INSIGHTS

The Myths and Truths About Teaming Agreements

As published in Washington Technology on September 14, 2021

By James C. Fontana

            Since many commentators are using the “myth-truth” shtick, I thought I’d try it with regard to an age-old debate on teaming agreements in government contracting.

Full disclosure: I wrote an article about teaming agreements many years ago (about the same time I penned a piece about the impending and lunacy-laden Y2K disaster – for those over 45). This was after a Virginia Supreme Court decision suggested that teaming agreements as they were then routinely written (and still today) were generally unenforceable. I said then that such agreements may or may not be enforceable depending on the language used in the agreement, and that certain language should be both used and avoided to assure maximum enforceability. Even before and since then articles on this subject have graced many a publication. But I’d thought I would try a different approach.

So, with that, here it goes.

Myth 1:  Teaming agreements are, like most contracts, binding and enforceable agreements.  

Truth: No.  Here’s the problem:  a number of courts (especially in Virginia) have ruled that teaming agreements used by many government contractors which don’t specifically provide for a promise to execute a subcontract are considered as mere unspecified “agreements to agree” and thus unenforceable. But that applies to those agreements whose language contains those unspecified terms, which means that not all teaming agreements are unenforceable.  Again, and this hasn’t changed, it depends on the language.  Many of the traditionally-drafted teaming agreements used by both prime and subcontractors do promise nothing more than the obligation to negotiate a subcontract in good faith upon an award to the prime, rather than to actually execute the subcontract.  Otherwise, it’s an unenforceable agreement beyond the obligation to negotiate. Virginia courts have taken a particular approach in its decisions regarding teaming agreements, with strong judicial opinions supporting the notion that the “agreement to agree”-type teaming agreements will likely be unenforceable.

Myth 2:  Courts have overwhelmingly ruled that teaming agreements are not valid, enforceable promises to subcontract work.

Truth: If I kept count, I’d likely agree that there have been more decisions against than in favor of the enforceability of teaming agreements, especially in Virginia.  However, that misses the point. In many of these cases, and as stated above, the teaming agreement language was held to be too uncertain to constitute an enforceable agreement. To drive home the point, if you want an agreement to be enforceable, its terms must be clear enough to reflect the specific intent of the parties to enter into a definite promise – a clear offer and acceptance of something of value. In this case it’s the specific intent to require the execution of a subcontract upon the prime award, and not just to negotiate one where those negotiations may succeed or fail.

I typically avoid citing case law outside of court briefings for fear of causing acute boredom among normal folks.  I make an exception here because some of them are quite instructional for showing the difference between the enforceable and unenforceable in these agreements.

For example, the Virginia Supreme Court in the 1997 W.J. Schafer Associates Inc. vs. Cordant Inc. case discussed in my article decided that the teaming agreement there was unenforceable because it stated only that, in the event of a prime contract award, the parties would “negotiate in good faith” a subcontract, which falls short of a definite promise to actually execute that subcontract. It also didn’t help that the subcontractor’s product wasn’t fully developed no less commercially available when the teaming agreement was executed. Not surprisingly, the court concluded that the agreement’s language was too vague and indefinite to constitute an enforceable agreement. 

In another case, Cyberlock Consulting, Inc. v. Info. Experts, Inc., a Virginia federal court decided in 2013 that a teaming agreement was invalid because it was similarly dependent on “good faith negotiations” of a subcontract, especially where the prime was able to terminate the teaming agreement upon the “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.” This was despite an agreement to actually execute a subcontract upon a prime award and further despite providing the subcontractor a specified workshare percentage. At most, said the court, the parties agreed to negotiate in good faith a future subcontract, again the very type of agreements other Virginia courts have ruled unenforceable.

Now compare these two cases with a case from the Fairfax, Virginia Circuit Court in 2002. In one of the better opinions I’ve ever read on the subject, the late Judge Terrence Ney in EG&G, Inc. v. Cube Corporation concluded that the teaming agreement there contained language that definitively reflected a clear commitment to award a subcontract upon a prime contract award. That language included words that the parties “would” enter into a subcontracting agreement and that the subcontractor “would” perform a certain percentage of the work (49% of the contract dollar value), among other words basically stating that upon award the prime committed to subcontracting the work.  (Note: I would have preferred using “will” or “shall” in that agreement, but I wouldn’t complain here since the subcontractor won the case). It also helped that the subcontractor had already started the work under a later executed “letter subcontract.” In any event, the difference between saying we will negotiate a subcontract in good faith upon a prime award and if we cannot then we can walk away, and we will issue a subcontract upon award, are strikingly different.  And that distinct language will likely make the difference between an enforceable and unenforceable teaming agreement, at least where the Virginia courts are concerned.  Notably, courts in other states have not been as consistent on this subject, but then again many if not most of the teaming agreements in this business and in this area provide that Virginia law applies.

Myth 3:  If I need a teaming agreement, I can get one off the web. Besides, they all pretty much contain the same standard language.

Truth:  That you do at your own peril. Throughout time there has been developed in this business teaming agreement templates or the garden variety “boilerplate” agreements.  In fact, a quick Google search will gin up dozens of articles and templates.  First, beware of such cut and paste approaches to any agreement, particularly teaming agreements, especially ones you find on the internet. This is because such ready-made agreements — beyond those that are so simple that just about any boilerplate version will do (e.g., your one pager car bill of sale) — don’t always fit the particular circumstances, arrangements or relationship between the prime and subcontractor.

Second, what a prime is looking to accomplish and promise or not promise (see above discussion) in a teaming agreement is often very different from what a subcontractor is looking to accomplish and be promised in that same agreement.

For example, a prime contractor in many cases may not mind the more indefinite and ultimately unenforceable language, like the agreements in the Schafer and Cyberlock cases, as it gives it flexibility to change the terms of the relationship with the subcontractor, to include the subcontractor’s work share and pricing. Or, the prime may want to exit the relationship by not subcontracting to the very party that may have been instrumental in preparing the proposal and receiving the award, for whatever reason, or just because, after all, the teaming agreement is not going to be enforceable anyway.  The subcontractor’s abject anger and a burning desire to lawyer up would be understandable as it will likely feel slighted for being dumped unceremoniously after pouring their heart, soul, personnel and dollars into the relationship and the proposal on the notion that it signed an agreement that in actuality was a toothless tiger from the standpoint of enforceability. This wouldn’t be the case, however, if the teaming agreement was properly drafted, clear, definite and unambiguous. Let me put it another way, just because one signs a written agreement doesn’t make it enforceable. Enforceability, and the strength of the obligations contained in the agreement, are dependent on the very words in that agreement.

So, if a subcontractor wants its teaming agreement to be binding and enforceable (of course no guarantees from any lawyers including this one since any judge may rule on a case with an eye-popping, mindless decision), it should make sure that the agreement contains language that screams “that shalt subcontract if there is a prime award.” Or at least words to that same biblical (and legally enforceable) effect.

Third, and perhaps most importantly, there is no boilerplate language for the workshare allocated under a teaming agreement. In many cases, these workshare allocations are defined in an exhibit to the teaming agreement, and in just as many cases they are similarly improperly defined. Is the subcontract work to be based upon a percentage of prime contract overall value, or a percentage of prime contract funded value? There is a huge difference. Or will the parties agree to allocate work based upon prime contract tasks or line items? Will it be based upon a percentage of the direct labor, or upon certain a number of employees, and if so what labor categories? And which categories provide for the most revenue and margin versus those that may be not much more than classic loss leaders with nothing behind to make up for it?  Or is the workshare what the prime may wish it to be – meaning that it’s not defined at all?  Much of this will depend on the contract type and work to be performed. And, once again, precision in the language is the key here.

Myth 4:  Litigation over teaming agreements is common in the government services industry.

Truth:   I don’t keep count but likely not.  The vast majority of teaming agreements that I provide advice on don’t end up as formal disputes.  Nonetheless, the decision to roll the dice and litigate over a teaming agreement should be business related. At the end of the day, a decision has to be made between litigating over a contract where the legal fees alone may exceed the contract work’s profits, without a certainty of success, and just moving on to the next opportunity. Having said that, litigation resulting from any poorly drafted agreement is usually avoidable. Very simply, preparing teaming agreements properly and knowing the extent of their enforceability at the outset, and including the correct language that “fits the deal,” will go a long way in avoiding litigation.  Put another way, a teaming agreement’s language needs to be certain, definite and properly tailored to the work to be performed to be enforceable – like any agreement. Otherwise, it’s not an agreement. And your attempts to enforce it will only enrich the lawyers.

Stay safe.

This article is for general information purposes only and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel.

CAN EMPLOYERS AND CUSTOMERS REQUIRE COVID VACCINATIONS?

As published in Washington Technology on June 1, 2021

By James C. Fontana

Reported covid cases in America are at an all-time low.  Vaccinations are rising.  Return to work plans are in place and ready to be implemented and many jobsites and schools are ready to open or have already re-opened. Many state government employees are returning to the workplace.  It won’t be long until federal agencies will be looking for all its employees to return to their offices rather than telework. And that includes the government contracting workforce. Some are already forgetting about CARES Act Section 3610. All will be well now that the pandemic is subsiding.

Not so fast.

Among other complications that will arise, consider this one in the post-covid world of government contracting: many contractor employees were co-located with their government counterparts during the pandemic. As these contractor employees return to customer sites, the agency may demand the contractor prove that employees received their vaccinations. Can the government do that? Can the contractor (or any employer) require its employees to be vaccinated? Can it require a vaccinated employee to return to work onsite if agency employees (or fellow employees) are refusing to be vaccinated? I don’t think the government, its vast bureaucracy, the legal or the business community — and certainly Congress — have fully tackled these questions.  

Here’s the first question: can an employer legally mandate that an employee provide proof of vaccination? Generally, yes – but that is not entirely clear.  In December 2020, the federal Equal Employment Opportunity Commission (EEOC), which enforces federal workplace discrimination laws, published updated guidance that addresses (or at least tries to address) covid-19 vaccinations. The guidance is available in full here (see section K). While the guidance doesn’t expressly endorse or prohibit mandatory vaccinations, it states that simply requesting and requiring an employee to show proof of vaccination is not a disability-related inquiry that may otherwise be prohibited in most cases under the federal Americans With Disabilities Act (ADA). But this comes with one caveat and two exceptions.

The caveat is that employers should be careful about asking why an employee didn’t receive the vaccination as such a question may elicit information about a disability and would be considered impermissible under the ADA.  Also, the EEOC has advised that an employer should not request or require any other medical information that may be related to the vaccination. Thus, an employer should inform employees under this scenario that they should not provide any medical information as part of the proof of vaccination.

As for the exceptions, the first is that there may be ADA-related issues if the employee (or an applicant for employment) indicates that he or she is unable to receive the vaccination because of a disability. For example, there may be health-related issues preventing the employee from receiving the vaccine such as an allergy, pregnancy or a history of serious vaccine side effects. In such cases, the employer would be required to provide the employee a “reasonable accommodation” in the form of exempting that employee from showing the proof or allowing the employee to continue working remotely, or some other accommodation.  This may be especially true if the employee is medically high risk along with being informed that his or her co-employees, not to mention government counterparts, may not be vaccinated. But there are limits to providing such accommodations if the employer can show that such would constitute an “undue hardship” through some significant difficulty or an unreasonable expense. And in case you don’t believe the employee’s disability claim, the employer is permitted to request medical certification of such disability that prevents the employee from receiving the vaccination.

And for those anti-vax employees insisting on returning to the workplace, excluding that employee gets more complicated as the ADA requires that the employer show that allowing the employee to return without a vaccination (or at least social distance to include wearing a mask) would pose a “direct threat” to the workplace. Although under the ADA and EEOC’s guidance the employer would meet standards in allowing it to require that an employee not pose a “direct threat” to the health or safety of other individuals at the workplace (to include potential covid transmissions), the employer would still need to demonstrate that such a direct threat could not be eliminated or reduced by providing the employee those reasonable accommodations.  The EEOC has stated that the risk of transmitting covid in the workplace qualifies as a direct threat, and of course it’s logical that a direct threat would include that the unvaccinated employee could expose others to covid. Keep in mind, however, that such guidance was issued last December. With all the vaccinations to date, and with so-called herd immunity close at hand, the prospect of supporting such a direct threat theory may be more remote. In any case, given the complexity and fact intensive nature of determining reasonable accommodations, undue hardship and direct threat as those terms are used under the ADA, applying this exception is not as simple as it sounds. And further don’t rely on the at best implicit EEOC guidance as binding precedent as it is not a court and can be overturned by one.

Under the second exception, employees may be unable or unwilling to provide proof of vaccination because their religious beliefs prevent them from receiving the vaccination. Under federal (and most state) anti-discrimination laws, once an employer is on notice that an employee’s sincerely held religious beliefs prevents the employee from receiving the vaccination, the employer must show that such beliefs are unfounded or else the employer must provide (here we go again) a reasonable accommodation for such beliefs.  One potential way of doing this is to ask the employee to show independent proof of such religious beliefs, practices or observances. Again, an invitation to numerous complex rabbit holes.

And here’s another vexing question. So far, the vaccination was approved by the FDA under the more limited emergency use authorization, or EUA, as opposed to a full and formal authorization process. Until that authorization converts to a full FDA-issued license to use the vaccine, there is an argument that the vaccination issued under the EAU cannot be mandated. For example, the federal statute governing EUAs requires the government to inform recipients of the option to “refuse administration” of the vaccine. The EEOC guidance muddles through this issue by mentioning the vaccine’s EUA status but not answering the question of how that status affects an employer’s right to mandate vaccinations. The good news is that once the vaccine is fully approved it seems (or at least one would hope) this argument will go away.

Here’s another even more vexing question: can we expect federal agencies to require contractors to prove that their employees have received the vaccinations? Will such be included in future government contract representations and certifications? Will the government amend the Federal Acquisition Regulation (FAR) to include a covid vaccine certification? Will that include a requirement to disclose employees not in compliance with contractor or agency vaccination requirements? And if not, then will an employee refusing vaccination but still willing to wear a mask all day in the workplace be a sufficient compromise? So far there are no solid answers to these questions. Only more questions: What would be the EEOC’s position on this issue? What if such a mandate conflicts with state laws having softer or no vaccination mandates? (Note 36 states to include Virginia and Maryland have proposed bills to prevent mandated vaccinations as a condition of employment).

Suffice it to say that the legal solutions to these upcoming business issues may be an enormous challenge in this and just about every other industry. Lawyers seek to rely on legal precedent. There is little here. (other than a 1905 Supreme Court case I stumbled upon ruling that mandatory smallpox vaccinations were constitutional). But I always say when there’s no precedent then try logic, so consider this potential scenario (with all names fictional): Joe the government program manager got vaccinated, believes everyone else should and is very vocal about it. Mary, John, and Melissa, the on-site contractor employees, refuse to be vaccinated and also refuse to wear masks, whether because of a claimed disability, a stated religious belief or because of their long adopted and equally vocal motto of “Don’t Tread on Me.”  Joe complains to the contracting officer that the contractor failed to mandate covid vaccinations. After multiple meetings and countless email exchanges the agency can’t decide on a course of action but is nonetheless faced with a number of dilemmas. For instance, can the agency force the contractor to make the employees receive vaccinations for the sake of its own workplace health and safety? The answer to that is likely no. Can the government require a rep and cert on contractor employee vaccinations? My initial reaction is likely yes, but the legal bonanza on that will start faster than you can say Hoss Cartwright. Can the agency require the contractor to remove any contractor employee refusing vaccination and/or to wear a mask by denying access to the government site? The answer is very likely yes. Can the agency just throw up its hands and terminate the contract for convenience? Definitely yes.

It’s only going to get more sticky from here.

Stay safe.

James C. Fontana is the managing member of Fontana Law Group, PLLC.  He can be reached at [email protected].  The firm’s website can be found at www.fontanalawgroup.com.

This article is for general information purposes only and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel.

SBA’S MENTOR PROTÉGÉ PROGRAM – ITS PLUSSES AND MINUSES

As published in Washington Technology on March 29, 2021

By James C. Fontana

Joint ventures in government contracting have become increasingly popular, particularly in small business set aside contracts. This is especially true with regard to the SBA’s Mentor Protégé Program. This program is designed to encourage approved “mentors” (typically large businesses) to provide various forms of business development assistance to small and developing “protégé” firms in connection with government contracts. The goal of the program is to enhance the capabilities of the protégé, assist the protégé with meeting the goals established in its SBA-approved business plan, and improve the protégé’s ability to successfully compete for contracts.

What this really means is that a large mentor can set up a joint venture with a small protégé and allow that JV to compete on small business set aside procurements as a separate small business concern without the dreaded prospect of being considered “affiliated” for SBA size determination purposes. More on that later.

Once the exclusive domain of the 8(a) world, since 2016 such joint ventures are now permitted with all qualified small businesses government-wide under the SBA’s All Small Mentor Protégé Program.

This program can have tremendous benefits. The small business partner relishes the opportunity to be backed by a large company and use its qualifications and past performance to compete on set aside contracts for which the small would otherwise not qualify. By the same token, the large business drools at the chance to capture a piece of the business that would otherwise be reserved only for smalls.

But the program has some shortcomings.  For starters, mentors may be frustrated that the protégé has little to no management experience, and may or may not make the ideal partner on these contracts, especially those contracts having more complex performance requirements. Even more challenging is that the protégé must have virtually total control over the JV, its management and the day-to-day operation of the contract. The protégé’s owner is even named individually as the “project manager” or what is now termed by the SBA as the “responsible manager.”  Recent changes in the rules allow the mentor to have some participation in corporate governance and operations-related activities of the JV, but the ultimate decisions are still to be made by the protégé.

For these reasons, mentors need to know their protégés and vice versa. A mentor should ensure itself that the protégé is the right fit and will be an able partner with the ability to perform reliably on contracts and operate the joint venture in an effective manner.

Similarly, a protégé may be concerned with a potentially overwhelming mentor, whose larger business is more structured and whose business model and culture lends more to controlling rather than being control by the protégé.  In addition, protégés are typically still in their developmental stage and may find it difficult to adjust both to operating a more highly structured co-owned company and meeting those complex performance requirements, as well as stepping up to the operational and organizational standards to which a large mentor is more accustomed. From a protégé’s standpoint, it’s important to both select mentors that align with the protégé’s core competencies and goals as well as continue to develop business outside of the mentor protégé relationship.  For both the mentor and protégé, this is where the adage of know your partner before you partner rings especially true.

Both mentor and protégé should also understand that a mentor-protégé arrangement is not designed to be a handout to the protégé or an open window for large mentors to enter and participate in set-aside contracts, but an opportunity for the protégé to use the mentor’s resources, financial assistance, and expertise to help grow the protégé from the developmental stage to the next level of size and sophistication. A high level of commitment from the mentor and protégé is necessary in seeking and obtaining valuable federal procurement opportunities. The business development and capture expertise that can be gained from an experienced mentor and later used by the protégé is critical and, in some cases, difficult to obtain outside of the mentor-protégé arrangement. However, some mentors may struggle to be effective mentors, and some may tend to hold a small protégé to standards that the protégé is not prepared to meet at the current stage of its business life.

Also, this program has the advertised benefits only if correctly formed and maintained. For example, the joint venture agreement itself is not your garden variety “JVA.” It must contain certain provisions as strictly prescribed by the SBA’s regulations.  And if any one or more of these regulatory bells and whistles are omitted from that JVA, the affiliation exception may be jeopardized and the agreement may be successfully challenged in a size protest thereby threatening the JV’s small business size status.

Disputes between the mentor and protégé can also be more tricky and riskier than the usual JV partner dispute. In some cases, that dispute can spill over to the courts or the SBA itself, which doesn’t necessarily enjoy acting as the mediator between warring JV partners but in some cases may be compelled to do so, either because the mentor or protégé is violating the mentor protégé agreement, or violating other SBA regulations governing the relationship, or where a JV is awarded a contract and an SBA size protest results.  A tongue in cheek comparison would be a married couple having to go before the presiding preacher to resolve their marital squabbles. Yet I’ve seen many a successful mentor protégé relationships, and a few unsuccessful ones, some of which ended up in JV divorce court.

But if done correctly, the mentor protégé JV can be a win-win for both parties.  Where typically a joint venture between a large and small concern is considered “affiliated” under SBA rules and thus their revenues or employees (depending on the size standard) would be combined, under the Mentor Protégé Program the JV enjoys an exception to that affiliation rule.  But don’t let that fool you, because despite doing everything right to set up the mentor protégé JV, the parties can still be “otherwise affiliated” which in plain English means that other aspects of the relationship can result in an affiliation unrelated to the establishment of the JV or the JVA. One example is no matter what a JV agreement says regarding the protégé’s management control of the JV, if there is evidence that the mentor is actually exerting improper control over the JV or its contracts, the mentor and protégé may be considered otherwise affiliated, thereby stripping away the affiliation exception. Other than being found affiliated or facing termination of an approved mentor-protégé arrangement, additional consequences can result from violating the SBA regulations, to include contract termination for default, suspension or debarment of both the mentor and protégé, and in rare cases civil and/or criminal penalties.

There is, however, some potentially brighter light on this process. Recently the SBA, apparently in a “let’s reduce some of the regulatory burden” mood, stripped itself of some of its proclivities at micromanaging the mentor protégé relationship, especially regarding JVAs that are required under the program.  In revised rules, which became effective last November 16, the SBA consolidated the 8(a) Mentor Protégé Program and the All Small Mentor Protégé Program, which should go some way in avoiding confusion between the two programs. The SBA explained that the two programs were virtually identical in any event and that having them separate were unnecessary and confusing. According to the SBA, there are currently about 1,200 active mentor-protégé agreements under the All Small Mentor Protégé Program.

A further (and very welcomed) change coming from these new rules is that SBA no longer requires prior approval of a mentor protégé JVA for competitive acquisitions (the approval requirement still exists for 8a sole source awards).  Here’s the back story: before last November 16, SBA was required to approve all JVAs, and frankly took a more substantial role in (putting it nicely) cajoling applicants to insert certain provisions into the agreement that had little or no relation to the SBA’s required provisions.  In some cases, provisions certain SBA officials sought made little to no business or legal sense.  See for example the SBA’s joint venture agreement template, which has typos, is devoid of any meaningful business terms, and is really just several pages of regurgitated regulations. There have been instances where the SBA has insisted that joint venture parties use this form, much to the chagrin of many a mentor and protégé, not to mention their lawyers, and forcing the parties to draft a separate “operating agreement” or other document governing the joint venture business, which was also subject to SBA approval. Trust me when I say that separate and potentially inconsistent agreements between the same parties for the same purpose is dangerous to say the least.

Another key change is the relaxing of the restrictions on how many contracts a mentor protégé joint venture can obtain. Under the old rule a joint venture was limited to being awarded only 3 contracts in a 2-year period to avoid “affiliation” between the JV partners. The SBA revised this so-called 3 in 2 rule by allowing the JV to obtain as many contracts as it can within the 2-year period, but the 2-year duration restriction remains so that unless the proposal was submitted before that 2-year period expired, the JV could not bid on further contracts without being found affiliated. However, a contract novation may occur after 2 years if the JV submitted the novation package to the contracting officer prior to the end of that 2-year period.

A not so positive development from these same revised rules goes beyond mentor protégé joint ventures: a small business must now re-certify its size status at the time it submits a proposal (to include price) on a set aside task order issued under an unrestricted multiple award contract (MAC). The only exception are those orders issued under the GSA’s Federal Supply Schedule.  That means if the firm cannot certify as small at the task order level and for each task order award it will not be eligible for a set aside award even if it did under the MAC. This is going to be tough for those smalls that outgrow their size standards in the midst of a 5 or 10 year MAC term, preventing the firm from riding out the contract’s full period of performance. In addition, the rule allows a contracting officer to request a size re-certification 120 day prior to the fifth year of a MAC. This is an unwelcomed change for small businesses to include small business joint ventures.

Frankly I’d rather SBA not make the welcomed changes if it meant not making the unwelcomed changes.

Stay safe.

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This article is for general information purposes only and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel.

August 31, 2020

CARES ACT FEDERAL CONTRACTOR RELIEF SET TO EXPIRE

By James Fontana

Section 3610 of The CARES Act became law on March 27, 2020. And it expires this September 30, coinciding with the end of the Government fiscal year. Put another way, or at least how GSA spins it, contract adjustments may apply only “for leave that a contractor has provided during the period March 27, 2020 through September 30, 2020.” Thus, it is the leave pay that accrues after September 30 that is on the line.

So now what?

CARES allocated more than $2.2 trillion in response to COVID’s devastating impact on the economy.  As you may recall from my earlier commentary, Section 3610 authorized agencies to pay contractors for paid leave under certain conditions to keep employees in a “ready state.” 

The law was designed for contractor employees restricted from Government worksites and unable to telecommute because their jobs cannot be performed remotely. Some contractor employees have been in this position due to Government facility closures, state and local lockdown orders (at least in the earlier “phases”), and where the employee cannot work remotely because he/she or a family member contracts COVID, or is caring for someone who does, or where the employee or family member is quarantined because of COVID, or some other legitimate reason. Either way there are a variety of situations where the pandemic still prevents an employee from both accessing a worksite and working from home.

Section 3610 has its limitation. Foremost, the provision is only as good as the available funding that comes with it. Under CARES, Congress could have provided specific funding for this type of contract reimbursement (which it didn’t) or funding could be provided through the affected contract so long as there are available funds on that contract. As DOD stated in its August 17 updated Implementation Guidance/FAQ (Q28), “[a]ny funds that are otherwise legally available . . . for use under a contract may be used to fund section 3610 reimbursement under that contract. Section 3610 adjustments need not be funded with only CARES Act appropriations.” The bottom line, however, is that available funding is a prerequisite to reimbursement.

Another challenge is that since CARES was enacted several different Government agencies have issued an array of written implementation memos, FAQs and other advisories interpreting or commenting on Section 3610 and, as I pointed out previously, not all of them are either consistent with each other or a precise reflection of the law.

Nonetheless, the demise of Section 3610 could hurt the Government business. In her testimony before the House Armed Services Committee on June 10, DOD Under Secretary Ellen Lord stated that payroll relief requests under Section 3610 are likely to be in the billions of dollars. So, as contractor employees continue to be unable to access work locations and unable to telework yet expected to remain in that perennial ready

state, the continued need for a Section 3610 extension looms large.

Some also argue that failing to extend Section 3610 will threaten the continuity of Government operations and the ability of industry to fully support critical Government missions.  That may be if this pandemic doesn’t subside further to allow both Government and contractor employees to fully return to work. On a positive note, some agencies have started to implement return-to-work plans on a limited basis. That may relieve some of the pressure that would otherwise warrant leave pay under Section 3610. Maybe.

One other piece of solace is that there’s a decent chance that forgivable loan amounts received by contractors under the CARES Act’s Paycheck Protection Program (CARES Section 1102) would cover or at least offset such otherwise allowable (or even unallowable) paid leave, assuming a PPP recipient complies with the PPP’s terms. In that case, however, the law is quite clear that a PPP recipient cannot double dip by also being reimbursed for that very same paid leave covered by Section 3610. But will PPP loans (or grants depending on how you look at it) cover all non-reimbursed Section 3610 expenses? I’m guessing not.

Of course, the challenge is how to convince Congress to extend the Section 3610 period. Unfortunately, with the current state of congressional bickering, I’m not that optimistic. Worse is that the competing House and Senate versions of Son of CARES currently don’t contain Section 3610 extensions.

For example, the House in May passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act (H.R. 6800), which addresses further implementation of Section 3610 and would provide some clarity to its provisions, but doesn’t extend it.   The Senate’s Health, Economic Assistance, Liability Protection and Schools (HEALS) Act, also passed in May (S.1624), looks to add $10.8 billion in funding to support Section 3610-related claims for DOD contractors, but that bill also doesn’t extend the September deadline.

It seems that convincing Congress to pass any additional relief measures despite a still-raging pandemic, in the heat of a hotly contested presidential election, with 35 Senate seats on the line and a divisive Congress that can’t agree on how to make a ham sandwich no less pass a major relief bill of Depression-era proportions, is becoming as easy as shoveling sand against the tide.  And that includes extending Section 3610.  Without an extension to Section 3610, not to mention other critical follow-on relief measures that are critical to the entire economy, businesses in this sector will again face a bleak uncertainty going forward.

On a somewhat brighter note, the Section 3610 extension movement has been getting recent traction on the Hill. On the Senate side, at least the Virginia and Maryland delegations are pushing the Senate leadership to extend the law, stating in in a July 31 letter that “[f]ailure to provide an extension of Section 3610 may undermine agencies’ ability to provide critical support to important government missions and operation needs during this time.”  Industry associations are also nudging Congress to extend Section 3610. In a July 31 joint letter to the House and Senate leadership from PSC, NDIA, AFCEA, and other acronymic organizations catering to the Government business, it was argued that extending the law through 2021 “would support the continuity of government operations through the COVID-19 national emergency while preserving the ability of the private sector to maintain its capability to fully support agency missions into the future.” A similar letter by the U.S. Chamber of Commerce on July 24 went further to suggest that Congress extend the provision and appropriate funds specifically to support Section 3610 leave pay reimbursements.

But at least for now none of this matters, for Congress is deadlocked on all the additional needed COVID relief, and the chances that it will pass some type of comprehensive relief measure, no less one that will extend Section 3610 by the end of September, is becoming more remote by the day. Beyond the futilely of arguing the Congress shouldn’t have imposed such a short time limit on Section 3610 in the first place, and I tend to stay away from such “who shot John” discussions, the law cannot extend itself.  Congress needs to do that.  And given the way Section 3610 was drafted in that Congress provided the specific relief for only specific dates, it is questionable at best whether such an extension can be made through non-legislative means.

Or can it?

Stay tuned.

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This article is for general information purposes only and is not intended to be and

should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel.

August 3, 2020

THE STARS II BIG SURPRISE – HOW GSA IS HELPING AND HURTING HOLDERS

By James C. Fontana

Few will dispute that the GSA’s latest Streamlined Technology Acquisition Resource for Services contract, better known as STARS II, has been a big success for the Section 8(a) community, and one of the GovCon community’s most coveted GWACs.  STARS II is still active through August 2021 and the STARS III solicitation was recently released but with an unspecified award date only projected by GSA to be sometime late next year and with no orders issued for at least a year, according to GSA.

Recently, in cooperation with SBA, GSA decided for the third time to increase the STARS II ceiling.  On June 24, GSA announced that it was going to modify STARS II to add an additional $7 billion to the ceiling amount, raising the total ceiling amount to $22 billion.  Great news, especially with the upcoming Government busy season. But again, nothing else was said, at least publicly.

But then on June 26, GSA surprisingly issued a bilateral modification (yeah the one where both parties must voluntarily sign) that indeed definitized the ceiling increase. But to many, GSA pulled a fast one by also modifying the STARS II contract language itself to reduce the remaining period that task orders can be completed from four years to two years starting July 1, 2020.  Under the existing contract, a task order awardee could continue to perform task orders after STARS II ends on August 21, 2021 – and as late as August 30, 2024. So, what GSA did was to convert a four-year task order completion deadline to a two-year deadline in a way that is completely inconsistent with the original STARS II contract terms.  Actually, it’s less than two years since the clock already started on July 1 so not even two-year task orders are possible going forward.

GSA knew there would be a potential competitive impact on its decision to shorten the task order completion date, especially given that ordering agencies would likely revert to using other contracting vehicles to the detriment of the STARS II holders. That’s why GSA felt it was required to issue a formal and legalese-laden document called a Justification and Approval, also known as a J&A, to justify the potentially anti-competitive impact resulting from this change.  And they are correct as this type of contracting action would require such a J&A under the federal Competition in Contracting Act and FAR Subpart 6.3.  On July 9, GSA did indeed publish a J&A on SAMbeta.gov, 19 days after it issued the modification and without any advance public statement.

But here’s the problem – GSA forgot to do something essential to the J&A process. It forgot to follow the law, let alone common sense. And I know more than a few STARS II holders who are furious about this, not to mention several members of Congress who recently asked GSA to explain its decision.

Under the FAR, a J&A must rely on one of seven enumerated reasons to restrict full and open competition. In this case, GSA selected the justification based on the Government’s need to maintain suppliers and the flow of supplies and services during a national emergency – here, the COVID-19 pandemic. Fair and lofty enough as disrupting critical IT services during the pandemic would hurt the public. But was shortening the task order completion deadline because of COVID a rational decision? That’s what the J&A was required to address, only it didn’t.   The FAR requires that a J&A must contain “sufficient facts and rationale” to properly support this kind of contract action – in this case, how reducing the completion date furthered the need to maintain IT services in the wake of COVID. The scant excuse offered by GSA in the J&A was that the ceiling increase “without adding to the completion date. . . provides all vendors on the [STARS II] Contract with the opportunity to receive new task orders through the end of the contract term.” That tells us nothing.

In fact, it stands to reason that the modification would actually reduce the number of available vendors under STARS II during this critical national emergency because an ordering agency cannot issue a task order after July 1 that would exceed a two-year performance period, forcing the agency to scramble for other similar contracting vehicles. 

The bottom line is that GSA’s required justification for shortening the STARS II completion date is completely lacking, and GSA provides conflicting reasons between its J&A and statements made at the Virtual Industry Event that completely call into question the validity of its action. 

And here’s the topping: the GSA’s email to contract holders accompanying the June 26 STARS II modification stated: “Sign the attached contract modification and return it to [email protected] no later than June 30, 2020. Once the signed modification is returned, and on or after July 1, 2020, you can accept new task order awards.”  In other words, GSA curtly instructed awardees to sign the modification or else!  With the June 26 email sent in the late afternoon on a Friday, that gave holders just two business days to respond. That is not the definition of a bilateral modification and not a fair example of how that process is supposed to work.  Rather, it’s more like economic duress. And I know plenty of lawyers (including me) who would love to litigate this issue.

Stay safe.

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This article is for general information purposes only and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel.

July 13, 2020

GOVERNMENT CONTRACTS, FORCE MAJEURE AND COVID-19

By James C. Fontana

The COVID-19 pandemic is still with us, and with it some renewed interest in the oft-considered obscure contract provision better known as the “force majeure” clause.

Force majeure clauses are found in a number of agreements from leases, vendor contracts, licensing agreements and of course subcontracts to include those found in Government subcontracts.  

According to Black’s Law Dictionary (yes there is a dictionary just for lawyers), the term force majeure comes from the French phrase meaning “superior or irresistible force.”  Many have referred to this type of clause as an “Act of God” clause. And, of course, Black’s defines that as well: “An act occasioned exclusively by violence of nature without the interference of any human agency.”

In plain English, a force majeure in a contractual sense is where an extraordinary or unforeseeable event beyond the control of one party prevents it from performing the contract. Put another way, if that event occurs, it may alter the contractual parties’ obligations.  Although there can be dozens of circumstances or events that may constitute a force majeure event, typical examples include war, riots, earthquakes, weather events, labor strikes, and of course epidemics.

Depending on its specific language, force majeure language may allow for delay in performance or excused performance, either partially or completely. Or it may provide a party the ability to outright terminate the contract. The latter remedy is less common. Usually the force majeure clause will buy some time – that is, allow for a delay of performance or a slip in a delivery schedule. It typically is not (but can be) a “get out of jail free” card in terms of overall performance obligations. 

I’ve seen many a lawyer and contract manager just skip these clauses as not worthy of review because, well, what are the chances that the Almighty will reign down with a seismic disaster, a devastating tsunami or a global pandemic? But in the world of COVID, which apparently is not going away anytime soon, we are now paying more attention to this language.

So, tying this in to the GovCon world, you won’t see a classic force majeure clause in a Government prime contract. (And if you do let me know and I’ll retire after 35 years on the job not seeing one). These clauses are normally found in subcontracts and other commercial agreements such as vendor agreements, leases and some consulting and professional services agreements, among others. 

For something at least conceptually similar in Government prime contracts look for the standard (and mandatory) FAR 52.249-14 clause, also known as the Excusable Delays Clause or EDC. The EDC, which is used for cost reimbursement, time-and-materials and labor-hour type contracts, provides that contract performance delays may be excusable if they are “beyond the control and without the fault or negligence of the contractor.” The clause uses the following examples:  “(1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather.”

Is the COVID-19 pandemic an event that would trigger this clause?  I doubt this has been an issue fully tested in the courts but consider this: an epidemic (covered by the EDC) is defined as a “widespread occurrence of an infectious disease in a community at a particular time.” A pandemic is that same infectious disease “prevalent over a whole country or the world.” So, a pandemic is an epidemic on steroids. You bet it triggers the EDC, or at least it should.

But whether COVID-19 is a qualifying event under a commercial force majeure clause and if so how it affects future contract performance depends on the particular language of that clause, and how that clause squares with other clauses included in the subcontract or other agreement. The best tip here is to carefully review your subcontract agreements to assure that (as a prime) your subcontractor is not able to completely escape its performance obligations under a broad force majeure clause and that (as a sub) your rights are spelled out in the event that performance may be delayed or subject to outright termination under such a clause. The bottom line is that, especially with COVID, conflicting provisions in any agreement are a recipe for litigation.

A few other things to consider about the EDC and its comparison with the commercially drafted force majeure clause:

First, the EDC provides that the contractor (or subcontractor) will not be in default where a failure of timely performance is caused by any of the above-stated (or perhaps similar) events. Thus, it allows a delay in performance; it does not excuse performance itself. It can, however, be the basis of a later claim against the Government for delay-related costs incurred. Also, a prime contractor cannot invoke this clause if it or its subcontractor has defaulted for other reasons.

Second, considering the limited reach of the EDC, it may be ill-advised for a Government prime contractor to allow for a subcontract force majeure provision that may be interpreted to excuse performance or allow termination of the subcontract due to a force majeure event, like COVID-19, while the prime can only delay performance under the EDC. A subcontract may (and I’ve seen more than a few that do) contain a broad force majeure clause while at the same time incorporating the EDC, causing the subcontract to contain conflicting and potentially ambiguous language, especially if the subcontract contains no order of precedent provision that elevates incorporated FAR clauses over conflicting subcontract language. 

Third, in any proposed agreement containing a force majeure clause, it is prudent to review it carefully to determine whether it serves your particular business interests. There may (and I underscore may) be a situation where a subcontractor should seek a robust force majeure clause that provides more protection than the EDC, such as one that may provide for a contract revision or termination. This may be especially warranted where a particular extraordinary event like COVID or any similar event will completely prevent performance or delivery by the subcontractor, or where the non-occurrence of such an event is a basic assumption upon which the agreement was made. That will depend on the circumstances of the subcontract and its deliverables. But in the end consider the fairness of that when the prime is stuck with the more limited EDC and may be on the hook if the subcontractor fails completely to perform.

Finally, there are some common-law (i.e., the ones made by the courts) remedies that may be available even absent a force majeure clause, such as frustration, impracticality or impossibility of performance. These issues are way beyond the scope of this commentary but suffice it to say that they are not a simple as they sound and their application can be limited.

With COVID-19, force majeure clauses are now getting their just due.  Just as your business is nuanced, there are a number of different force majeure clause variations.  In fact, there are more variations of these clauses than opinions on wearing PPE to prevent COVID.

Stay safe.

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This article is for general information purposes only and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel.

May 8, 2020

Section 3610 Versus Paycheck Protection Program – Credit? What Credit?

By James C. Fontana 

The most recent COVID conundrum presented to me is the interplay between Section 3610 and the Paycheck Protection Program or PPP (Sections 1102 and 1106 of CARES). The former is a cost allowability concept designed for potential reimbursement to Government contractors to keep employees who are unable to work as a result of COVID-19 in a “ready state.” The latter is a type of disaster relief measure designed to provide potentially forgivable loans to small businesses in an effort to maintain employees on payroll and relieve financial stress caused by the pandemic. A challenge arises where a contractor receives payments from multiple sources.

Section 3610 contains the following proviso: “That the maximum reimbursement authorized by this section shall be reduced by the amount of credit a contractor is allowed pursuant to [the tax credit provisions of the previous law providing for paid leave] and any applicable credits a contractor is allowed under this Act.”  Putting aside the tax credit issue, that suggests that if you recover amounts for paid leave under Section 3610 you cannot also receive without a credit to the Government the same amounts provided under other parts of the CARES Act – for example PPP.

Agency guidance also suggests that receipt of funds from other Government responses to the COVID-19 pandemic should result in a similar credit if funds from Section 3610 were also used for the same purpose.  For example, in its April 8 Class Deviation, DoD stated that where a small business receives a loan under PPP, it “should not seek reimbursement for the payment from DoD using the provisions of Section 3610. The accompanying new DFARS 231.205-79(b)(6) states that “Costs made allowable by this section are reduced

by the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with” the COVID-19 pandemic.

In its April 17 guidance memo, OMB, also looking to avoid federal funds from “being used to make multiple payments for the same purposes,” cautioned agencies that, as part of maintaining adequate documentation for COVID-related expenses, “it is important to secure fully supported documentation from contractors regarding other relief claimed or received, including credits allowed, along with the financial and other documentation necessary to support their requests for reimbursement under section 3610.” OMB followed by stating: “Fully supported documentation, which may involve representations, will help to prevent incidence of double-dipping, as would be the case, for example, if a federal contractor that was sheltering-in-place and could not telework were to use the PPP to pay its employees, have the loan forgiven pursuant to the criteria established in the interim rule published by SBA and then seek reimbursement for such payment from a federal contracting agency under section 3610.”

All of this may appear redundant because, as noted in my April 28 commentary,  there are already many FAR provisions intended to prevent double dipping. For example, FAR 31.201-1 provides that the composition of total costs subject to allowability would be “less any allocable credits.”  FAR 31.201-5 (known as the Credits Clause) goes on to state that credits are to be counted as a “cost reduction” to the Government.  In short you cannot be reimbursed for a cost not incurred or a cost that is otherwise credited to you. That should include any forgiven PPP loan amounts under CARES or any other loan program.

But does that mean that all PPP amounts received by a contractor and ultimately forgiven are to be applied as credits against any amounts reimbursed under Section 3610? Or is there at least a partial apples-to-oranges argument to me made? Section 3610 provides for reimbursement only of paid leave while PPP is designed to provide relief for both payroll costs (with the requirement that the recipient allocate at least 75% to compensation costs for the loan to be forgivable) and other expenses (such as utilities, rent and mortgage interest where the required allocation is no more than 25%). To the extent there is a clear overlap of those costs, then double dipping should be avoided. But if 25% of the PPP amounts are spent on non-payroll items then arguably  there is no overlap for this portion and therefore no double dipping with Section 3610 payroll related amounts.  

Greg Bingham, a partner and GovCon forensic accountant with the Kenrich Group, agrees. “Where you have different cost categories, one being direct labor and the other indirect non-payroll expenses such as rent and utilities that are not covered by Section 3610 there may be a good argument that at least some portion of the PPP funds were used to cover different types of expenses than those covered under Section 3610 and so there should be no credit afforded to the Government for that portion of the PPP funds.” 

To even further cloud the waters, DoD seems to be taking the position that the PPP loan amounts are to be credited toward any Section 3610 reimbursement even if that loan is not forgiven. In its April 17 FAQ update (Question # 23), DoD stated that “to the extent that PPP credits are allocable to costs allowed under a contract, the Government should receive a credit or a reduction in billing for any PPP loans or loan payments, regardless of whether the PPP loan is forgiven.” 

So even if the PPP loan is paid back in full with interest, under the DoD guidance it still counts as a credit toward Section 3610 amounts. How is that fair? It isn’t and DoD is wrong both in applying basic cost principles including FAR 31.201 and in not applying common sense. Says Bingham, “This Q&A is just incorrect. Even the phrase ‘the Government should receive a credit or reduction’ would depend on the facts and circumstances such as contract type.”

This is an example where you have multiple agencies interpreting the same statutory provisions with different conclusions. And the credit issue is not the only difference in how agencies are reading Section 3610. That one I’ll examine in a later commentary.

Stay Safe.

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This article is for general information purposes only and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel.