"Ready State" Reimbursement Checklist for Government Contractors

HOST: ERIC POPPE: Hello, and welcome to Cherry Bekaert's GovCon podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward. I'm Eric Poppe. I'm a senior manager with Cherry Bekaert in our Government Contract Services Group.

HOST: ERIC POPPE: With me today is Ryan Bredell from Ward and Barry. Ryan is a partner at Ward and Barry leading their government contracting practice. Ryan, thanks for joining me today.

GUEST: RYAN BREDELL: Thanks, Eric. I'm happy to be here and looking forward to discussing some timely issues.

HOST: ERIC POPPE: I know in this current COVID stay-at-home state we are all trying to adjust. To start off quickly, do you want to say anything about Ward and Barry or your practice before we jump in?

GUEST: RYAN BREDELL: Of course. Ward and Barry is a boutique law firm that specializes in providing a full range of legal services primarily to government contractors. We can handle almost any type of legal work a government contractor might need. I'm particularly focused on traditional government contracts issues such as the FAR, FAR compliance, bid protests, and claims.

GUEST: RYAN BREDELL: In this COVID environment, I've been working to stay on top of the new rules and regulations that are coming out as part of the government's COVID relief package. That's what we're going to focus on today.

HOST: ERIC POPPE: Guidance has been trickling out. Back in mid-March when stay-at-home orders and base and facility closings were issued, everyone was wondering how this would impact billing and contracts with the government. Today I was hoping we could talk about the CARES Act, which was issued on March 27th, the DOD class deviation that followed, and recent checklists about what information contractors need to submit claims for reimbursement. Can you give us a quick overview of that class deviation and the checklists?

GUEST: RYAN BREDELL: Sure. This all started with the CARES Act, specifically Section 3610. That section allows contractors who have personnel who are mission critical and need to be kept in a ready state to obtain reimbursement for providing those personnel with paid leave.

GUEST: RYAN BREDELL: To set up the scenario: if a contractor is providing personnel to the government, security personnel for the intelligence community or IT programmers working on a sensitive government requirement, these personnel are often in high demand. If they get furloughed, they may go to other jobs or be unavailable to their employer or the government.

GUEST: RYAN BREDELL: Sometimes the work is mission critical but the government facility where they perform their work is closed because of the coronavirus crisis or they can't telework. Section 3610 allows contractors to pay these individuals paid leave and seek reimbursement from the government for that paid leave.

GUEST: RYAN BREDELL: Since the CARES Act, the DOD issued a class deviation to begin implementing the Act, and just recently the DOD released implementation guidance advising contractors and contracting officers on how to put Section 3610 into action.

HOST: ERIC POPPE: The class deviation gave a timeframe, correct? January 31st through September 30th, 2020?

GUEST: RYAN BREDELL: Yes. Leave eligible for reimbursement under Section 3610 must have been taken between January 31st and September 30th, 2020.

GUEST: RYAN BREDELL: A key point is that this is not a mandatory program. It's at the discretion of the contracting officer to determine whether the contractor's personnel and the work they perform are mission critical. That provides broad discretion to the contracting officer.

GUEST: RYAN BREDELL: It is notable that it took the DOD two months after the CARES Act passed to issue this guidance. In the grand scheme, that's relatively fast, but for an immediate crisis that delay means contractors may have already paid employees paid leave and now must seek reimbursement for the prior months.

GUEST: RYAN BREDELL: That retrospective window raises issues. Contractors may find it difficult to argue that employees were mission critical if they were furloughed for months with no adverse consequences. Contracting officers might be reluctant to find that the employees were mission critical in hindsight.

GUEST: RYAN BREDELL: That said, contractors should stay in dialogue with contracting officers and continue to emphasize the critical nature of affected employees. There are still four months remaining in the reimbursement window, so contractors that can demonstrate mission-critical services going forward should continue to press for reimbursement.

HOST: ERIC POPPE: Sometimes comment periods are three months or longer for proposed rules, with back and forth. It made me think of the Paycheck Protection Program. Early on many contractors applied for PPP expecting significant impact, then later found less impact and returned loans or sought forgiveness. It seems similar here: contractors must prove they were impacted and that their personnel were essential to remain in a ready state.

HOST: ERIC POPPE: You have to create a narrative and show how Section 3610 applies, what facilities were closed, which contracts were impacted, which people were affected. That affects charge codes, collecting and accumulating costs, and preparing a submission possibly down to a task order level.

GUEST: RYAN BREDELL: Correct. This will affect cost accounting, indirect rates, and estimating practices.

GUEST: RYAN BREDELL: Section 3610 guidance requires a fairly substantial submission package. The DOD provided a checklist for Section 3610 reimbursement requests that requests a hefty package. One of the key asks is a full narrative describing why the contractor believes it is entitled to reimbursement of paid leave under Section 3610.

GUEST: RYAN BREDELL: From a practical perspective, advising clients on this checklist involves several challenges. First, maintain constant communication with the contracting officer. There is concern about consistency of cost accounting practices, especially if you are CAS-covered under CAS 401 and 402.

GUEST: RYAN BREDELL: If you are CAS-covered, your disclosure statement describes how you treat leave, sick leave, and PTO, including whether these costs are direct or indirect. You must consider how Section 3610 fits into those practices and whether you remain compliant with disclosed practices. Have that conversation with the government.

GUEST: RYAN BREDELL: Second, create what we've been calling a cost narrative or the auditable support for the claim. This is similar to preparing costs for a claim or a request for equitable adjustment. Segregate those costs, create charge codes, identify and silo the impacted costs, and understand the impact to indirects and direct costs.

GUEST: RYAN BREDELL: You should be able to prepare a package similar to what you'd submit for a contract claim or request for equitable adjustment: identify impacted individuals, eligible hours, contract rates, and affected indirects. Fit those elements into the narrative describing which labor categories were affected, their skill levels, the amount sought, and the hours involved.

HOST: ERIC POPPE: The DOD guidance indicates that when the contractor submits the package, the paid leave reimbursement cost will be treated as a fixed-price separate line item under the contract. So contractors should silo these costs and create a new charge code so the paid leave is easily trackable and can be segregated into a single fixed-price line item.

HOST: ERIC POPPE: I also noted that the guidance explicitly states the Truthful Cost or Pricing Data Act (TINA) applies and there is a requirement for certified cost or pricing depending on contract type. The guidance also asks whether you applied for relief under the Paycheck Protection Program.

GUEST: RYAN BREDELL: Correct. A contractor cannot get reimbursement for paid leave if that paid leave was covered by the PPP or any other program that provided reimbursement for those employees. No double dipping. Section 3610 is effectively a last resort if the contractor wasn't eligible for a PPP loan or otherwise could not cover those employees under other programs.

HOST: ERIC POPPE: It's a juggling act. Communication with the contracting officer is critical. Having an open dialogue and ensuring you meet the checklist requirements is essential since the contracting officer makes the final decision.

GUEST: RYAN BREDELL: One thing to add: although we've been discussing the DOD checklist, Section 3610 is a government-wide provision. If you're doing work for any agency, you may be eligible for Section 3610. The DOD took the lead in drafting guidance due to its mission and the types of personnel likely to be mission critical, but other agencies, State Department, intelligence community agencies, Department of Energy, and others, could have covered work.

GUEST: RYAN BREDELL: Other agencies may follow the DOD's lead and use its guidance, but they are not required to. This remains a fast-moving, fluid area of law. The DOD guidance came out recently, and suggested changes and recommendations have already been submitted by practitioners, so expect changes in the near term. Stay up to date and obtain necessary advice to ensure compliance.

HOST: ERIC POPPE: Ward and Barry has been putting out information on proposed rules and additional guidance in response to COVID. Cherry Bekaert has been providing guidance from the accounting side as well. If you have questions, please reach out to Ryan at Ward and Barry or to me at Cherry Bekaert.

HOST: ERIC POPPE: Ryan, thank you very much for joining me today on Cherry Bekaert's GovCon podcast. I appreciate your time.

GUEST: RYAN BREDELL: Thanks for having me. I enjoyed it and look forward to doing it again soon.

HOST: ERIC POPPE: Take care.