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The COVID-19 public health emergency and governmental responses at all levels have disrupted businesses throughout the US economy, including many that contract with the US government. The pandemic has prompted guidelines and orders imposing and enforcing social distancing and stay-at-home policies, resulting in closures of commercial and government facilities.

Many businesses that support the government are considered essential and exempt from some of these restrictions, but many are not. Even contractors that are not subject to these restrictions may have employees who are ill, reluctant to report to work for fear of contracting the virus, and unable to work due to the need to care for at-risk family members or educate children with schools closed.

Recognizing the adverse effects on the contractor community, Congress included Section 3610 in the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, to authorize agencies to provide much-needed relief to contractors and their employees for certain paid leave resulting from the COVID-19 public health emergency. Yet the statutory relief is permissive, not mandatory, and limited in scope.

Plus, the statutory language is imprecise and ambiguous in places—shifting responsibility to the executive branch to resolve numerous complex issues associated with implementing Section 3610 and addressing the cost impact of the public health emergency on contractors more generally.

The US Department of Defense promptly issued a defense federal acquisition regulation supplement, or DFARS, class deviation, introducing a new cost principle, DFARS 231.205-79, CARES Act 3610 - Implementation, and a series of guidance for contracting officers and contractors tasked with applying Section 3610 and the cost principle to existing contracts and subcontracts.

The guidance from the Office of the Secretary of Defense (Acquisition and Sustainment) presently consists of two memoranda, one Acting Principal Director, Defense Pricing & Contracting, or APD DP&C, memorandum released with the class deviation1 and another released the following day,2 and answers to frequently asked questions that the DOD is updating on a rolling basis.3

The guidance is detailed and answers many, although certainly not all, questions concerning the DOD's implementation of Section 3610.

This two-part series highlights the critical aspects of the DOD's implementation of Section 3610 and offers a practical road map to help contractors best position themselves to try to recover not only the costs for which relief is authorized under Section 3610, but also other costs resulting from the COVID-19 public health emergency.

This first article focuses on the DOD's guidance concerning eligibility requirements and prerequisites to relief under Section 3610 and DFARS 231.205-79.

The second installment will focus on the DOD's guidance concerning the application of Section 3610 and DFARS 231.205-79 to fixed-price, cost-reimbursement, and time-and-materials and labor hour contracts. It also will identify numerous remaining questions, and provide a concise list of best practices that contractors can consider while awaiting additional guidance and the federal acquisition regulation, or FAR, rulemaking.

Summary of the DOD's Implementation of CARES Act Section 3610

Section 3610 is fairly narrow in that it only covers certain costs for paid employee leave and imposes limitations on eligibility for relief. Specifically, it authorizes agencies to use any available appropriated funds "to modify the terms and conditions of a contract … without consideration, to reimburse at the minimum applicable contract billing rates not to exceed an average of 40 hours per week any paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state" through Sept. 30.

The authorization, however, only applies where "employees or subcontractors cannot perform work on a site that has been approved by the federal government, including a federally-owned or leased facility or site, due to facility closures or other restrictions, and who cannot telework because their job duties cannot be performed remotely." Further, the maximum reimbursement must be "reduced by the amount of credit a contractor is allowed pursuant to [the Families First Coronavirus Response Act] and any applicable credits a contractor is allowed under [the CARES Act]."

The DOD's implementation of Section 3610 is largely faithful to the statutory language. The DOD's class deviation introduces a special cost principle instead of a series of special contract clauses. The class deviation, like Section 3610, does not modify any existing contracts or entitle a contractor to relief under any specific contract.

Relief is left to the contracting officer's discretion, limited to certain paid leave costs related to the COVID-19 public health emergency, and subject to the availability of funds.4

The contractor bears the burden of establishing that it qualifies for relief and must secure the contracting officer's approval before invoicing for payments under this authority. And the DOD intends to reduce relief that it provides under Section 3610 by the amount the contractor receives (and also possibly by any amount for which it is eligible but does not pursue, as discussed below) under the CARES Act and the Families First Coronavirus Response Act.

Eligibility Requirements and Prerequisites to Relief

Affected-Contractor Status

Before a contractor can treat costs as allowable under DFARS 231.205-79, the contractor must secure a written determination from the contracting officer that it qualifies as an "affected contractor."

Although the new cost principle does not define affected contractor, the DOD's FAQs indicate the contractor must establish that: (1) specific prime contractor or subcontractor employees are unable to work (including remote work) due to the COVID-19 public health emergency, (2) the contractor incurred paid leave costs (up to a maximum of 40 hours per week) between Jan. 31 and Sept. 30, to keep those employees in a ready state, and (3) the contractor has not been reimbursed for the leave costs through other federal programs.5

The FAQs further state the contractor must (1) describe the actions taken to continue performing contract work; (2) describe the circumstances that necessitated granting employee leave at prime contract or subcontract level; (3) explain why it was not feasible for employees to continue performing either at the government-approved site or remotely; and (4) explain how the leave served to keep the employees in a ready state, which is defined as "a contractor's ability to mobilize and resume performance in a timely manner."6

If the contractor is part of the critical infrastructure workforce, as defined by the DOD,7 or directed to implement a contract's continuation of essential services plan, the contractor must demonstrate that it made "all reasonable efforts" to continue contract performance. Based on current guidance, contractors should assume that they may be required to describe the efforts taken to try to mitigate the paid leave costs by reassigning employees (e.g., to other projects/contracts or to business development efforts).8

The DOD directs contracting officers to make determinations of affected-contractor status on a case-by-case basis considering the particular circumstances of each contract, and does not seem to contemplate the possibility that a contractor can secure a global, DOD-wide determination. This creates the possibly that a contractor could qualify as an affected contractor for some DOD contracts but not others.

The DOD's guidance addresses perhaps the most ambiguous aspect of Section 3610, which is the element that seems to require that the contractor's inability to perform work result from closure of, or restriction on access to, a federally approved site and its inability to resort to remote work.

If interpreted narrowly, that element of Section 3610 could prove restrictive. The guidance, however, suggests that the DOD does not intend to apply that element as narrowly as it might, stating that:

The approved work site is the contractor's location and any other places of performance specifically identified in the contract."9 Interestingly, the DOD indicates that its definition extends to any facility "at which contract administration services are performed in support of those contracts.10

Although not perfectly clear, this apparently means that if a contractor's or subcontractor's approved work site is affected, the relief also extends to other facilities that provide administrative support, presumably including the home office.

The DOD's FAQs also indicate that a contractor may be able to recover for otherwise unallowable employee leave costs even where the contractor's facility is not closed (or where the contractor's facility is closed but remote working is possible).

A contractor may be able to recover costs for paid leave that arise, not because the contractor's facility is closed and remote work is infeasible, but because an employee cannot be in the workplace and cannot work remotely due to "public health reasons or family care issues."11

This reflects the DOD's recognition that a responsible contractor may extend paid leave (voluntarily or to comply with the mandate in the Families First Coronavirus Response Act or other applicable law) to an individual who is unavailable to perform productive work due to the need to care for family members or other reasons associated with the COVID-19 public health emergency.

Contractors, however, should be mindful that their burden to substantiate increased costs due to paid leave during this period will be heightened where that leave is not related to the inability to work due to facility closures and the lack of remote work options.

Substantiating Cost Impact

The most fundamental prerequisite to relief under the DOD's implementation of Section 3610 is the contractor's ability to demonstrate increased paid employee leave costs for the purpose of keeping employees in a ready state.

The DOD's guidance to contracting officers states that it is critical that both contracts and supporting documentation clearly identify costs paid under the Section 3610 authority and describe how such costs are "identified, segregated, recorded, invoiced, and reimbursed."12 To that end, DFARS 231.205-79 requires contractors to segregate their paid leave costs, and the DOD's guidance underscores why segregating these special costs is critical.13

As the FAQs state:

Some paid leave is an allowable cost under the cost principles of FAR 31.2, specifically FAR 31.205-6(m) [but] ... it is likely contractors may not have an established provision in their compensation plans for granting leave for the specific purposes stated in Section 3610 of the CARES Act and, without such a provision, leave of that kind normally would not be an allowable cost.14 In other words, the DOD's implementation of Section 3610 renders allowable certain costs that arguably could be unallowable. Hence, the DOD's emphasis on the importance of the ability to trace costs to the COVID-19 public health emergency and specifically to the impacts that Congress intended to address through Section 3610.

Limitation on Recovery Where Other Avenues for Relief Are Available

One aspect of the DOD's implementation that remains unclear is Section 3610's requirement that the contractor's maximum recovery must be reduced by amounts it is "allowed" under other sections of the CARES Act and the Families First Coronavirus Response Act.

DFARS 231.205-79(b)(6) uses broader language, reducing cost recovery by the amount the contractor is "eligible to receive" under any other federal payment, allowance, tax or other credit specifically identifiable with the COVID-19 public health emergency.

The DOD's FAQs state that the "cost principle is inapplicable" where "the contractor has been or can be reimbursed for employee leave costs by other means."15 The DOD's guidance, however, also contemplates that a contractor can provide an attestation to the contracting officer that it "has not or will not pursue reimbursement for the same costs accounted for under their request" through other channels, seeming to suggest that such an attestation will suffice to address the Section 3610 limitation.16

Although contractors might prefer to have the option of committing to forgo opportunities under other specified programs, agencies may decide they would prefer to force contractors to exhaust other funding sources. In any event, contractors should be mindful that Congress intended to avoid contractors receiving a windfall from the CARES Act and other programs, and should expect that oversight and enforcement efforts will target contractors deemed to have improperly double dipped.

This issue is relevant not only to establishing entitlement to relief, but also to quantifying the amount of relief to which a contractor is entitled and the way that the contractor and its cognizant contracting officers must administer relief by contract type. These issues will be discussed in the second article in this series.

  1. Office of the Under Secretary of Defense (Acquisition & Sustainment), Defense Pricing and Contracting, Memorandum, "Class Deviation - CARES Act Section 3610 Implementation" (Apr. 8, 2010), available here.

  2. Office of the Under Secretary of Defense (Acquisition & Sustainment), Defense Pricing and Contracting, Memorandum, "Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security" (Apr. 9, 2010), available here.

  3. Office of the Under Secretary of Defense (Acquisition & Sustainment), Defense Pricing and Contracting, "Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Frequently Asked Questions" (Apr. 9, 2010).

  4. The CARES Act did not include a special appropriation to fund relief under Section 3610. It remains to be seen whether the availability of appropriations will affect contractors' ability to receive reimbursement. An agency might be able to resort to the Judgement Fund if it is so inclined. Yet the decision to do so is likely to be discretionary, even when the agency has agreed to compensate the contractor contingent on the availability of funding.

  5. See DOD FAQ #1 ("Q1: When would Class Deviation - CARES Act Section 3610 Implementation not be appropriation for consideration? A1: Pursuant to this deviation, the new cost principle is inapplicable when employees or subcontractor employees were able to work, including remote or telework; when costs were not associated with keeping employees in a ready state; for costs incurred prior to January 31, 2020, or after September 30, 2020; or when the contractor has been or can be reimbursed for employee leave costs by other means. Additionally, it is inapplicable for costs not related to COVID-19 and is subject to the availability of funds.").

  6. See DOD FAQ #2 (identifying what is considered in assessing and negotiating requests for relief under Section 3610); DOD FAQ #18 (defining "ready state"); DOD FAQ #27 (describing "appropriate documentation" requirement). Some commentary has suggested that additional guidance is needed on the meaning of ready state. While additional guidance would be welcomed, it seems that for the meantime, contractors should assume that they will be expected to take the steps that they would under a formal stop-work order.

  7. Office of the Under Secretary of Defense (Acquisition & Sustainment), Defense Pricing and Contracting, Memorandum, "Defense Industrial Base Contract Considerations" (Mar.20, 2020), available here.

  8. See, e.g., Dynamics Research Corp.  , ASBCA No. 53788, 04-2 BCA ¶ 32,747 (cost of idle labor recoverable when government computer servers crashed and government directed contractor personnel to go home); Raytheon STX Corp. v. Dep't of Commerce  , GSBCA Bo. 14296-COM, 00-1 BCA ¶ 30,632 (costs of idle employees reimbursable due to government furlough during shutdown).

  9. DOD FAQ #6.

  10. Id.

  11. DOD FAQ #7.

  12. DOD April 9 Memorandum at 1. The DOD has instructed its contracting officers to document the dates when the applicable conditions begin and end, the extent of the conditions, the specific reasons why reimbursement under Section 3610 applies, the impact on cost/pricing and the effect on contract performance, but DOD has put the onus on the contractor to make sure that the contracting officer possesses the requisite information to paper the file on each of these points.

  13. Id.

  14. DOD FAQ #8.

  15. DOD FAQ #1.

  16. DOD April 8 Memorandum at 2.