costs were the result of some act or omission of the government (i.e., imposing quarantine restrictions) in conjunction with a force majeure event.  See, e.g.Maint. Engineers, ASBCA No. 23131, 81-2 BCA ¶ 15168.

Changes might also arise from other events, such as directions to use different work stations or to comply with new on-site policies.  If a government direction increases the cost of performance, it is generally worth evaluating whether it is a compensable change.

Suspension of Work Clause 

There are other potential avenues for recovery in addition to the Changes clause.  For example, the Suspension of Work clause at FAR 52.242-14 provides for an adjustment of the contract price in the event that work is “unreasonably” delayed “(1) by an act of the Contracting Officer in the administration of this contract, or (2) by the Contracting Officer’s failure to act within the time specified in this contract (or within a reasonable time if not specified).”  FAR 52.242-14(b).  This language has been interpreted to permit contractors to recover additional costs in a number of circumstances, including as a result of delays that are caused by government restrictions on access to the work site.  See, e.g.Blinderman Constr. Co., Inc. v. United States, 695 F.2d 552, 557 (Fed. Cir. 1982) (“[I]f any part of the contractor’s work was thereafter delayed for an unreasonable period of time because of the Navy’s failure to provide access to the apartments, the contractor is, under the ‘Suspension of Work’ clause, entitled to an increase in the cost of performing the contract.”).

Termination Clause and Considerations

To the extent that a contract is terminated in whole or in part as a result of COVID-19 related restrictions, contractors will be entitled to recover certain costs under the standard FAR Termination for Convenience clause: FAR 52.249-2 (fixed price), FAR 52.249-6 (cost reimbursement), or other related variations of these clauses.  The FAR sets forth detailed rules regarding the categories of costs that are recoverable in the event of a termination for convenience, but there often are nuances in the application of these rules to the particular facts of the case.  And there also may be nuances — and opportunities — depending on whether the partial loss of contract work is characterized as a partial termination for convenience (under a T4C clause) or a deductive change (under a Changes clause).  Under the FAR’s recovery scheme, if a contract generates significant profits, the contractor will be better served if the deletion is characterized as a deductive change.  But if, on the other hand, the contractor is in a loss position, the contractor will be better off if the deletion is classified as a partial termination.

Sovereign Acts Defense May Apply in Some Cases

Notwithstanding the above, one potential obstacle to recovering compensatory costs through an adjustment to contract price is the “sovereign acts” doctrine.  Under that doctrine, “the United States when sued as a contractor cannot be held liable for an obstruction to the performance of the particular contract resulting from its public and general acts as a sovereign.”  Conner Bros. Constr. Co. v. Geren, 550 F.3d 1368, 1371 (Fed. Cir. 2008) (emphasis added).  When the sovereign acts doctrine applies, the contractor is entitled only to schedule relief.  See Garco Constr. Inc. v. Secretary of the Army, 856 F.3d 938, 945 (Fed. Cir. 2017) (“Although actions taken by the United States in its sovereign capacity shield the government from liability for financial claims resulting from those acts, the contractor may be allowed additional time to perform.”).

Importantly, however, this doctrine — which is effectively an affirmative defense of the government to contractor claims — applies only when the government’s performance of its obligations under the contract are rendered impossible as a result of the sovereign act.  See Klamath Irr. Dist. v. United States, 635 F.3d 505, 521 (Fed. Cir. 2011) (doctrine applies only when “the sovereign act renders the government’s performance impossible”).  The government bears the burden of meeting this high standard.  See id. at 522.[1]

Be Prepared to Demonstrate Cost Impacts and Notify the Customer

To prepare for filing a request for adjustment, contractors should carefully document the costs of any increased work and the reasons why those costs were caused by the government’s directions or conduct.  Costs may include additional hours worked, new materials purchased, scrapped goods, or other categories of costs.

Contractors should also pay close attention to any contractual notice requirements.  The FAR’s standard Changes clause generally requires contractors to provide notice within 30 days from the date of the government’s directed change, but terms may vary from contract to contract.  Contracts may even require two stages of notice — an initial notification of change within a brief period of time, followed by a request for adjustment within another period of time.

Of course, any claim for a schedule or price adjustment will depend significantly on a case’s particular facts and circumstances.  However, where contractors find their performance delayed or disrupted by restrictions related to COVID-19, they should understand the potential recovery options available and any notice requirements that must be met.

Originally published at Covington & Burling