The vast majority of industries have experienced the severe and often existential impacts of the COVID-19 crisis. Among the hardest hit are Government Contractors and the countless businesses directly impacted by public contracts. While there is no shortage of COVID-19 guidance for prime contractors—including a superb webinar by Edward DeLisle—Government subcontractors have largely been overlooked. We are here to fill that gap and provide these unsung heroes of federal contracting with guidance on the subcontract provisions to pay close attention to and the practical steps they can take to limit the impacts to their business.
Subcontract Provisions to Protect your Business
Before getting to the specific provisions of your subcontract, it is imperative to remember that Government subcontracts are commercial contracts between private entities. Beyond the “flow-down” provisions from the prime contract, subcontracts are not necessarily subject to the Federal Acquisition Regulations. Also, every agreement is unique so paying close attention to specific language in your subcontract is critical. With that out of the way, here are the key provisions to keep in mind:
- Changes – Many subcontracts provide a mechanism by which the prime can make changes to the scope of work, deliverables, and other aspects of performance. These provisions generally provide mandatory procedures to effectuate the changes and, depending on the clause, may be implemented without the subcontractor’s consent. However, these provisions may allow subcontractors to obtain additional time for performance and even compensation to cover any increases in costs.
- Delays & Extensions of Time – Subcontracts typically include a provision that contemplates what happens when the project is delayed without the fault of the subcontractor. While these clauses commonly preclude compensation of any additional costs arising out of the delay, they may allow the subcontractor to obtain additional time to complete performance.
- Force Majeure – These provisions allow subcontractors to be excused from performing without risk of default when an unforeseeable event (often referred to as an “act of God”) occurs, which prevents the subcontractor from being able to perform or frustrates the purpose of the agreement. What constitutes such an event is strictly defined by the subcontract terms, and while it would seem the current crisis should qualify, typical force majeure clauses don’t contemplate pandemics as part of their terms. However, if the current crisis does fall under your subcontract’s force majeure provision, it may provide for relief in the form of additional time and/or compensation for increased costs.
- Suspension & Stop Work – These provisions allow the prime, often at the direction of the Government, to temporarily suspend performance and may provide for remedies to address the costs to do so. Many subcontractors whose work is not telework appropriate have already received notices under these provisions directing them to cease performance until told otherwise. Even those who have not may be subject to a “constructive” stop-work order due to Government or prime directives which make performance impossible. This could allow for a subcontractor to assert that it has effectively received a stop-work order even if the prime insists they continue performance.
- Termination – Every subcontract will have provisions relating to how the agreement can be terminated prior to completion of the project. These are often reserved for “Terminations for Default” due to some failure of the subcontractor to perform or otherwise comply with the subcontract terms. However, many subcontracts also provide for “Termination for Convenience” where the prime can terminate the contract for any or no reason. Under both clauses, subcontractors can generally recover the value of the work completed through the date of the termination but if the contract is terminated for convenience, the subcontractor may be able to recover costs associated with early termination or even charge a termination fee.
Practical Steps Subcontractors Should Consider
Beyond reviewing the subcontract provisions discussed above, the most critical recommendation is that the subcontractor continue performance to the extent possible unless and until directed otherwise by the prime. Failure to perform could lead to a termination for default and potentially damages owed to the prime. For this reason, keeping open lines of communication with the prime (and if the subcontract allows, the government customer) is pivotal. Any subcontractor that anticipates an impact on performance as a result of the COVID-19 crisis should immediately contact their prime to discuss those impacts and the prime’s expectations. Any in person or phone conversations should also be confirmed in writing.
Relatedly, Subcontractors should be careful to document any changes and impacts to the subcontract. Any requests for increases in costs or time generally need to be paired with contemporaneous documentation to prove the subcontractor’s need for such relief. For this reason, subcontractors would be wise to create unique charge codes or other accounting methods to track any cost increases in a separate bucket from normal subcontract costs. Similarly, any delays or other impacts on the project schedule should be documented in reports, schedule updates, timesheets, and other documents indicating that such delays were related to the COVID-19 crisis.
Finally, to the extent that subcontractors rely on lower-tier subcontractors, suppliers, manufacturers, or others for their performance, they should remain in similar constant contact with these downstream entities. This is critical to ensure any potential delays or other performance issues can be recognized and addressed as quickly as possible.
Remember, every subcontract is unique and will determine the subcontractor’s legal rights and obligations. If you are unsure of how to handle a directive from your prime or the Government, you should contact an experienced government contracts attorney before acting. Stay safe, everyone!
ABOUT ANDRÉS VERA
Andrés Vera’s practice is concentrated on federal contracting and general corporate law. With a focus on small business government contracting, he is well-positioned to advise start-ups and small businesses seeking to enter the complex federal procurement landscape. His experience as a former clerk in the U.S. Small Business Administration’s (SBA) Office of Procurement Law allows him to counsel clients on compliance with the agency’s 8(a), HUBZone, Woman-Owned, and Service Disabled Veteran-Owned (SDVO) programs. He also advises federal contractors and subcontractors in bid protests, contract disputes with federal agencies, and general corporate administration. Prior to law school, Andrés was himself a government contractor for the U.S. Agency for International Development.
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