COVID-era contracting question continues to bedevil the government

A recent argument a contractor made to the Contract Board of Appeals might lead companies to the wrong conclusion. It is another case of a company trying to recover unanticipated costs under a fixed price contract, costs incurred because of the COVID pandemic. The case is about jurisdiction, though, and not cost recovery. For details, the Federal Drive with Tom Temin spoke with Haynes Boone procurement attorney Zach Prince.

Interview Transcript:  

Tom Temin  And Zach, you’re saying this particular case is causing people to think, oh, goody, we can get recovery for costs that we didn’t know we were going to incur. But you’re saying not so fast.

Zach Prince Yeah. That’s right. It’s getting a lot of press. And I think there’s a good reason for it. People incurred a lot of costs over the years when COVID was really a hot issue, and folks were stuck at home and people couldn’t work, and they’ve wanted to recover it for years. And there have been mechanisms. And Congress passed the CARES act and section 36.10, which I talk about a little bit more, but not that many companies really got relief there. This case could involve that ultimately, where a company does get relief under section 3610, but it might not. We don’t know yet.

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Tom Temin Well, tell us about the particular case.

Zach Prince So this case was brought by a company called Aviation Training Consulting. They operate, maintain support and upgrade the trainers for the B-52 bombers for the Air Force. So, in 2010, they had people who are home because of COVID, and they thought they ought to get relief under section 36.10. 36.10 was a congressional grant for agencies to have authority to modify terms of conditions of contracts without consideration, to reimburse at contract billing rates for any paid leave that a contractor provided to keep its employees in a ready state. So, the authority was limited. It only applied to a contractor whose employees or subcontractors who couldn’t work on site because of facility closures or other restrictions, and in this case, aviation training was seeking $512,000 or so from the government under 36.10. But 36.10 ultimately was a grant of authority. It wasn’t a mandate that the government had to give that money, which I think is the basis for this case. The contracting officer denied the claim. Aviation training appealed, but then the government moved to dismiss for lack of jurisdiction.

Tom Temin And whose jurisdiction did not have the authority.

Zach Prince This was at the Armed Services Board of Contract Appeals, and the government said, hey, this was never a basis for a valid claim and is not the basis for a contract Appeals Act, appeal at the board. And so, board, you’ve got to kick this right.

Tom Temin But the board disagreed with the government.

Zach Prince They did. And I think it was a pretty straightforward application of the law. Again, I don’t know where the government’s really coming from. I think this is the second time in a month that we’ve talked about a case where I just have no idea where the government’s coming from. Here they said, well, it’s really not a claim because there’s this sort of unfettered grant of authority to the government to consider or not to consider these requests. Well, that’s not what a claim is, right? A claim is defined really broadly under the Contract Disputes Act as something relating to a contract with the government. Leading to a contract is broad. This clearly relates to a contract. So, on that basis it is a claim. And the board does have jurisdiction.

Tom Temin So the board disagreed with the government and said we will take this case in fact.

Zach Prince Yeah. That’s right. The government tried to analogize this to Public Law 85-804, which has also gotten a lot of focus in the past couple of years, because it’s a basis for the government to grant extraordinary contractual relief to contractors. So, if you’ve got crazy costs that you didn’t anticipate and it’s going to knock you out of business and it your business, the government has to continue, they might consider granting you relief under that statute. That statute is clear that there is no appeal authority under the CDA. So, the government said, hey, this is the same thing. 85-804 CARES act. But here’s a problem. 85-804 clearly doesn’t permit jurisdiction, right? No such thing exists in the CARES act, legislative history or language of the statute.

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Tom Temin We’re speaking with procurement attorney Zach Prince. He’s a partner at Haynes Boone. So therefore, from the face of it, it looks like then aviation training consultants do have a claim that can validly be brought to the contract Board of Appeals, which will then have to decide on its merits.

Zach Prince Yeah. That’s right. I mean, I suspect what they’re going to do is try to argue that the government abused its discretion by not granting relief under 36.10, which is a pretty high bar. But, you know, they’ll get their chance to explore that theory. And the government can’t kick it prematurely like they were trying to.

Tom Temin I think, you know, I have some suspicion the government probably in its mind, in the minds of the contracting officers, probably don’t disagree that the contractor might be entitled to this compensation. This case, it’s only a half $1 million. Only big deal to the contractor. Not that big a deal to the government. But, you know, with the threat of a continuing resolution for the rest of the year, for the lack of new budget authority, you know, new appropriations for the current fiscal year. I just wonder, as a practical matter, they wonder if they’ll actually have that money at the end of the year.

Zach Prince I have to guess that this is money that would have been from prior year appropriations. But you’re right. I’m seeing a lot of that where the agencies are being penny pinching might be the nice way to say it with the ways that they’re granting, you know, relief or issuing new contracts for things that they know they need or they’re doing it. And, you know, half batches basically for what they really will need for the whole year because they just don’t know how much money they’re going to continue having.

Tom Temin Right. And the CARES act did not necessarily appropriate money to give to agencies to cover contractor costs incurred because of COVID.

Zach Prince No it didn’t. And that’s been the problem with some of the other reliefs that Congress have granted and the National Defense Authorization Act in the past two years. They both of those 2024 and 23 had provisions authorizing the government to grant relief were cost increases due to inflation. But both of them were contingent on appropriations. 23 it never happened. I sort of think 24 is not going to happen either.

Tom Temin Yeah, right. And so, the government has fixed costs and there’s an automatic reduction of 1%, should the CR go for the entire year. That’s a, you know, an old budgetary rule. So, there’s really no money in the accounts to pay for ongoing costs of a contract. And I guess maybe the government looks at it. I’m just trying to guess what the Air Force might have been thinking is, well, they’re still in business. They’re still providing us B-52 training systems. I’m just going to look the other way and let them eat it.

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Zach Prince That might be the case. I mean, we’re starting to see programs getting cut. I don’t know that it getting cut had to do with budgets, but maybe. And I think we’re going to start seeing other big programs that are being squeezed in ways that nobody’s happy with because of this budget issues.

Tom Temin Yes, because contracting costs are really the only, in some sense, variable costs the government has. You can cut training and travel for people, but that’s trivial compared to contracting spending. And if you need to squeeze, that’s your accordion bellows.

Zach Prince That’s right. But it doesn’t. It doesn’t really support a robust defense industrial base. Right. And we keep hearing time and time again that, the industrial base is shrinking. And there too few companies willing to do business with DoD and the government at large. Well, this is not how you help.

Tom Temin Procurement attorney Zach Prince is a partner at Haines. Boone, thanks so much.

Zach Prince Thanks for having me, Dan.

Tom Temin And by the way, the CDA will decide this case. So, you’ll be watching to see what they actually say on the merits.

Zach Prince We’ll all be watching. I mean, with the low dollar value at issue, I suspect there’s going to be a settlement if there’s any merit. But you never know. Maybe there’ll be a decision on the merits, ultimately.

Tom Temin And the merits of the case may not necessarily be the claim that the company has, but simply whether the government was correct in exercising its discretion. That’s a big distinction.

Zach Prince Yeah. It is. And the government has quite a lot of, leeway in exercising that discretion. Right. It has to be rational. And rational is a pretty low bar. So, if the contractor is going to prevail here, they’re going to have to demonstrate that it was totally beyond the pale for what the government did. They had money. They could have given it out. They should have given it out. Any reasonable person would have. That’s a really high standard to me.

Tom Temin Yeah. So, the contractor still has the high bar here and the government the low bar, to put it simply.

Zach Prince Yeah. That’s right. Yeah. I don’t see the contract there likely to prevail, but I don’t know any of the facts really. So, we’ll see what happens.

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