Government contractors face a unique set of challenges and opportunities in the wake of the COVID-19 pandemic. On one hand, contractors – like other firms across the broader economy – face huge economic hurdles due to the pandemic, globally and domestically, in an economic downturn unseen since the 1930’s. On the other hand, firms serving governments in the coming months will benefit from relatively stable public customers, and from a number of U.S. federal relief measures (some uniquely focused on contractors) intended to support a badly battered economy.
Global Economic Outlook Grim Through 2020
The COVID-19 pandemic spawned an unprecedented international health crisis that immediately impacted the global economy. As the pandemic endures, economic reverberations will continue into the foreseeable future. The International Monetary Fund (IMF) released a report predicting the international economic impact of “The Great Lockdown.” By the end of 2020, the IMF projects, the global economy will contract drastically by 3 percent, with a cumulative Gross Domestic Product (GDP) loss of approximately $9 trillion. In comparison to the Great Recession of 2008, during which the global economy contracted by less than 1 percent, experts predict the current economic downturn to parallel the Great Depression, when the global economy contracted around 10 percent.
Assuming the pandemic declines within the second half of 2020, the IMF predicts global economic growth to recover by up to 5.8 percent by 2021. Numerous factors may affect both the duration and intensity of the pandemic, leaving grave uncertainty for the months to come. Interactions between containment efforts, supply-chain disruptions, adjustments in spending patterns, and volatile commodity patterns will all shape the final economic impact. Until there is a reliable vaccine, and therapies to combat the virus, adverse economic consequences will continue on a global scale.
U.S. – Sharp Decline in 2020, With Some Recovery in 2021
In comparison to the global forecasts, the IMF’s economic projections indicate the United States economy will contract 5.9 percent in 2020 and grow only 4.7 percent in 2021. Moreover, economic forecasts predict U.S. unemployment to hit approximately 10 percent by the end of this year, and remain at 6 percent until the end of 2021.
The White House Bureau of Economic Analysis attributed a 4.8 percent drop in U.S. GDP over the first quarter of 2020 to the COVID-19 pandemic. The U.S. Department of Commerce reported consumer spending, which accounts for two-thirds of the national economy, fell 7.6 percent and industrial production declined 5.4 percent, the largest slump since World War II. The private sector also reported major profit and revenue declines during the first quarter. The federal government remains confident, though, that current plans to insulate the economy will lead to a strong recovery over the next year.
Government Contractors: Challenges and Opportunities
As the U.S. economy regains its footing over the coming year, government contractors should prepare for challenges and opportunities specific to public procurement markets.
Bloomberg Government predicted that solicitations should remain at levels similar to those before to the pandemic, though contractors may face stalled contract payments, delayed delivery schedules, and stop work orders.
In an April 16, 2020 special report, Bloomberg Government predicted that the number of solicitations should remain at levels similar to those before to the pandemic, though contractors may face stalled contract payments, delayed delivery schedules, and stop work orders. New government contracting opportunities are also predicted to arise from COVID-19, specifically within the healthcare and information technology (IT) industries. According to Bloomberg Government, current federal government spending for COVID-19 obligations has totaled $4.2 billion and is expected to increase. During March – April 2020, the federal government released at least 11 solicitations specifically related to COVID-19 response efforts, with the majority of procurements being for drugs and medical supplies.
Because a recession in 2020 is highly likely, contractors may wish to return to a critical lesson from earlier recessions: in times of economic stress, firms will shift aggressively into government markets because of severe payment risks in the private sector.
Traditionally, the fastest pathways into the federal market were through subcontracting with existing prime contractors, and through the U.S. General Services Administration (GSA) Multiple Award Schedules (MAS) contracts (though it can take months to conclude the MAS negotiations). Now, however, another path is likely to open: direct user purchases through commercial online marketplaces.
GSA To Open Online Marketplaces
Because of the pandemic, GSA has delayed awarding contracts which would open commercial online marketplaces (such as Amazon) to federal users making micro-purchases. The micro-purchase ceiling is normally $10,000, but has been increased with the emergency to $20,000 domestically, and $30,000 for purchases abroad. Once these contracts for online marketplaces are awarded by GSA, federal officials – not necessarily contracting officers – will be able to make thousands of dollars in purchases directly from commercial online platforms, bypassing the federal procurement system and most of its rules.
For contractors seeking to expand their positions in the federal market – especially those selling goods and services below $10,000 – these online marketplaces will be an obvious channel for consideration. The question now is which firms will be awarded these no-cost contracts for online marketplaces by GSA. It is possible that Amazon will not be awarded a contract, despite Amazon’s prominence in the market – a risk exacerbated by the acrimony between President Trump and Jeff Bezos, who heads Amazon. Until GSA awards the contracts opening these online markets, therefore, vendors may decide to wait to commit resources to this new channel to the federal marketplace.
Section 3610 Requests for Relief
Contractors that are already in the federal marketplace may be suffering ongoing costs because of state and local stay-at-home orders that keep their employees from working. If so, contractors may wish to submit requests for reimbursement for leave paid their employees, under Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
As a prior post explained, under Section 3610, “funds made available to an agency” by any law “may be used by such agency to modify the terms and conditions of a contract, or other agreement . . . to reimburse” contractors for leave paid to workers as a result of the pandemic, “subject to the availability of appropriations.” That Section 3610 support may be extended under any agreement (including “other transactions”), by modifying an existing contract without demanding additional consideration (goods, services or other concessions) from the contractor.
Reimbursement under Section 3610 is to be for “any paid leave, including sick leave” that the contractor “provides to keep its employees or subcontractors in a ready state,” including leave “to protect the life and safety of contractor personnel,” up to September 30, 2020 (the end of the current federal fiscal year). The reimbursement is to be “at the minimum applicable billing rates” for those employees, “not to exceed an average of 40 hours per week.”
Section 3610 also imposes limitations on contractors’ reimbursement. Under Section 3610, reimbursement is available “only to a contractor whose employees or subcontractors cannot perform work” at a government-approved site, “due to facility closures or other restrictions” such as state and local government stay-at-home orders issued to mitigate the COVID-19 pandemic. Section 3610 reimbursement is available only for employees “who cannot telework because their job duties cannot be performed remotely” during the COVID-19 health emergency which was declared on January 31, 2020. Finally, the reimbursement authorized by Section 3610 is to “be reduced by the amount of credit a contractor is allowed” under the CARES Act and other legislation, including the tax credits for paid leave funded under Division G of Public Law 116-127 (an issue discussed further below).
Although Congress took only a few days to draft and pass Section 3610, the Trump administration took three weeks to publish governmentwide guidance to implement the statute. Before that government wide guidance was issued by the U.S. Office of Management and Budget (within the White House), individual agencies issued their own guidance for Section 3610 reimbursement. As Michelle Coleman and her colleagues have pointed out, the agencies’ guidance was often conflicting; nor did the OMB guidance harmonize or resolve those contradictions.
The various guidance also suggested that agencies would not reimburse qualified contractors as a matter of course, but would regard reimbursement as wholly discretionary (or “permissive”). For example, the OMB guidance said that agencies “should carefully consider if reimbursement for paid leave to keep the contractor in a ready state is in the best interest of the Government for meeting current and future needs.” The agency guidance opened the risk that agencies – or even individual contracting officers – might decide to reject reimbursement under Section 3610 for unsubstantiated reasons, because of a subjective perception that the reimbursement request was not worthy, or merely to protect an agency’s program funds. Section 3610, OMB stated, “does not compel reimbursement,” but instead “simply authorizes payment of these costs such that agencies may use their discretion to make reimbursements only when they find that making such payments are in the best interest of the government.”
Contractors denied relief under Section 3610 may argue that the statute stands as an obligation to reimburse eligible contractors, akin to the statutorily grounded obligation recently recognized by the U.S. Supreme Court in Maine Community Health Options, Inc. v. United States, No. 18-1023 (Apr. 27, 2020). The question may spill into litigation, because agencies may argue that Section 3610 is permissive, not mandatory; that, in turn, may trigger the claims process under the Contract Disputes Act, and protracted litigation through the Court of Federal Claims and the boards of contract appeals. Delay through litigation, however, will derail the fiscal stimulus and public health benefits (by allowing social distancing) that Section 3610 was intended to provide.
Possible Fraud and Audit Risks
As Dominique Casimir noted in a recent interview with Federal News Radio, contractors may face a series of potential enforcement actions stemming from the COVID-19 relief:
Over the next few years, the oversight provisions of the CARES Act will likely lead to hundreds or even thousands of enforcement actions against companies and individuals, and billions of dollars in penalties and fines.
One of the first things that we should talk about is remembering that all existing oversight functions that apply to federal contractors will continue to exist and the CARES Act directs millions of dollars to existing inspectors general and directs them to increase their investigative and enforcement activities of programs that are tied to CARES Act funds. These people are already aggressive and they know how to do their jobs.
[O]n top of the existing enforcement framework, the CARES Act creates three new oversight bodies.
First is the pandemic response accountability committee. This committee will conduct, coordinate and support inspectors general in the oversight of covered funds in order to detect and prevent fraud, waste, abuse and mismanagement. And this committee has the authority to conduct independent investigations and refer matters to the Department of Justice for criminal or civil investigation.
Second, there is the Special Inspector General for pandemic recovery. This inspector general is established within the Treasury Department and will be responsible for conducting supervising and coordinating audits and investigations of the making, purchase, management and sale of loans, loan guarantees and other investments by the Secretary of the Treasury. . . . [T]his general will have authority to conduct investigations and issue reports and be able to refer to the matter to the Department of Justice for criminal or civil investigation. This is the post for which President Trump intends to nominate White House lawyer Brian Miller to serve as the Inspector General.
[T]hird . . . is the congressional oversight commission. This will be five members selected by a majority and minority leadership from both the House and the Senate, and will have authority to conduct oversight of the implementation of the stimulus package by the Treasury and the Federal Reserve. And what’s important for contractors to remember here is that this oversight commission may be particularly aggressive in terms of holding hearings, taking testimony receiving evidence and issuing reports . . . .
To prepare for possible audit and enforcement actions, Dominique Casimir recommended, contractors should be careful to document their funding and their contractual actions. Among other things, as noted contractors that receive Section 3610 reimbursement will want to ensure that they do not “double-dip” with other relief available under the CARES Act.
Expanded Use of the Defense Production Act
As a recent report from the Congressional Research Service noted, the Defense Production Act of 1950 gives the President a broad set of authorities, including the power to require businesses to prioritize and accept contracts for materials and services necessary for the national defense. These authorities originated in war powers given the executive branch during World War II, and have been expanded over the years to address threats beyond war, to include public health emergencies.
During the COVID-19 pandemic, the federal government has drawn on a number of legal authorities under the Act, including “rated” orders under the Defense Production Act which displaced local and state purchases, export controls instituted under the Act, and, efforts by the U.S. Justice Department to use the Act to stem “price-gouging” on critical supplies.
Under Title I of the Defense Production Act, the President may prioritize the government’s orders and contracts over other parties, in the interests of the national defense (and by extension to protect public health). As Liza Craig and her colleagues explained:
The DPA confers upon the President vast authorities to impose some control over private-sector industry to ensure the production of material that is deemed necessary for national defense. These authorities can be used across the federal government to ensure that the domestic industrial base is capable of providing materials and goods required.
During the COVID-19 crisis, the federal government exercised this authority to prioritize the federal government’s orders of critical supplies over other orders for critical supplies, sometimes from state and local governments. In the face of anger from state and local governments against the federal government for “outbidding” their orders, FEMA argued that “[p]riority rated DPA orders do not create a situation of ‘outbidding,’” but “rather, it puts the federal government requirement to the ‘front of the line’ for fulfilment ahead of other orders” so that critical supplies can be “routed through the Strategic National Stockpile to where they’re needed most.”
While internal U.S. demand for critical supplies raised difficult domestic issues under the Defense Production Act, the Trump Administration’s use of the Act to institute export controls – apparently for the first time – triggered much broader international concerns. The United States’ export control measures were part of a broad range of trade controls (see graphic) put in place by countries around the world, as nations struggled to gather supplies needed to fight the pandemic.
More surprising was the Trump administration’s decision to waive certain import controls on vital items in short supply. In normal times, the General Services Administration excludes goods from nations which have not entered into trade agreements with the United States (non-Trade Agreements Act (or “non-TAA”) nations) from tens of billions of dollars in annual sales under the MAS contracts. Because of acute shortages in fighting the pandemic, however, GSA temporarily lifted that ban for certain supplies – despite the Trump administration’s strong “Buy American” rhetoric.
The third important use of the Defense Production Act came as part of an effort by the U.S. Department of Justice to counter “price-gouging” in the market for badly needed medical supplies. In a March 2020 memorandum, Attorney General William Barr warned of “individuals using the crisis to hoard vital medical items and then make inappropriate, windfall profits at the expense of public safety and the health and welfare of our fellow citizens.” Barr stressed that the Justice Department would target individuals who were hoarding supplies which had been designated as critical. Section 102 of the Defense Production Act prohibits hoarding of designated supplies to sell at inflated prices. In late April 2020, the U.S. Attorney for the Eastern District of New York announced another prosecution under this initiative against two men who allegedly hoarded face masks, which the government had designated as critical.
PREP Act Protections and Other Immunities
Medical supply contractors may be specially protected in the pandemic by the Public Readiness and Emergency Preparedness Act (PREP) Act, which provides limited liability immunity. As Kendra Perkins Norwood and her colleagues noted:
On March 17, 2020, the HHS issued a declaration invoking the PREP Act (42 U.S.C. 247d-6d) in response to COVID-19, which provides immunity from certain federal and state law claims to “covered persons” that provide certain covered medical “countermeasures” that are used or administered in response to COVID-19. Specifically, the Declaration gives immunity to “manufacturers,” “distributors,” and certain other covered persons (as defined in the PREP Act) who are engaged in the manufacture, test, development, distribution, administration, or use of “covered countermeasures” to combat COVID-19. Covered countermeasures include any “antiviral, any other drug, any biologic, any diagnostic, any other device, or any vaccine, used to treat, diagnose, cure, prevent, or mitigate COVID-19.” The Declaration has retroactive application, which makes it effective as of February 4, 2020, and it applies to covered entities that provide such covered countermeasures pursuant to “present or future” government contracts or other agreements. The PREP Act provides immunity from suit for federal or state law claims for certain “losses” (e.g., death, physical injury, mental injury), but does not shield contractors from liability for claims for losses caused by the contractor’s wilful misconduct.
This PREP Act protection and is just one of a range of special immunities which the federal government has afforded manufacturers and suppliers during the COVID-19 pandemic, which will be discussed in more detail during the May 6, 2020 webinar.
Editors’ Note: Click here for information on the free webinar, “COVID-19: Contractors’ Road to Recovery,” on Wednesday, May 6 at 12 noon Eastern, and here to register.
