Contractors sidelined by facility closures and stay-at-home orders in the wake of the COVID-19 pandemic may now have a new pathway to recovering idle labor costs.  The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act includes a provision, Section 3610, that provides a new form of relief for contractors facing delays and additional costs as a result of employees being unable to work due to quarantine restrictions.

Section 3610 of the Act allows federal agencies to use “funds made available by the Act” to modify contracts to reimburse contractors for the costs of providing “paid leave … to keep [their] employees or subcontractors in a ready state” if they are unable to enter a government-approved site of work due to closures or quarantine restrictions resulting from COVID-19.  This provision supplements other new requirements in the CARES Act and its predecessor, the Families First Coronavirus Relief Act (“FFCRA”), for paid sick leave.

While undoubtedly helpful to contractors who want to maintain readiness without bearing the millstone of idle labor costs, Section 3610 contains several limitations for government contractors to be aware of:

  • Reimbursement is limited to “minimum applicable contract billing rates,” and may not exceed an “average of 40 hours per week.”
  • Reimbursement will be made only if the relevant employees’ job duties “cannot be performed remotely.” This limitation is consistent with the new paid sick leave provided by FFCRA; employees are not eligible for that paid sick leave if they are able to telework.
  • Reimbursement will not be made for costs incurred after September 30, 2020, the end of the government’s fiscal year. This is stricter than the FFCRA paid sick leave, which is available through December 31, 2020.
  • The payments are offset by the amount of refundable tax credits that employers may receive under FFCRA. In essence, this prevents “double-dipping” for reimbursements.

The Department of Defense’s office of Defense Pricing and Contracting (“DPC”) highlighted Section 3610 in a March 30, 2020 Memorandum advising Contracting Officers on how to work with contractors to minimize the impacts of the COVID-19.  However, both the memo and the statute leave several issues unresolved.

  • First, regulations or guidance do not yet exist to explain how contractors should apply for reimbursement. The DPC March 30 Memorandum promises that “DPC will provide implementing guidance for this section as soon as practicable.”  DPC has been consolidating and publishing COVID-19 guidance, under the leadership of Under Secretary Ellen Lord, and we expect the guidance to come in due course.
  • Second, the Act does not define when a contractor is in a “ready state.” This term may be akin to the requirement that a contractor establish that its workers were on “standby” as a condition of recovering unabsorbed overhead costs.  Under federal law, a contractor is considered to be on standby when contract work is suspended for an indefinite duration, even as the contractor is nevertheless required “to be ready to resume work on the contract, at full speed as well as immediately.”  J. Dick, Inc. v. Principi, 324 F.3d 1364, 1371 (Fed. Cir. 2003).  That guidance may be informative, but we cannot stay for certain what a contractor will need to do in order to be considered to be in “ready state.”
  • Third, the Act does not address how the reimbursable rate will be determined in fixed-price contracts that do not specify labor category billing rates. In such cases, contractors should coordinate with their Contracting Officer and be prepared to substantiate billing rates cited in reimbursement requests from documentation beyond the four corners of the contract.

Even with these limitations and open questions, Section 3610 will be of interest to many contractors, as it raises the possibility of substantial relief for firms whose workforces have been idled by COVID-19.  And unlike the requirements for recovering costs under the Changes or Suspension of Work clauses, Section 3610 contemplates granting relief even absent proof of a contract change or unreasonable delay by the Contracting Officer.

We soon expect to see additional guidance for implementing the provisions of Section 3610 and will be closely monitoring developments in this area.  In the meantime, contractors affected by coronavirus-related delays and restrictions should meticulously document both the circumstances and costs associated with any performance impacts.