Last week, DoD released a draft of its much-anticipated guidance implementing Section 3610 of the CARES Act, which authorizes the government to reimburse qualifying contractors for the costs of providing certain paid leave to employees as a result of the COVID-19 pandemic.  DoD previously published a collection of memoranda, Q&A documents, and a class deviation addressing Section 3610 reimbursement, but the new draft guidance (“Guidance”), which includes a “reimbursement checklist” and accompanying instructions, provides significantly more detail regarding the process for requesting and substantiating claims for reimbursement under the statute.

A number of open questions remain pending the issuance of final guidance, as discussed below, but the contours of DoD’s Section 3610 process are becoming increasingly clear.  Contractors interested in pursuing recovery under the statute should start preparing now to satisfy these emerging rules and requirements.

Overview of Guidance

In brief, Section 3610 of the CARES Act permits federal agencies to reimburse contractors for the costs of providing paid leave to employees who cannot perform work on a government approved site (or otherwise perform remotely) due to the effects of the pandemic.  While this is not a complicated concept to grasp, contractors must satisfy a number of technical requirements to access funding under this section, and agency guidance regarding this process is continuing to evolve.

DoD’s latest Guidance actually is comprised of three documents: an overarching guidance document, a reimbursement checklist, and a set of checklist instructions.  The Guidance is detailed and highly technical in some respects, and a comprehensive treatment of the proposed process and requirements is beyond the scope of this article.  However, the Guidance does offer additional insight into three fundamental questions at the heart of Section 3610: (1) Who is eligible?  (2) What is the scope of coverage? and (3) What substantiation will be required?  We briefly address each in turn below.

  • Who is Eligible? DoD’s Guidance states that “affected contractors” may be eligible for reimbursement under Section 3610.  An “affected contractor” is any prime or subcontractor that provided paid leave to employees to maintain them in a “ready state” while such employees were prevented from performing “on a site that has been approved by the Federal Government” and could not work remotely.  For purposes of the statute, the term “ready state” means the ability to “mobilize and resume performance in a timely manner.”  A government-approved facility may include both federal installations and the contractor’s own location or any other places of performance specified in the contract.[1]  Additionally, even if employees were able to perform a portion of their job responsibilities, contractors may seek recovery for partial paid leave so long as other necessary conditions are met.  Notably, however, DoD’s Guidance makes clear that reimbursement under Section 3610 is discretionary; indeed, the Guidance expressly states that “contracting officer is not required to reimburse any or all of the requested paid leave costs.”
  • What is the Scope of Coverage? DoD’s Guidance provides that affected contractors may receive reimbursement for costs of up to 40 hours of paid leave per week at “appropriate rates.”  (Section 3610 itself references “minimum applicable contract billing rates,” but due to limited applicability to many contracts that do not have established labor rates, the Guidance adopts the term “appropriate rates,” consistent with the DFARS class deviation that DoD issued in April 2020.)  Of course, contractors will bear the burden of establishing that any requested rates are appropriate, and DoD may require extensive supporting documentation for claimed rates, as discussed further below.  Reimbursement claims under Section 3610 may include appropriate overhead and G&A, but not profit or fees.  Additionally, the Guidance requires contractors seeking Section 3610 funding to disclose the amount of any loan that is forgiven under the Paycheck Protection Program or tax credits received under Families First Coronavirus Relief Act, and to decrement any claim for reimbursement by these amounts.
  • What Substantiation Will be Required? This question lies at the heart of the Guidance released last week.  DoD now has provided an initial framework for reimbursement, as the Guidance makes clear that the contractors must be prepared to submit significant information to establish both entitlement and quantum.  However, the Guidance contemplates that contracting officers would retain substantial discretion to determine what sorts of information contractors must provide to substantiate reimbursement claims.  At a minimum, this information is likely to include the following:  (i) a narrative describing why it is an affected contractor; (ii) the names, labor categories, and skill levels of all employees for whom reimbursement is being sought; and (iii) detailed information justifying the rates and hours for which reimbursement is being sought.  In an effort to reduce administrative burdens associated with compiling this supporting information, the Guidance encourages contractors to pursue “early engagement” with contracting officers to seek alignment on the information that will be required to support a reimbursement request.

Open Questions

Although the Guidance is detailed in certain respects, it is curiously general in others.  As a result, a number of key questions remain unresolved that DoD should address as it prepares to issue final guidance to the contractor community:

  • Practical Value of Early Engagement: As noted, the Guidance encourages contractors to pursue “early engagement” with contracting officers to, inter alia, seek initial feedback on a claim to “affected contractor” status and the amount and type of information that will be required to substantiate any reimbursement request.  The Guidance suggests that this early engagement may reduce inefficiency and administrative burdens on the contractor, but it also emphasizes that no determination in this early engagement context is final or binding.  The non-binding nature of early engagement discussions raises questions about whether they will achieve the desired goal of reducing inefficiency and administrative burden.  As a practical matter, it remains to be seen whether contracting officers would be willing, for the sake of efficiency, to make a preliminary determination about whether a contractor is an “affected contractor” before the contractor goes through the trouble of compiling a detailed submission to substantiate rates, hours, credits, etc.
  • Subcontractor Reimbursement Requests: The Guidance provides that prime contractors may request reimbursement for their subcontractors so long as they “provide the same supporting information for the subcontractor(s) (separated by subcontractor) as required from the prime contractor.”  However, DoD has not addressed several key questions for managing subcontractor reimbursement requests.  For instance, the Guidance declares that the “the prime contractor is responsible for performing the same type of analysis that the contracting officer is performing on the prime contractor’s request for Section 3610 reimbursement,” but it does not address a looming practical question about how prime contractors can get comfortable with the reliability of a subcontractor’s accounting system and practices.  Additionally, the Guidance permits subcontractors to protect proprietary information by providing the prime contractor with only the total amount of its requested reimbursement while submitting all supporting information “directly to the contracting officer under separate cover.”  This raises a question about whether prime contractors will encourage subcontractors to adopt this approach to limit the work involved in evaluating the subcontractor’s claim for reimbursement—and if so, whether there is any problem with such an approach.
  • Reimbursement By Contract Level or at Enterprise Level: The Guidance permits contractors to submit reimbursement requests in connection with a single contract, in connection with multiple contracts, or at the “corporate office level” level. This flexibility is helpful, but also leads to additional complexity:  it is unclear, for example, whether contractors with a mixture of DoD and non-DoD contracts can use DoD’s process to receive reimbursement for all of these contracts at the corporate office level.  Moreover, contractors will need to determine whether they submit for reimbursement in connection with some or all of their DoD contracts.
  • Contractors Who Are Both Primes and Subs: The Guidance requires the contractor to identify any other Section 3610 reimbursement requests that it has submitted. However, most government contractors hold a mix of prime contracts and subcontracts.  It is not clear whether contractors are required to identify any subcontracts they hold where the prime contractor might submit a request for Section 3610 reimbursement.
  • Reviewability of Contracting Officer’s Determination: The Guidance states that the “contracting officer has sole discretion to make decisions on a contractor’s affected status and the amount of any Section 3610 reimbursement.” What happens, then, if the contracting officer denies an otherwise well supported claim for reimbursement?  The contracting officer’s action is presumably reviewable; however, as discussed above, Section 3610 is also a permissive authority, and the “contracting officer is not required to reimburse any or all of the request paid leave costs.”  In any event, the Guidance does not address the dispute resolution process when a contracting officer denies what the contractor believes to be a meritorious claim.
  • Other Federal Agencies: Section 3610 reimbursement can be provided by all types of federal government agencies, and it remains to be seen whether other agencies will adopt an approach as rigorous as that embodied by the Guidance.  Some agencies, including USAID, GSA, and certain intelligence agencies, already have issued guidance of their own, but other agencies, may instead look to DoD’s Guidance as a model.  This patchwork implementation of Sector 3610 may result in additional complexity for contractors with a mix of defense and civilian work, as their reimbursement requests may be subject to different processes, requirements, and standards of review.

In light of these and other open questions, the defense contracting community will no doubt be keenly interested in seeing the final version of the Guidance once it is released.  And we may not have long to wait:  DoD originally expressed a desire to publish final guidance by May 22, 2020, but the delayed release of the draft Guidance has pushed back this date.  Still, we expect to see definitive guidance from DoD in the coming weeks – if not days.  Contractors affected by the pandemic would be well advised to continue monitoring the agency’s guidance.

 

[1] This includes any facility where “contract administration services are performed in support of the contract” or any facility that has been cleared by the National Industrial Security Program, pursuant to the execution of a DD Form 254.