Keeping government contracting business healthy during the pandemic

Jun 22, 2020

As the COVID-19 pandemic drags on, government contractors are adjusting to a world that few could have foreseen. In some cases, contracts have been delayed. In other cases, companies have had to hastily change locations or configure telework when government facilities shut down. Still others have had to furlough part of their workforce.

In response, Congress has passed laws to grant relief to businesses and agencies have changed some procurement rules to help government contractors adapt. Taking advantage of these programs can help in the short term with cash flow and cash management. But in the bigger picture, we recommend that contractors reevaluate their costs and consider how to adjust their strategy. 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by President Donald Trump in March, contains a provision to help contractors. Section 3610, Federal Contractor Authority, gives agencies discretion to modify contract terms and conditions to reimburse paid leave in certain situations in which a contractor’s employees could not access work sites or could not telework because of the nature of their work.

In addition, the CARES Act created the Paycheck Protection Program, in which eligible borrowers receive a government loan that is forgivable if at least 75% of it is used to make payroll during a specified period. 

Document compliance with COVID-relief program requirements

Even though your business may be in the midst of the crisis, and you are often dealing with chaotic situations, it’s important to pay attention to the rules of any new programs in which you participate, and absolutely critical to document that compliance. The government’s audit scrutiny, thorough even in normal times, will be heightened for COVID-19 relief programs. Congress has created several watchdog agencies as well as specifically directed existing federal agencies to oversee and investigate the use of this funding. These include a Special Inspector General for Pandemic Recovery and a Pandemic Response Accountability Committee. That’s why we recommend contractors designate one person as a central point of contact for all COVID-19 relief programs. This person should be responsible for administering all relief programs and ensuring the required documentation.  

Under section 3610, if you are unable to get to a work site, you can make a request for equitable adjustment (REA) from your contracting officer. According to guidance published by the Office of Defense Pricing and Contracting, Office of the Under Secretary of Defense (Acquisition & Sustainment), agencies can reimburse contractors, under certain conditions, at the minimum applicable billing rates for paid leave, including sick leave, during the government-declared COVID-19 public health emergency, from Jan. 31 to Sept. 30, 2020. You will need to document such details as average pay of employees who were unable to get to the work site and the number of hours per week they typically worked. 

Implementation varies by contract type. Under fixed-price contracts, you make an REA. Under cost-reimbursement contracts, the DOD guidance recommends costs be charged to a separate account, noting that contract officers will work with contractors to establish appropriate cost procedures. 

Under the Paycheck Protection Program, you certify to the Small Business Administration that the uncertainty of economic conditions makes the loan necessary to your ongoing operations. The vagueness of that provision has been a source of confusion. But recent guidance the SBA published in mid-May states that loans of less than $2 million fall under a safe harbor. Loans over $2 million will be subject to SBA review for compliance with program requirements, as described in the PPP’s interim final rules. The SBA will seek repayment if it determines that a company lacked basis for certification. If the borrower repays the loan, SBA will not pursue administrative enforcement. 

Determine how COVID affects indirect rates

The COVID pandemic will likely have an impact on your budget in many ways. After all, today’s companies have never had to deal with a pandemic. What’s more, no one has had to figure out how to discount a pandemic before. Not only should you know how it affects your budget today, you also need to thoroughly understand how these increased costs will affect both current contracts and how you price future work. 

How have these increased costs changed your indirect rate? Among the costs to consider:

  • Moving to alternate worksites or setting up employees to work from home
  • Reconfiguring office space to allow for adequate social distancing
  • Maintaining unused work space and equipment
  • Increasing employee benefits, such as paid sick leave or hazard pay
  • Providing personal protective equipment to employees
  • Changing or delaying contract work schedules

In cost reimbursement contracts, has your provisional rate increased significantly? Will the contract have enough funding to accommodate these costs? Understanding how your provisional rate changed gives you a chance to raise the issue early, and negotiate a satisfactory solution with your contracting officer.

In competitive contracts, it’s critical to understand new costs so you can make well-informed decisions when bidding for work. COVID-19 has made the competitive environment much more complex. You, or your competitors, may bid higher to try to recoup increased costs. Alternatively you, or they, may be willing to bid contracts at pre-pandemic competitive rates to ensure a win and potentially ward off bankruptcy. Those companies that best understand their internal costs will be in the best position to bid smartly. Even if a contractor decides to bid on a contract at a projected loss, those who do not understand their new costs could be in for a much greater loss than they realize. They risk decimating their margins and, ultimately, their bottom line. 

Think strategically also about which costs are temporary and which are likely to be permanent changes. Even when the crisis is over, how you perform work will have changed. Some observers speculate that working from home will become the norm, for example. Will you reduce office space, and thus pay less rent? How much will it cost to provide the equipment and networking infrastructure for your staff to work from home? What extra technology and IT expertise may be required to ensure cybersecurity?  If you remain in a facility, what changes are required to ensure health and safety? 

In conclusion, this pandemic requires more than just a few temporary changes in how you conduct business. It has significantly affected costs over the long term, sometimes in ways that are not immediately apparent. Contractors who take the time to thoroughly understand those changes now will be in the best position to keep their businesses healthy in the years to come.