Costs of a Pandemic: Lessons for COVID-19 from a Case on Epidemic-Related Costs
Update: This article has been updated to reflect the Federal Circuit’s affirmation of the CBCA’s Pernix Serka decision and additional developments in the Government’s ongoing COVID-19 response.
The COVID-19 pandemic has had a profound impact on many Government contractors’ bottom lines. As contractors consider whether and how certain cost impacts associated with the pandemic may be reimbursable under their Government contracts, they should carefully review a 2020 decision of the Civilian Board of Contract Appeals (“CBCA”), recently affirmed per curiam by the Federal Circuit only two days after oral argument. The Pernix Serka case addresses a contractor’s costs of responding to an Ebola virus outbreak, and the issues in the case are analogous to the COVID-19 pandemic and the contract claims likely to result from it. The key take-aways are that (1) the success of a contractor’s claim depends upon the contract’s terms, and (2) clear, documented communication with the contracting officer is critical to demonstrating entitlement.
In Pernix Serka Joint Venture v. Department of State, CBCA No. 5683, 20-1 BCA ¶ 37,589 (Apr. 22, 2020), the CBCA denied a contractor’s appeal seeking an equitable adjustment for costs incurred when responding to the Ebola outbreak in West Africa in 2014. The Pernix Serka Joint Venture (“PSJV”) held a firm fixed-price contract with the Department of State (“State”) to construct a rainwater capture and storage system in Sierra Leone. The contract included its own Excusable Delays clause that referenced the Federal Acquisition Regulations (“FAR”) fixed-price construction Default clause:
The Contractor will be allowed time, not money, for excusable delays as defined in FAR 52.249-10, Default… Examples of such cases include (1) acts of God or of the public enemy; (2) acts of the United States Government in either its sovereign or contractual capacity; (3) acts of the government of the host country in its sovereign capacity; (4) acts of another contractor in the performance of a contract with the Government; (5) fires; (6) floods; (7) epidemics; (8) quarantine restrictions; (9) strikes; (10) freight embargoes; and (11) unusually severe weather.
The clause was consistent with the FAR’s fixed-price Default and Excusable Delays clauses (FAR 52.249-8 and FAR 52.249-14), under which the contractor is entitled to additional time if a force majeure type of event causes an excusable delay in performance, but the contractor assumes the risk of the same event increasing its costs.
During PSJV’s contract performance, the West African Ebola outbreak spread to Sierra Leone, and PSJV sought instructions from the contracting officer on how to move forward with its contract work, including whether to delay the work and evacuate contractor personnel from Sierra Leone. The contracting officer responded that State could not tell PSJV whether or not to leave the jobsite, and that it was PSJV’s decision on how to respond to the Ebola outbreak. PSJV decided to delay and demobilize the project, sending a notice of delay to State. As the Ebola outbreak continued, PSJV shut down the project and directed all contractor personnel in Sierra Leone to evacuate, notifying State of its decision. State responded that because PSJV took action to shut down the project and evacuate personnel without direction from the Government, PSJV would not be entitled to an equitable adjustment for costs that may be incurred as a result of it delaying the project, and State reiterated this response through later communications with PSJV throughout the outbreak.
After PSJV returned to the jobsite and continued work, it submitted a revised project schedule proposing more time to complete the contract work, as well as two requests for equitable adjustment (“REAs”) to State. The REAs sought costs associated with medical, health and safety measures to allow personnel to return to the jobsite and other costs related to the delay and disruption of work from the Ebola outbreak. State accepted PSJV’s revised schedule, but the contracting officer denied the first REA and did not take action on the second REA. PSJV later submitted a certified claim, which became the basis for its appeal before the CBCA.
The CBCA denied PSJV’s appeal requesting costs incurred from the Ebola outbreak. The CBCA reasoned that a firm fixed-price contract entitles a contractor to receive only the fixed contract price and places the risk of increased costs on the contractor, not the Government. Further, the contract’s Excusable Delays clause explicitly addressed how acts of God, epidemics, and quarantine restrictions were to be treated – by providing the contractor additional time, but “not money.” The CBCA rejected PSJV’s attempt to shift the increased costs to the Government, finding that there was neither a cardinal nor constructive change in the contract work, as State never formally changed the description of work under the contract or informally ordered that PSJV complete additional work.1 Instead, the CBCA reiterated that State did not give directions to PSJV on how to respond to the Ebola outbreak, leaving the decisions on how to proceed to PSJV. On these bases, the CBCA granted summary judgment in favor of State and denied PSJV’s appeal.
Although PSJV appealed the CBCA’s judgment, in Pernix Serka Joint Venture v. Secretary of State, No. 2020-2153, slip op. (Fed. Cir. June 9, 2021), the Federal Circuit affirmed per curiam the CBCA only two days after hearing oral argument. The oral argument previewed the result, with the three-judge panel pointing out that the excusable delays clause explicitly denied payment for delays and that the contracting officer did not order the company to return to the jobsite. With the approval of the Federal Circuit, Pernix Serka will likely be a guiding decision for agencies on how to handle pandemic-related contract claims when such claims related to COVID-19 start arising.
What takeaways from this decision can contractors apply to the COVID-19 pandemic?
Contractors have faced many challenges from the COVID-19 pandemic, including an inability to access facilities, personnel, and other resources; disrupted communication channels; reduced productivity; and shifting Government priorities that impact workloads. These challenges are likely resulting in increased costs, but as the CBCA explained in Pernix Serka, where these risks fall will depend on the type of contract at issue and the specific clauses contained in the contract.
The clauses most obviously implicated by COVID-19 are those addressing excusable delays, as the clauses contain enumerated lists of events giving rise to an excusable delay, explicitly including “epidemics” and “quarantine restrictions.” These clauses include:
- FAR 52.212-4(f), the Excusable Delays clause for commercial items;
- FAR 52.249-8(c), the Default clause for fixed-price supply and service;
- FAR 52.249-9(c), the Default clause for fixed-price research and development;
- FAR 52.249-10(b), the Default clause for fixed-price construction; and
- FAR 52.249-14, the Excusable Delays clause for cost-reimbursement contracts.
Excusable Delays clauses generally allocate the performance risk of an excusable delay to the Government, as the contractor will be excused for performance issues resulting from an excusable delay. The cost risk of an excusable delay depends on the type of contract.
For fixed-price contracts, the Default clauses shift the risk of increased costs to the contractor. In order to receive additional costs, a contractor with a fixed-price contract will need to succeed where the contractor in Pernix Serka failed: it must prove that its additional costs were incurred as a result of some action by the Government or a third party for which the contract provides an equitable adjustment or price remedy, or that can be characterized as a breach by the Government. In addition to the Suspension of Work and Stop-Work Order clauses at FAR 52.242-14 and 52.242-15, the Changes clauses at FAR 52.243-1 through -5 provide the most likely vehicle for recovery. Changes can be formal or constructive. For a formal change, the change must be issued by an official with authority, be within the general scope of the contract, and be a type of change specified in the Changes clause. For a constructive change, the change must result from Government action or inaction by someone with authority, and the contractor must not perform the changed work voluntarily. Additionally, contractors can face constructive acceleration, which is a change that occurs when the Government orders the contractor to perform on time, even though its delay was excusable. As evidenced by these requirements, a contractor will not be entitled to additional costs under a fixed-price contract if it unilaterally decides to alter its contract work. The change must come from a Government action.
Cost-reimbursement contracts are on the other side of the risk allocation spectrum, as the Government bears the risk of increased costs on these contracts, subject to certain limitations. These limitations may include any fixed-price contract line items (“CLINs”) or indirect rate ceilings, as well as the requirements of the Limitation of Cost and Limitation of Funds clauses at FAR 52.232-20 and 52.232-22.
The CARES Act – initially enacted in March 2020 to address the COVID-19 pandemic and subsequently amended through further legislation – provides a limited exception to cost-reimbursement rules for a limited time. Section 3610 of the CARES Act permits Federal agencies to reimburse contractors’ costs of paid leave (including sick leave) for employees and subcontractors when they are unable to perform work on-site because of facility closures and also unable to telework. The leave costs must meet several conditions, including that they were not reimbursed under other COVID-19 relief programs. In the cognizant agency’s discretion, even contractors performing fixed-price contracts may benefit from this limited exception, which applies to costs incurred through September 30, 2021 (extended for a full year from the initial deadline of September 30, 2020).
In light of these concerns and developments, contractors should continue to have early, candid, and transparent discussions with contracting officers regarding their COVID-19 pandemic responses and the expected impacts. Such communications will prove important in showing any directives from the Government, which would affect the finding of a change to the contract. Additionally, documentation of communications and costs is critical, as a contractor will have the burden to demonstrate entitlement should it choose to seek costs from the Government. By being aware of how pandemics are handled in Government contracts and following these recommended practices, contractors can be well prepared to address issues of COVID-19 related costs.
1 PSJV also raised a constructive suspension of work claim in opposition briefing, but the CBCA rejected it as untimely and did not address the claim on the merits. Although the CBCA did not provide any guidance or hint on whether a constructive suspension of work claim would have been successful, contractors in situations similar to PSJV’s should consider a constructive suspension claim from the start and plead relevant facts.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.