The spread of COVID-19 has resulted in a substantial expansion of government spending and procurement. Not only existing government contractors but also businesses that had focused only on commercial business opportunities may now be presented with additional opportunities in the governmental sector. Given that the government is currently mounting an expansive response to the COVID-19 crisis, it seems likely that there will be an increase in government procurement activity especially in the pharmaceuticals and medical devices space. For example, the government may seek to enter into contracts for new pharmaceutical interventions that can be produced on a wide scale or for the manufacture of additional ventilators or dialysis machines that can replenish the national stockpile.
While the typical — and not infrequently demanding and one-sided — laws, regulations and rules that apply to government contracting still generally apply and require careful navigation, there are a number of additional requirements, revisions and nuances that arise from various laws and regulations applicable to government procurement during times of national emergency. Indeed, in responding to the current public health crisis, the government has already taken steps to alter some of the normal rules applicable to government contracting.
This Sidley Update will describe some of the key considerations for prospective and current government contractors in the age of COVID-19.
Key Considerations Regarding New Government Contracts
As the federal government expands its contracting with the private sector to procure the goods and services necessary to respond to the public health emergency, existing and prospective federal contractors should be aware of some unique procedures and powers available to the government during this declared national emergency.
Defense Production Act. The Defense Production Act (DPA) gives the President authority to require companies to prioritize the performance of government contracts and to accept a government contract that is necessary to respond to an emergency such as the COVID-19 crisis. See 50 U.S.C. § 4511(a). In fact, the government has already invoked the act as part of its COVID-19 response. After declaring a national emergency on March 13, the President directed the Secretaries of Homeland Security and Health and Human Services, on at least two occasions, to use all available authority (including pursuant to 50 U.S.C. § 4511(a)) to procure goods relevant to the nation’s response. More specifically, on March 27, the President directed the Secretary of Health and Human Services to “use any and all authority available under the [Defense Production] Act to require General Motors Company to accept, perform, and prioritize contracts or orders for the number of ventilators that the Secretary determines to be appropriate.” On April 2, he directed the Secretary of Homeland Security to “use any and all authority available under the [Defense Production] Act to acquire, from any appropriate subsidiary or affiliate of 3M Company, the number of N-95 respirators the Administrator determines to be appropriate.”
While future invoking of the DPA is not guaranteed, companies with large-scale production capabilities may be subjected to future executive orders that could require them to accept government contracts for the production of, for example, personal protective equipment or health equipment such as ventilators and dialysis machines. Companies should keep in mind that if they are forced to accept a government contract pursuant to the DPA, they may bring an action in federal court alleging that the President has not complied with the various requirements of the Act. See 50 U.S.C. § 4556(b). For example, the DPA requires the President to determine that the invocation of the DPA is essential to the national defense. Theoretically, a company that is faced with an order pursuant to the DPA may argue in federal court that the President has not adequately made the required determination.
Importantly, the DPA also provides that companies shall not be held liable for any act or failure to act resulting from an order pursuant to the DPA to prioritize a government contract. What this means is that if a company is forced to accept a government contract, the company cannot be sued for damages if it is forced to breach a contract with a private entity as a result of its compliance with the DPA order. Nevertheless, the contractor would still be liable for other damages that could result from its performance of the government contract.
Sole-Source Contracting. Normally, the Competition in Contracting Act of 1984 requires federal procurement officials to obtain full and open competition by using competitive procedures involving a number of businesses bidding against one another. However, as set forth in the Federal Acquisition Regulation (FAR), “[w]hen the agency's need for the supplies or services is of such an unusual and compelling urgency that the Government would be seriously injured unless the agency is permitted to limit the number of sources from which it solicits bids or proposals, full and open competition need not be provided for.” FAR § 6.302-2(a)(2). Further, “[f]ull and open competition need not be provided for when the agency head determines that it is not in the public interest in the particular acquisition concerned.” See FAR § 6.302-7(a)(2). Importantly, federal agencies sometimes do not on their own identify the need and justifications for procuring particular items on a sole-source basis. Businesses that believe they have compelling cases for a sole-source contract may wish to reach out directly to the appropriate agency procurement officials to explore any such opportunities. However, it is important that companies be very careful not to create an organizational conflict of interest, which can arise where a contractor has an unfair competitive advantage or where the contractor’s objectivity in performing the government contract is impaired. See FAR § 9.505. Companies must not be seen as writing all or part of a request for proposals or even advising the government on the details of what should be procured. If an organizational conflict is found to have been created, the company could lose the ability to perform the government contract.
Avoiding Stays of Performance During the Pendency of a Bid Protest. Losing bidders for federal contracts typically have available to them a number of avenues to challenge an agency’s adverse procurement decision, including by protesting the decision to the agency contracting officer or the U.S. Government Accountability Office (GAO) and by commencing protest litigation in the U.S. Court of Federal Claims (COFC). Protesting to the GAO offers a disappointed bidder the advantage of nearly always forcing the agency to stay the winning bidder’s performance of the contract during the pendency of the protest. These so-called “automatic stays” can be overridden upon a written finding that “(i) [c]ontract performance will be in the best interests of the United States; or (ii) [u]rgent and compelling circumstances that significantly affect the interests of the United States will not permit waiting for the GAO’s decision.” See FAR § 33.104(c)(2). Obviously, the procurement of critical items related to the government’s response to the COVID-19 crisis would seem to allow government procurement officials to meet the standard and to override any automatic stay of performance resulting from a GAO protest. While stays are not automatic in the COFC, and disappointed-bidder litigants instead have to seek preliminary injunctions from the court, the COFC would likely be more receptive to government arguments that contract performance should not be stayed during litigation involving a contract for the procurement of items critical to the government’s COVID-19 response.
Simplified Acquisition Procedures. As a result of the President’s March 13, 2020, National Emergency Declaration, the government may use simplified acquisition procedures for domestic purchases up to $750,000, $1,500,000 for purchases outside of the United States and $13 million for commercial items. See FAR Part 18. These simplified acquisition procedures allow the government to make necessary purchases quickly and without strict adherence to all of the normal procurement requirements. For example, the contracting officer may solicit from a single source if the circumstances of the contract deem only one source reasonably available. See FAR § 13.106-1(b)(1)(i). Furthermore, the contracting officer is given “broad discretion in fashioning suitable evaluation procedures.” FAR § 13.106-2(b)(1). Finally, contracting officers are instructed to “[k]eep documentation to a minimum” and to “limit written records of solicitations or offers to notes or abstracts to show prices, delivery, references to printed price lists used, the supplier or suppliers contacted, and other pertinent data.” FAR § 13.106-3(b).
Key Considerations Concerning the Performance of Government Contracts
Whether a federal contract is newly obtained or has been long held, performance of the contractual terms during the current public health emergency could prove challenging in any number of ways. Contractors would be well served by being aware of contractual mechanisms that may help address such difficulties, including those discussed below.
Excusable Delays. As the nation continues to grapple with the COVID-19 crisis, government contractors’ performance may be delayed as a result of their compliance with various COVID-19 public health orders that require social distancing and for employees to stay home. Government contractors may be able to use contractual language to excuse delays in delivery of goods or services to the government. With this in mind, it is important for contractors to review their contracts’ delay provisions, as different types of government contracts refer to various provisions in the Federal Acquisition Regulation (the “FAR”). For example, FAR § 52.249-14 excuses delays that arise “from causes beyond the control and without the fault or negligence of the Contractor” and includes “epidemics” as an example of such causes. See also FAR § 52.249-8 (fixed price supply and service); FAR § 52.212-4 (commercial items). However, for these types of clauses to apply, the delay would have to be caused by the COVID-19 emergency. See Appeal of Ace Electronics Associates, Inc., ASBCA No. 11496, 67-2 BCA 6456 (July 18, 1967); Shipman’s Sons Ltd., GPOBCA No. 06-95, 1995 WL 818784 (Aug. 29, 1995).
The government has already acknowledged that excusable delays may “extend to quarantine restrictions due to exposure to COVID-19” and that “[e]xcusable delays that result in adjustments to the contractor’s delivery schedule should not negatively impact a contractor’s performance ratings.” See OMB March 20, 2020, Memorandum to Heads of Exec. Departments and Agencies RE: Managing Federal Contract Performance issues Associated with the Novel Coronavirus (COVID-19) (the “OMB Memo”). Therefore, it is important to consider whether any delay in performance is excusable.
Excess Costs. During the current national emergency, government contractors may be forced to incur additional costs in order to comply with the various public health mandates associated with the spread of COVID-19. As a result, government contractors should assess whether to invoke specific provisions in their contracts that can allow for recovery of costs associated with the emergency. Contractors must continue to maintain proper and detailed records of all costs associated with their performance of the contract. Proper accounting is especially crucial during this time, as it may allow contractors to justify a request for equitable adjustment to their contracting officers if their performance has been affected by the COVID-19 emergency.
The OMB Memo makes clear that equitable adjustment requests should be evaluated by “taking into account, among other factors, whether the requested costs would be allowable and reasonable to protect the health and safety of contract employees as part of the performance of the contract.” The FAR establishes that “a cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business.” See FAR § 31.201-3. The government has stated that it will consider whether the contractor has taken actions consistent with guidance from the Centers for Disease Control and Prevention and whether the contractor reached out to the contracting officer or the contracting officer representative to discuss appropriate actions. See OMB Memo. Therefore, any contractor forced to change its operations to comply with public health guidance would be well advised to keep detailed, contemporaneous records of the directions the company was given by the contracting officer and the specific costs that were incurred. Such recordkeeping is crucial to being able to support a request for additional compensation.
As a result of the spread of COVID-19, the government has already expanded its procurement efforts for pharmaceuticals and medical devices. Given that the disease is unlikely to abate in the near term, government contractors — both existing and prospective — should be aware of new opportunities to participate in the federal response to the public health crisis, along with the myriad federal procurement laws and regulations that apply, including those that apply specifically during the current national emergency. The private sector will undoubtedly play an important role in the response to the novel coronavirus — and companies should ensure that they are aware of all of the various requirements that will affect both contractual performance and bids for future government contracts during these uncertain times.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.