DoD Implements Section 3610 of CARES Act by Converting It Into a Cost Principle: Reflections and Best Practices

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On April 8, 2020, the Office of the Undersecretary of Defense issued a "Class Deviation"¹ to the Defense Federal Acquisition Regulation Supplement (DFARS), by issuing a cost principle governing the allowability of paid leave—including sick leave—incurred under certain circumstances arising from the COVID-19 pandemic. This provision enhances the ability of defense contractors to recover extraordinary labor expenses from the Federal government, the entitlement to which would otherwise be uncertain. Significantly for contractors in immediate need and eligible for recovery under CARES Act Section 3610, the class deviation reflects the steady pressure from Congress and others for DoD to provide guidance and help to affected, covered contractors. In the Memorandum issuing the deviation, the Acting Principal Director, Defense Pricing & Contracting (APD,DP&C) provides guidance to contracting officers declaring that "[i]t is imperative that we support affected contractors, using the acquisition tools available to us, to ensure that, together, we remain a healthy, resilient, and responsive total force." The Memorandum, however, immediately tempers that imperative guidance with clarification about the limited circumstances triggering the relief, specification that eligibility for any other relief should be pursued first (or at least calculated and subtracted from any claim under Section 3610), and a reminder that contracting officers must act as "good stewards of taxpayer funds."

Essentially, the new DFARS cost principle, 231.205-79 CARES Act 3610 - Implementation, reiterates the language of section 3610; however, it frames the language with discretion and some limitations. In the Memorandum issuing the deviation, the APD,DP&C provides guidance to contracting officers that would constrain the degree of judgment in applying the provision. Whereas the new DFARS 231.205-79 is a step forward in dealing with the immediate crisis, it raises some questions. Invariably, there will be disputes of cost allowability down the road.

Briefly, Section 3610 of the CARES Act provides for reimbursement subject to several restrictions: (1) reimbursement will be discretionary, rather than mandatory; (2) the parties must alter the terms of the contract to provide for reimbursement; (3) reimbursement will be at the minimum applicable contract billing rates not to exceed an average of 40 hours per week for paid leave, including sick leave; (4) the labor expense reimbursed must be to retain employees (or subcontractors) in a ready state; (5) the reimbursable labor expense must be due to an inability to perform work on a Federally-approved site because of a closure or restriction and an inability to telework due to the nature of the job duties; (6) reimbursable costs are limited to those incurred between January 31, 2020 and September 30, 2020; and (7) the contractor must offset reimbursement for such idle labor by the amount of any credits the contractor "is allowed" under other sections of the CARES Act. For a comprehensive analysis of the CARES Act, including section 3610 and inter-related sections, see Arnold & Porter's Advisory, "Coronavirus Legislative Update: The CARES Act Becomes Law."

To the extent that new DFARS 231.205-79 emulates the provisions of Section 3610, it renders allowable the costs of:

paid leave (including sick leave) . . . at the appropriate rates under the contract for up to an average of 40 hours per week . . . as direct charges, if appropriate, if incurred for the purpose of:

(i) Keeping contractor employees and subcontractor employees in a ready state, including to protect the life and safety of Government and contractor personnel, notwithstanding the risks of the public health emergency declared on January 31, 2020, for COVID-19, or

(ii) Protecting the life and safety of Government or contractor personnel against risks arising from the COVID-19 health emergency.

Also consistent with the terms of Section 3610, DFARS 231.205-79 limits the costs to those for employees who (i) would have worked on a Federally-approved site that has been closed or made inaccessible due to COVID-19 and (ii) are unable to telework because their job duties cannot be performed remotely. DFARS 231.205-79(b)(3). The new cost principle also calls for an offset arising from any payment, allowance, tax or other credit the contractor "is eligible to receive" from a law specifically identifiable with the COVID-19 public health emergency. Id. 231.205-79(b)(6). And, the allowable costs are limited to those incurred between January 31, 2020 and September 30, 2020. Id. 231.205-79(b)(5).

The new cost principle creates further restrictions to allowability and does not fully implement section 3610. Primarily, as a deviation to the cost principles addressing cost allowability, DFARS 231.205-79 does not readily solve the problem of increased expense on firm fixed price type contracts. Contractors seeking relief on such contracts for extraordinary leave expense arising from the COVID-19 pandemic will have to follow a different protocol. Section 3610 specifically calls for the alteration of contract terms. Although the Section 3610 implementing memorandum echoes CARES Act Section 3610's application to all contract types, the temporary cost principle does not provide guidance as to all contract types.

As to the specific terms of DFARS 231.205-79, the provision commences with the uncertain condition that it only applies to a contractor whom "the cognizant contracting officer has established in writing to be an affected contractor." The cost principle does not define an "affected contractor." It may not be as simple as a contractor with employees who are unable to work at a Federally-approved site and to telework. For instance, the accompanying Memorandum explains that a small business eligible for the Paycheck Protection Program should not be entitled to charge the costs as allowable under DFARS 231.205-79. The Memorandum also advises contracting officers to consider the contractor's ability to conduct business during COVID-19: "While impacts will certainly be experienced by many contractors, some will have more immediate need for relief than others." (Memorandum at 2.) Still further, the Memorandum suggests that "contracting officers shall consider the immediacy of the specific circumstances of the contractor involved and respond accordingly."

As we predicted in our Advisory on the CARES Act Section 3610, the Government is likely to consider steps a contractor has taken to mitigate the paid leave expense. Nor does the cost principle provide guidance on who should be the "cognizant contracting officer." If a contractor treats paid leave, including sick leave, as an indirect expense, then the answer may be the contractor's Administrative Contracting Officer. If, however, such expense is charged direct, then there, presumably, would need to be a written determination by each Procuring Contracting Officer. This could lead to inconsistent determinations of allowability. Additionally, the requirement for a writing can be a tricky wicket. Contractors cannot rely on an "understanding" with the contracting officer. If there is no written determination, the Defense Contract Audit Agency will undoubtably challenge the expense down the road.

DFARS 231.205-79 also extends the offset to credits beyond those in the CARES Act. It provides that for the cost to be allowable, it must be reduced by "the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020." (DFARS 231.205-79(b)(6) (emphasis added).) Note that the reduction is not based on actual receipt; but, rather, on eligibility. And, it applies to a wide range of laws and receipts. This caveat is rife for disputes. In an attempt to curtail discrepancies, the accompanying Memorandum directs contracting officer to secure an "affirmation" from the contractor that it has not or will not seek reimbursement for the same costs accounted for treatment under DFARS 231.205-79; i.e., no double-dipping. For example, see Arnold & Porter Advisories "Families First Coronavirus Response Act Signed Into Law By President Trump" (March 18, 2020) and "DOL Issues First Guidance On Paid Sick Leave and Expanded Family and Medical Leave Under the Families First Coronavirus Response Act" (March 25, 2020).

Though not stated in DFARS 231.205-79, the Memorandum also conditions allowability of the expense on the availability of funds.

DFARS 231.205-79 also provides some helpful components for contractors. First, it includes contractor-owned and leased facilities or sites approved by the government for contract performance among Federally-approved sites. Arguably, though not definitively, this might include corporate headquarters necessary to conduct the indirect expense of contracts and the overall conduct of business. Second, the cost principle clarifies that costs are allowable, not only if the Government site is closed, but also if access to the approved sites is "prohibited or made impracticable by Federal, State, or local law, including temporary orders having the effect of law." Lastly, the cost principle provides that a contractor must segregate the costs, which must be identifiable in the contractor's records. DFARS 231.205-79(b)(2) provides that such "segregation and identification of costs can be performed by any reasonable method as long as the results provide a sufficient audit trail." (Emphasis added.)

Again, in our prior Advisory on Section 3610 of the CARES Act, we expressed concern that the government would treat Section 3610 as a cost allowability question, which it has, and as such, might seek penalties for expressly unallowable costs under FAR 42.709 for any deviations from the provision. DFARS 231.205-79 is susceptible to so much condition and interpretation that it ought not give rise to penalty. Nevertheless, when the immediacy of the pandemic is in the past, auditors may cross that path.

In the interim, contractors that fall with Section 3610's coverage should take comfort that DoD has moved still further in the direction of supporting the contractor community (even if traps for the unwary remain) and consider the following best practices:

• Document, document, document. Maintain contemporaneous documentation to address potential disputes in the future. Most importantly, secure the written determination of the contracting officer for application of DFAR 231.205-79. It likely also makes sense to seek and document contracting officer concurrence on the method for charging of such costs.
• Prepare evidence of mitigation and other factors to assist the contracting officer's determination of an affected contractor.
• Document that COVID-19-related causes are preventing the contractor's workforce from working on a site approved by the Federal Government for contract performance and identify the employees who cannot telework and present your findings to present to the cognizant contracting officer for determination that company is an "affected contractor".
• Segregate and support related costs to maintain those affected and reason for incurring costs and any mitigation efforts.
• Work with counsel to identify any other COVID-19 related relief provisions available to the contractor in connection with the costs and which costs are affected. This analysis should also identify other options for contractual relief if the contractor does not qualify as an affected contractor, or the contract type is not susceptible to treatment under DFARS 231.205-79.
• Pursue the other avenues of relief if available.

Prior to submission, confirm that the amount sought under Section 3610 does not include any costs that could be recoverable under other relief provisions or any paid leave costs incurred before January 31, 2020 and after September 30, 2020.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.