Guidance for CARES Act Implementation

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On May 18, the Defense Department released a draft of its much-anticipated guidance implementing Section 3610 of the CARES Act, which authorizes the government to reimburse qualifying contractors for the costs of providing certain paid leave to employees as a result of the COVID-19 pandemic. Although a number of open questions remain pending the issuance of final guidance, contractors interested in pursuing recovery under the statute should start preparing now to satisfy these emerging rules and requirements.

Section 3610 permits federal agencies to reimburse contractors for the costs of providing paid leave to employees who cannot perform work on a government approved site or otherwise perform remotely due to the pandemic. The Defense Department’s draft guidance implementing this statute includes an overarching guidance document, a reimbursement checklist and a set of checklist instructions. Taken together, they offer additional insight into who is eligible, what is the scope of coverage, and what substantiation will be required.

The guidance states that “affected contractors” may be eligible for reimbursement. An “affected contractor” is any prime or subcontractor that provided paid leave to employees to maintain them in a “ready state” while such employees were prevented from performing “on a site that has been approved by the federal government” and could not work remotely. For purposes of the statute, the term “ready state” means the ability to “mobilize and resume performance in a timely manner,” and a government-approved facility may include both federal installations and the contractor’s own location or any other places of performance specified in the contract.

The guidance provides that affected contractors may receive reimbursement for costs of up to 40 hours of paid leave per week at “appropriate rates.” Contractors will bear the burden of establishing that any requested rates are appropriate, and the Defense Department may require extensive supporting documentation for claimed rates.

Reimbursement claims may include appropriate overhead and general and administrative costs, but not profit or fees.

Additionally, the guidance requires contractors seeking Section 3610 funding to disclose the amount of any loan that is forgiven under the Paycheck Protection Program or tax credits received under the Families First Coronavirus Response Act, and to decrement any reimbursement request by these amounts.

What substantiation will be required? The guidance makes clear that the contractors must be prepared to submit significant information to establish both entitlement and quantum. However, it contemplates that contracting officers would retain substantial discretion to determine what sorts of information contractors must provide to substantiate reimbursement claims. At a minimum, this information is likely to include: a narrative describing why the applicant is an affected contractor; the names, labor categories and skill levels of all employees for whom reimbursement is being sought; and detailed information justifying the rates and hours for which reimbursement is being sought.

Notably, the guidance encourages contractors to pursue “early engagement” with contracting officers to streamline the application process.

Although the draft guidance is detailed in certain respects, it is general in others. As a result, certain key questions remain unresolved, pending the release of the final guidance.

For example, the draft guidance suggests that early engagement may reduce inefficiency and administrative burdens, but also emphasizes that no determination in this early engagement context is binding. The non-binding nature of these early engagement discussions raises questions about their practical utility. For instance, a contracting officer may not be willing to make a preliminary determination concerning whether a contractor is an “affected contractor” before the contractor goes through the trouble of compiling a detailed submission to substantiate rates, hours, credits, etc.

The guidance provides that prime contractors may request reimbursement for their subcontractors if they “provide the same supporting information for the subcontractor(s) ... as required from the prime contractor.” However, the department has not addressed several key questions for managing subcontractor requests. Most notably, the guidance declares that the “the prime contractor is responsible for performing the same type of analysis that the contracting officer is performing on the prime contractor’s request for Section 3610 reimbursement,” but does not address how prime contractors can get comfortable with the reliability of a subcontractor’s accounting system and practices.

It requires the contractor to identify any other Section 3610 reimbursement requests that it has submitted. However, most government contractors hold a mix of prime contracts and subcontracts. It is not clear whether contractors are required to identify any subcontracts they hold for which the prime contractor might request reimbursement.

Additionally, the guidance states that the “contracting officer has sole discretion to make decisions on a contractor’s affected status and the amount of any Section 3610 reimbursement.” What happens, then, if the contracting officer denies an otherwise well supported claim for reimbursement? The contracting officer’s action is presumably reviewable, but the guidance does not address a dispute resolution process.

The defense contracting community will no doubt be keenly interested in the final guidance from the Pentagon, and we may not have long to wait.

Peter Terenzio is an associate and Scott Freling and Michael Wagner are partners at Covington & Burling LLP.

Topics: Defense Contracting