The unprecedented actions taken by governments here and around the world to manage the COVID-19 pandemic are affecting, and will continue to affect, government contractors in many ways. We applaud the speed at which contractors and government are adapting to unfamiliar, uncertain operating conditions.
Many law firms specializing in government contracts have published useful alerts and insights into the legal rights, obligations and remedies that may apply or be available under a wide variety of contract types. Read these articles, then review your contracts to determine the portfolio of clauses under which your company performs.
Of course, uncertain operating conditions translate rapidly into real financial implications, which are currently unpredictable. Neither contract prices nor agency funding levels contemplated the wide variety of delays, disruptions, scope changes and other inefficiencies that are now impacting the performance of many government contracts. As our future unfolds, we urge contractors to prepare proactively.
Regardless of the remedies that may be available, contractors ultimately must be able to quantify their costs with some reasonable degree of accuracy. Taking the following steps now will greatly improve visibility into the variety of financial impacts that may arise.
- Communicate early and often with your government customers. What is their direction regarding continuity of contract performance? How is their mission impacted by this crisis and how do they expect you to respond or adjust? Have you received direction in writing from the contracting officer? Note: Only warranted contracting officers can provide contractual direction. Ask the contracting officer to clarify or explicitly state their directions and the contractual rights they’re exercising (e.g., change order, full or partial stop work, etc.).
- In these uncertain times, your government customers may be looking for help in accomplishing their mission within the current constraints. Contractors should seize this opportunity to present their customer with options and solutions that would demonstrate the contractor’s flexibility and solidarity in these trying times. Contractors can enhance their value to government customers if they take the initiative rather than simply react to events.
- Establish frequent recurring meetings with leaders in key functional and operational areas. Discuss challenges that may affect contract performance, employee productivity, increased costs, market/demand shifts and other such issues. Assess how these issues will affect customer relationships and missions, indirect rates, revenue projections and other matters.
- Ensure your program managers are alert for changes in contract performance unrelated to explicit direction from your government customers. Changes could include loss of productivity, scope creep and new tasks beyond the work scope that arise due to the changed operating conditions. Project managers who act autonomously, without involving legal, finance, and human resources, could expose contractors to serious financial or performance risks. Project managers should promptly document and communicate changes of this nature internally, and then to the government customer (including the contracting officer).
- Establish new project codes to capture employee time associated with idled or reduced contract performance, as well as scope changes. Whether these project codes should be direct or indirect depends on a variety of facts and circumstances – too many and varied to summarize here. But, in our view, it’s far more important to capture this in real time than to agonize over classifications. Any misclassifications can be easily corrected once remedies become clearer, but estimating labor impacts after the fact is difficult and expensive. Communicate new time charging protocols to employees clearly and in writing.
- Evaluate how performance delays and disruptions will impact different segments of your company’s workforce. For example, non-exempt hourly personnel may be affected differently than exempt salaried personnel. Personnel assigned to government worksites may be affected differently than personnel assigned to company facilities. And, of course, impacts may be unique to each contract and customer.
- Take reasonable steps to mitigate costs during delays and disruption. Cost mitigation may include shifting available capacity toward contracts with increasing demand, valuable indirect projects, professional development/training activities, business development and other activities. Furloughs, layoffs and other drastic measures may be reasonable when government customers provide certainty that delays and disruptions will persist for long periods or become permanent. Also assess facility support needs for potential deferment or temporary suspension until your employees can return.
- Revisit (or create) policies and procedures that address work-from-home arrangements, paid/unpaid leave, sick time, overtime, business travel and related items. What important new policies or policy changes do your employees need to know and understand? Communicate them clearly, early and often.
- Evaluate your company’s information technology infrastructure. This includes providing (or providing for) necessary telework equipment and communication channels, bandwidth/system stability, access to appropriate company systems, and appropriate cybersecurity and other risk mitigation measures. Many of these things will come with increased costs – capture them.
- Evaluate impacts to your suppliers and subcontractors. Understand how the changed operational circumstances affect them. Will their performance adversely impact your performance obligations? Which subcontract/purchase order terms address or apply to the situation? Will your subcontractors and suppliers experience increased performance costs that may translate into price adjustments and, in turn, impact your costs of performance? Identify (and estimate them to the extent possible), document and communicate them to affected government customers.
- To the extent you can incrementally estimate the impacts of any of the above items on your company’s financial performance, consider proposing revised provisional billing rates (PBRs) and/or forward pricing rates (FPRs) for at least your current fiscal year. Although contractors don’t yet have clear visibility into whether – and to what extent – indirect costs may increase and/or direct costs may decrease, indirect cost rates will likely increase from current PBRs. Cash collections are the lifeblood of your business, so taking proactive steps now to bill and collect increased costs may help reduce financing pains in the future. Especially since the cost of interest on borrowings is unallowable.
- Keep your cognizant Defense Contract Management Agency (DCMA), Administrative Contracting Officer (ACO) and Defense Contract Audit Agency (DCAA) auditors in the loop, too, regarding impacts to your business operations – they will appreciate it.
- Finally, document all decisions, communications and actions that affect contract performance and costs. Get government direction in writing, which includes documenting your understanding in emails to your government customers. In the absence of express directions or agreements, transparency and disclosure with the government is essential.
Our team members are listed below. Please give one of us a call, or send us an email, to discuss your company’s or organization’s circumstances and how we can help you think through the actions you must take now to weather, and ultimately recover from, these unprecedented times.