On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Public Law No. 116-136, $2.2 trillion-dollar emergency legislation which under Section 3610 would allow agencies to support contractors sidelined by the COVID-19 virus by reimbursing the costs of leave paid to contractor employees held in a “ready state.” The CARES Act reflected extensive negotiations and compromise between the White House and Congress, and between Senate Democrats and Republicans. After a three-week delay, during which several agencies issued their own guidance, on April 17, 2020 the White House’s Office of Management and Budget (OMB) issued a government-wide memorandum for contracting offices considering contractors’ requests for equitable adjustment Section 3610.
OMB Memorandum M-20-21 offered little administrative guidance on how, exactly, requests for relief under Section 3610 should be submitted and processed. OMB instead largely deferred to agencies’ own class deviations (agency-specific, often temporary deviations from the Federal Acquisition Regulation (FAR)), and confirmed that regulators are preparing a governmentwide rule under the FAR. For now, because of the severe economic and practical pressures of the COVID-19 pandemic, contractors and contracting officers negotiating potential Section 3610 relief are likely to follow the agency guidance already published (discussed below), including the class deviation and guidance from the Defense Department.
To make sense of the OMB memorandum, this piece returns to Congress’ (and the White House’s) goals behind the CARES Act law and Section 3610: to protect workers’ health, minimize the spread of the COVID-19 virus, preserve the contracting base and jump-start the economy. The analysis below highlights a key principle asserted by the OMB memorandum – OMB’s suggestion (echoing several agencies) that contracting officers may deny Section 3610 requests for relief despite contractors’ best efforts to keep their employees in a ready state during the pandemic – and discusses how that principle, and the broader Section 3610 relief initiative, may play out in the future.
Section 3610 is an important experiment in disaster recovery, for it is an explicit effort to use the government’s procurement function to mitigate the economic and public health effects of a catastrophic event. Unlike the Stafford Act, which affords disaster relief by funding recovery work, Section 3610 of the CARES Act would compensate contractors for not working – for paying their employees to stay home, to mitigate the effects of the pandemic. Whether the Trump administration succeeds in deploying relief under Section 3610 may affect whether this form of procurement relief is used here (and abroad) in future disasters.
Section 3610 of the CARES Act
As an earlier post discussed, the CARES Act was the product of a bipartisan compromise between the White House and Congress. Among other forms of relief, the CARES Act provided funding to preserve public health and economic stability in various economic sectors, including federal contracting – a market sector that employs several million U.S. workers.
Section 3610 was added to the CARES Act after the Senate Republican majority’s original bill was rejected by Senate Democrats and rapidly replaced with a new, broader bill. Section 3610 was apparently hastily drafted, which has led to uncertainties in interpretation and implementation.
Section 3610 says that, notwithstanding any other legal bar, “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.
Although Section 3610 was awkwardly drafted, Congress’ goals in passing Section 3610 and the broader CARES Act – and President Trump’s goals in supporting the multi-trillion-dollar relief package – were clear:
- Protect workers’ health: Section 3610 of the CARES Act explicitly protects workers’ health by reimbursing contractors for leave paid “to protect the life and safety of Government and contractor personnel.”
- Minimize the spread of the coronavirus: Section 3610 allows reimbursement when employees cannot work “due to facility closures or other restrictions” – stay-at-home orders issued by state and local governments to “flatten the curve” by retarding the spread of the COVID-19 pandemic, through reduced social exposure to the virus in thousands of offices and factories.
- Save the contracting base: Section 3610 directed reimbursement to contractors that provided leave “to keep [their] employees or subcontractors in a ready state.” There was an acute concern that, without government support, business (especially small businesses) could collapse as a result of the COVID-19 shutdowns. (In the days before passage of the CARES Act, for example, the Air Force had issued memoranda on March 20 and March 26, 2020 on “creative contracting techniques” for maintaining the financial health of the defense industrial base during the pandemic.)
- Jump-start the stalled economy: When President Trump signed the CARES Act, he pointed out that the legislation ultimately may cost over $6 trillion – stimulus funding which was critically needed, as the President noted, for the American economy to rebound in the coming months.
Implementation of Section 3610
Although Congress spent only a few days drafting and passing Section 3610, the Trump administration took three weeks to publish governmentwide guidance to implement the statute. The implementing guidance was issued in an “upside-down” way. While governmentwide procurement rules normally are issued under the FAR (which almost all executive agencies must follow), here the process was reversed: individual agencies issued their own sometimes-contradictory Section 3610 guidance, which OMB ultimately endorsed in the governmentwide guidance issued on April 17. Rather than leading a well-coordinated governmentwide relief effort, the OMB guidance was a sometimes discordant voice following a jostling parade of agency guidance.
- The U.S. Department of Defense issued an initial memorandum on Section 3610, on March 30, 2020, three days after the CARES Act became law. As was previously noted, the initial DoD memorandum suggested that contracting officials, when considering contractor requests for compensation for additional costs (“requests for equitable adjustments”), take into account relief available under Section 3610. The DoD memorandum said that “contracting officers are to take into account, among other factors, whether the requested costs would be allowable, allocable and reasonable to protect the health and safety of contract employees as part of the performance of the contract.” The government had earlier issued general guidance on addressing the COVID-19 pandemic, and the DoD memorandum noted that the earlier guidance shared the common theme “that contracting officers are trusted and empowered to make the difficult decisions on appropriate adjustment to each contract. . . . to ensure continuity of operations and mission effectiveness, while protecting the continuing vitality of the DIB [Defense Industrial Base].”
- Roughly a week later, on April 8, 2020, the Department of Defense published a “class deviation” to implement Section 3610. While the DoD class deviation acknowledged that “it is important that our military, civilian, and contractor communities work together to withstand the effects of COVID-19 and maintain mission readiness,” it cautioned as well that contracting officers should be “good stewards of taxpayer funds while supporting contractor resiliency.” The class deviation instituted new cost guidance, DFARS 231.205-79, to implement Section 3610. The DoD guidance said that contractors “are responsible for supporting any claimed costs . . . with appropriate documentation,” and for identifying other credits (other forms of relief) that would reduce reimbursement. The DoD guidance said that contracting officers should consider “the immediacy of the specific circumstances of the contractor,” to provide more rapid relief for contractors in dire need. The guidance expressly made Section 3610 reimbursement available “on any contract type,” and the accompanying cost principle set forth a framework for assessing allowable COVID-19 costs.
- In response to many questions from the contracting community on how Section 3610 should be implemented, the Defense Department issued answers to “Frequently Asked Questions” (FAQs) beginning on April 9, 2020; those responses continue to accumulate. Some key points:
- Basis for request: While neither the DoD class deviation nor the FAQs offered detailed guidance on how contractors should structure their requests for equitable adjustment (REAs) under Section 3610, the FAQs did suggest that a contractor’s request “should describe the actions the contractor has taken to continue performing work under the contract, the circumstances that made it necessary to grant employee leave, an explanation of why it was not feasible for employees to continue performance via telework or other remote work, and how the leave served to keep employees in a ready state.” (FAQ 2) “Ready state,” the FAQs explained, “refers to a contractor’s ability to mobilize and resume performance in a timely manner” (FAQ 19).
- How contractors should frame requests for relief: In a subsequent tranche of answers, the Defense Department provided guidance on what documentation contractors should provide (FAQ 27). “The documentation contracting officers require contractors to provide in the course of negotiations,” the FAQ said, “should include identifying the employees that were provided paid leave . . . , the contract(s) the employees are performing under, and the amount and dates of the paid leave provided . . . for which the contractor is seeking reimbursement.” With regard to the affected employees, the contractor must explain “that the employees: (1) but for the COVID-19 pandemic, work on a site approved by the Federal Government . . . ; (2) could not perform work on such Federal Government approved site due to closures or other restrictions resulting from the COVID-19 pandemic; (3) were unable to telework or otherwise work remotely . . . ; (4) received paid leave for a period beginning no earlier than January 31, 2020, and ending no later than September 30, 2020; and (5) were provided paid leave at rates calculated based on the rates the contractor would have paid the employees.” The contractor, said the FAQ, “should also state that: (a) the costs it is claiming are only for paid leave meeting all of the previous numbered conditions; and (b) that its claimed costs constitute the only reimbursement or payment it is receiving for this purpose.” Per the FAQ guidance, contractors also are to identify any credits that may reduce entitlement to reimbursement under section 3610.
- No certification: While contractors “will not be required to certify their request” for Section 3610 relief, “all contractor invoices will require applicable certification(s) under existing regulations and statutes.” (FAQ 20)
- Process for approval: The FAQs explained how requests for relief would be processed, by contract type. (FAQ 22) “In a cost-plus context,” the contracting officer’s approval for relief “will take place when the contracting officer transmits his or her written determination . . . as outlined in the class deviation.” In fixed-price contracts, in contrast, “a formal contract modification will be required” which will require a finding that the contractor has been affected by COVID-19, as contemplated by Section 3610. “A contractor’s ability to bill will depend upon the terms of that necessary modification,” the FAQs said, “but certainly no billings can be made before such a modification is executed.”
- How to charge: The Defense Department left open whether Section 3610 relief should be charged as direct or indirect costs (FAQ 9), but did specifically “recommend that the paid leave costs be charged to a newly created cost category, Other Direct Costs (ODC) COVID-19,” because by “creating a new category of costs, any potential issues with disclosed accounting policies and procedures . . . may be avoided” (FAQ 10). Fixed-price contracts may be adjusted by adding a unique CLIN (Contract Line Item Number) (FAQ 15). Commercial item contractors are “expected to provide appropriate documentation and justification to support any claimed costs,” and those “costs should be recognized as a fixed price CLIN.” (FAQ 14). The CLIN should be identified to the predominant “Product Service Code” (PSC) for the contract efforts. (FAQ 19)
- Foreign contracts: Foreign contractors, and contracts performed abroad, are eligible for Section 3610 relief (FAQ 21).
- Other Transactions: The FAQs also confirmed that Section 3610 relief is available for agreements issued under special “Other Transaction Authority,” even though they are not FAR-based agreements. (FAQ 3).
- Covered work sites: The FAQs state that relief extends to disruption suffered at any “approved work site,” which would include “the contractor’s location and any other places of performance specifically identified in the contract.” (FAQ 6).
- Family care covered: The Defense Department acknowledged that Section 3610 relief may be available when, “for public health reasons or family care issues, contractor employees cannot be in the workplace and cannot otherwise work remotely,” even if the employees’ workplace remains open (FAQ 7).
- No requirement for complete inability to perform: FAQ 26 confirmed that there is no “100% inability to perform rule” – even if an employee or subcontractor can perform part of the time, Section 3610 relief may still be available.
- No profit: No contractor profit or fee is to be reimbursed under Section 3610 (FAQ 16)
- Permissive not mandatory: The FAQs stated that “section 3610 is permissive, not mandatory,” and so the Defense Department is not required to provide relief (a point discussed further below). “Agency decisions to reimburse these costs,” the FAQs noted, “should take into account the Congressional intent to reduce the impacts of the COVID-19 pandemic on the Defense Industrial Base and small business entities supporting the DoD, but also fiscal constraints on the ability to fill Defense needs through contracts.” (FAQ 12)
- Other sources of relief: Where other sources of relief are available from state or local governments, contractors “should disclose any State and local reimbursement received for employee leave and should not request duplicate reimbursements from the Federal Government where other bases for relief have been accepted.” (FAQ 17). Similarly, where a contractor has received relief through the federal “Paycheck Protection Program” (PPP), “to the extent that PPP credits are allocable to costs allowed under a contract, the Government should receive a credit or a reduction in billing.” (FAQ 23).
- Disputes: The Defense Department’s FAQ 24 stated that the standard Disputes clause “does not apply to requests for equitable adjustment,” and so would not apply when a contractor and a contracting officer disagreed over a request for relief under Section 3610. That answer, however, did not reach beyond the REA process. Under the Contract Disputes Act and FAR Subpart 33.2, where there is continuing disagreement between the parties, the contractor may convert the request for an equitable adjustment to a claim (defined by FAR 2.101), which will be addressed by the contracting officer through a final decision; that final decision, if adverse, can then be appealed by the contractor to the cognizant board of contract appeals or to the U.S. Court of Federal Claims, and the matter may be carried ultimately to the U.S. Court of Appeals for the Federal Circuit and, potentially, to the U.S. Supreme Court.
- The Office of the Director of National Intelligence (ODNI), who heads the agencies in the U.S. intelligence community (IC), issued Section 3610 guidance on April 9, 2020. The CARES Act, ODNI noted in a press release, “has given the U.S. government a powerful tool to use in the protection of our valuable partners in the federal contractor workforce, as we together face the COVID-19 crisis.” ODNI, “in coordination with IC agencies,” issued a set of guiding principles to facilitate consistent and effective implementation of Section 3610. ODNI strongly encouraged “IC agencies to make full use of the flexibility provided by this act, and in other existing contracting tools, to enable contract personnel to stay home in a ‘ready state’ during the national effort to mitigate the spread of the COVID-19 pandemic.” The ODNI guidance pointed out that Section 3610 allows agencies to “modify contracts when contractor employees cannot access authorized work sites or work remotely because of health and safety concerns caused by COVID-19.” The guidance pointed out that the modifications will help contractors remain “financially viable and enable the retention of skilled (and often cleared) contractor employees, thereby ensuring the long-term health of the industrial base on which the Intelligence Community, the Defense Department, and other Federal agencies depend.” The ODNI guidance said that if a contractor had “COVID-19 related costs dating back to the declaration of the national emergency on 31 January 2020,” the contractor could “submit a request for equitable adjustment (REA) for changes or other conditions that may entitle the contractor to an REA.” The ODNI guidance also called for contractors to “segregate and specifically identify the time and expenditures billed under this authority to allow for future review and analysis of COVID-19 related expenses.”
- The Department of Energy (DOE) announced Section 3610 guidance on April 15, 2020. The DOE guidance largely tracked the statutory requirements. The DOE guidance also echoed the Defense Department’s position that awarding Section 3610 relief is discretionary with the contracting officer. DOE said the agency’s contracting officers should exercise “sound business judgment” to “determine if it is in the best interest of the Government” to award relief. Section 3610 relief, the DOE guidance said, is “intended to preserve the resilience of the federal contracting base in the fight against the COVID-19 by helping the acquisition workforce ensure the health and safety of federal contractors and subcontractors in light of COVID-19 while maintaining continued contract performance in support of agency missions.” The guidance, DOE stated, is “an authorization, not a mandate, to reimburse costs claimed for paid leave.” The DOE guidance said relief could be afforded “using any funds made available to the agency by Congress to reimburse contractors,” by “modifying contracts unilaterally and without consideration to reimburse the costs,” on any contract type. Other forms of relief (under the CARES Act and otherwise) are available to contractors, the DOE guidance noted, and contractors “are responsible for identifying all available sources of relief including any for which they have not applied.” The DOE guidance included special contract clauses (different clauses for different contract types) to guide Section 3610 relief. The DOE special clause for a fixed-price type contract stated that the “Contractor may propose and the Government will treat–for the purpose of beginning negotiations–as allowable . . . the incurred or estimated costs of paid leave . . . the Contractor or its subcontractors provide to keep employees in a ready state.” The clause cautioned, though, that the “Government’s treating–for the purpose of beginning negotiations–the costs as allowable, does not mean the Government–in determining the amount of the equitable adjustment is fair and reasonable–will agree to the Contactor’s proposed adjustment.”.
The summaries set forth above gloss over differences between the agencies’ guidance, some of which were charted by David Robbins and his colleagues in an April 13, 2020 post. They pointed out, for example, that the National Security Agency (NSA) alone excluded certain types of paid leave (for childcare and eldercare), and that some agency guidance (unlike the DoD guidance) excluded relief before March 27, 2020, the date the CARES Act was signed into law. These differences between the agencies arose even though the agencies reportedly assured the business community that the guidance would be consistent. As the summaries above reflect, the agencies’ guidance also differed on a more fundamental question: while the ODNI guidance encouraged intelligence agencies “to make full use of the flexibility provided by this act . . . to enable contract personnel to stay home in a ‘ready state,’” other agencies and OMB took a less open-handed approach and suggested that contracting officers could unilaterally reduce relief available under Section 3610, in their discretion.
As a result of gaps that remained in the agencies’ guidance, stakeholders in the procurement community repeatedly asked for clarification. On April 1, 2020, members of the Ohio congressional delegation called for clarifying guidance from the Defense Department, and by letter of April 16, 2020 a cross-section of industry groups wrote to ask OMB to issue governmentwide guidance.
OMB Guidance
The Office of Management & Budget (OMB), which is part of the White House, issued the long-awaited government-wide guidance on April 17, 2020 (OMB Memorandum M-20-22). The OMB guidance did not impose governmentwide procedures for relief under Section 3610. Relief under Section 3610 would vary from agency to agency, OMB wrote, much as “application of any equitable remedy” would vary per “different mission requirements, contractual arrangements, and funding situations, especially in exigent circumstances.” Despite industry’s request for more implementing detail, the OMB guidance offered little direction on how, exactly, Section 3610 reimbursement should be administered. The OMB guidance urged agencies to issue their own class deviations to implement Section 3610 (which several agencies have – see above). The OMB guidance indicated that the Federal Acquisition Regulatory Council is completing a rule making process for implementing Section 3610 in the FAR.
The OMB guidance confirmed that contracting officers may “modify contracts unilaterally or bilaterally to reimburse allowable paid leave costs,” on any contract type. The OMB guidance clarified that reimbursement at the contractor’s billing rate “might include certain overhead costs in addition to labor,” but (as the DoD guidance had said) “shall not include profit or fees.”
While the OMB memorandum was short on administrative guidance, it did emphasize OMB’s position that relief under Section 3610 would be discretionary. Agencies, the OMB guidance stated, “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.” In assessing potential relief for contractors’ paid leave, the OMB guidance said, “agencies should keep in mind that section 3610 provides agencies with considerable discretion to treat paid leave as a reimbursable cost.” OMB called on agencies to “exercise good stewardship,” noting that reimbursements are subject to the availability of 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.”
In deciding “where and how to implement additional paid leave,” OMB wrote, agencies should (1) consider available funding; (2) assess the “impact of funding or of not funding additional paid leave and the mission impact of each alternative”; and (3) evaluate the “benefits of paid leave under section 3610 in the context of the broader universe of” relief available to contractors, “to determine where [that relief] is best applied in light of potential budget constraints.”
Next Steps
The Trump administration’s delayed implementation of Section 3610 means that government-wide guidance from the Federal Acquisition Regulatory Council may not emerge until after the pandemic has peaked across the United States, as it already has in some hard-hit states such as New York. As a result, core purposes of Section 3610 – to protect workers’ health, and to minimize the spread of the COVID-19 virus – may not be met because of contractors’ uncertainty whether they will, in fact, be reimbursed for placing employees on leave. The delay means that another core legislative goal of the CARES Act – fiscal stimulus – may not be met by Section 3610 unless (as some analysts fear) the pandemic causes a deep and protracted worldwide recession.
Even absent governmentwide direction in the FAR, contractors may draw upon the direction offered by the Defense Department and other agencies and file REAs for reimbursement of leave paid their employees as a result of the pandemic. If contracting officers reject those requests, under the normal Contract Disputes Act process the contractors may submit disputed claims to their contracting officers. Per FAR 33.211, contracting officers will need to decide those claims within a reasonable time (within 60 days if the claim is below $100,000 and the contractor so requests). If a contracting officer denies a claim, the contractor (as noted above) will be able to appeal that denial to the boards of contract appeals or the U.S. Court of Federal Claims. That process may take months, if not years, and it may be stalled even further because of legal issues raised by the agency and OMB guidance.
Perhaps among the first legal questions the boards and the courts will need to resolve is the most basic one: whether contracting officers may unilaterally reduce or deny Section 3610 relief outright, as the DoD and OMB guidance suggest. The OMB guidance on this point is based on the statutory language which says that agencies “may” afford Section 3610 relief. Contractors may respond, however, that the agency and OMB guidance, because it was conflicting, should not be afforded deference. Instead, contractors may argue, the boards and the courts should read Section 3610 in the broader context of the CARES Act, which (as an earlier post noted) calls elsewhere for continued contractor payments during the pandemic.
In arguing that agencies may not simply deny Section 3610 relief out of hand, contractors may urge that Congress contemplated contractual relief in return for contractors holding their employees in a “ready state” – a promise grounded in contract (industry may argue) that must be honored, and not a discretionary grant.
Contractors may point out that the agency and OMB guidance, if followed literally, would leave contracting officers to make very open-ended decisions – to award Section 3610 relief based on factors ranging from the availability of agency funding (which under the CARES Act could include any available agency funding), to the need to support small businesses, to an assessment of the relative importance and health of the contractor, to public health and macroeconomic concerns for the nation’s (or even the world’s) economy. Pointing to past precedent, such as the decision not to saddle contracting officers with “blacklisting” contractors for labor violations, contractors may argue that no sound procurement system would leave contracting officers with this breadth of discretionary decision making – decisions for which contracting officers arguably are neither trained nor equipped.
Contractors may argue that to allow this type of subjective decision making by contracting officers would open the door to favoritism and corruption. Instead, the contractors may argue, a fairer reading of the statute is the simpler one: that having paid for its employees’ leave to mitigate the effects of the pandemic, under Section 3610 a contractor has a right to be reimbursed if the contracting agency has any funds available to do so.
If this disagreement over the proper reading of Section 3610 does arise, it may come to a head sooner rather than later. The time period covered by Section 3610 ends with this fiscal year, on September 30, 2020. Agencies typically try to spend their remaining funds by the end of the fiscal year and they – and the contractor community – may try to resolve these uncertainties over Section 3610 quickly, to avoid years of litigation over an only dimly remembered pandemic.
Editor’s note: The CARES Act’s Section 3610 will be discussed, along with other emerging issues under COVID-19 procurement, in a free webinar to be held on Thursday, April 23, 2020, at 12 noon Eastern. Program information – Registration