On April 8, 2020, Acting Principal Director for Defense Pricing and Contracting issued a memo providing guidance in support of DFARS Class Deviation 2020-O0013 – CARES Act Section 3610 Implementation. The Class Deviation provides language for DFARS 231.205-79, CARES Act Section 3610 – Implementation. The cost principle language makes costs of paid leave (including sick leave) allowable at the appropriate rates under the contract for up to an average of 40 hours per week and may be charged as direct to a contract.
Key Requirements of the DFARS Cost Principle:
- The contracting officer has established, in writing, the contractor is affected.
- The contractor’s employees and subcontractor employees:
- Cannot perform work on a government-owned, government-leased, contractor-owned, or contractor-leased facility or site approved by the federal government for contract performance due to closures or other restrictions, including facilities that cannot be accessed due to travel restrictions, and
- Are unable to telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020, for COVID–19.
- The costs are reduced by FFCRA tax credits and CARES Act credits or other credits allowed by law.
- The costs are otherwise allowable under existing FAR and DFARS cost principles.
- The costs incurred are to keep employees and subcontractor employees in a ready state or to protect the life and safety of Government and contractor personnel from COVID-19.
- The costs are limited to costs incurred to grant paid leave due to COVID-19 and would not otherwise have been incurred in the normal course of the contractor’s business.
- The costs must be segregated and identifiable in the contractor’s records with an audit trail.
- The paid leave has been incurred between January 31, 2020 and September 30, 2020.
Clarifications from the Guidance Memorandum:
The guidance memorandum provides a few additional key requirements for contractors to understand:
- Reimbursement is still limited to the available funding on the contract.
- The contracting officer must modify the contract to set specific expectations of the individual contract to address reimbursement of allowable paid leave costs, not otherwise reimbursed.
- Contracting officers and contractors must work together to understand the effects of COVID-19 on the business and contract and options to maintain mission readiness.
- Contractors are responsible for supporting any claimed costs, including claimed leave costs for their employees, with appropriate documentation and for identifying credits that may reduce reimbursement under section 3610.
While the DFARS language does not specifically address the impact of Small Business loans, the memorandum points out that contracting officers must be good stewards of taxpayer funds and ensure the use of CARES Act Section 3610 is necessary. The memorandum states:
Some contractors may receive compensation from other provisions of the CARES Act, or other COVID-19 relief scenarios, including tax credits, and contracting officers must avoid duplication of payments. For example, the Paycheck Protection Program (PPP) established pursuant to sections 1102 and 1106 of the CARES Act may provide, in some cases, a direct means for a small business to obtain relief. A small business contractor that is sheltering-in-place and unable to telework could use the PPP to pay its employees and then have the PPP loan forgiven, pursuant to the criteria established in the interim rule published by the Small Business Administration. In such a case, the small business should not seek reimbursement for the payment from DoD using the provisions of section 3610.
This makes it clear that DoD wants to ensure the different avenues available to support contractors during this emergency do not allow for duplicate reimbursement and a windfall profit for the contractor.
The actions you, as a contractor, should take:
- Make sure you can track all related costs. Set up the necessary labor charge codes, special expense accounts or subaccounts, etc.
- Develop a plan with input from all functional areas as to the best path forward for your business. SBA Loan, Section 3610, etc.
- Open lines of communication with your ACO and PCOs. Get written documentation including contract modifications.
- If Section 3610 contract modification is the best path:
- Notify the contracting officer of your company’s impact as a result of Section 3610 specifically citing the language from the Act.
- Request the contracting officer to issue a memorandum for record stating that the contractor is affected by COVID-19. Specifically cite Section 3610 of the CARES Act in all communications concerning your situation.
- Request the contracting officer to issue a contract modification that outlines the expected tracking and documentation of the paid leave including the appropriate rates under the contract that will be reimbursed.
- Request a written agreement regarding the accounting records and documentation you will need to provide to support reductions due to FFCRA tax credits and CARES Act credits or other credits allowed by law.
- In seeking the above (c, d) agreements it is imperative to define in your request as much of what is known at this time and how you intend to track costs and how you plan to support costs incurred under the modification that are known/anticipated at this time.
- Document and communicate, in real-time, your decisions related to COVID-19 impacts on your employees, business, and Government contracts.
- Except as necessary, with approved contract modifications, allowing the direct charging of costs that would normally be charged indirect (i.e. paid leave) or to establish additional accounts for tracking, do not make changes to your current accounting practices. Try to work within your current system, but track everything so you can make necessary disclosures.
- Continue to communicate with the contracting officer and advise of continuing impacts, availability of funds, et al. It is imperative that if your contract contains the Limitation of Cost/Funds clauses that notifications are made timely and the resulting impacts if additional funding is not provided (e.g. layoffs, lack of workforce readiness, etc.).
- Watch for additional regulation and guidance.
Redstone GCI has conducted weekly COVID-19 discussion forums and we plan to continue these discussions when emerging guidance or regulation is issued affecting our clients. We encourage you to join us, as well as review prior sessions here.