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On August 18, 2020, the Acting Principal Director for Defense Pricing and Contracting (DPC) issued updated guidance regarding contractor and subcontractor reimbursement of paid leave costs under the CARES Act § 3610, including two key Class Deviations, both effective immediately. First, it issued Revision 1 to Class Deviation 2020-O0013, which revises and supersedes the original class deviation (issued April 8, 2020) to FAR 31 and DFARS 231, which added a new cost principle, DFARS 231.205-79, “CARES Act Section 3610 – Implementation,” governing the allowability of paid leave costs under § 3610. Second, it issued Class Deviation 2020-O0021, which establishes guidance for contracting officers to follow when reviewing and processing § 3610 requests for reimbursement, including detailed checklists that describe the cost and other information contractors should provide with their requests. It also establishes a new contract clause, DFARS 252.243-7999, “Section 3610 Reimbursement Requests,” to be used to reimburse approved costs. Together, these class deviations revise, clarify, and amplify the earlier version of Class Deviation 2020-O0013, which we discussed here.

Notably, the revision of Class Deviation 2020-O0013 shortens the period for which the cost of paid leave related to COVID-19 is allowable under DFARS 231.205-79 from January 31, 2020 through September 30, 2020, to March 27, 2020 through September 30, 2020. The revision explains that March 27, 2020 was the date the CARES Act was enacted into law and it did not provide for retroactive coverage. The guidance and the DPC’s updated Frequently Asked Questions make clear, however, that contracting officers may still reimburse the cost of paid leave provided between January 31, 2020 and March 27, 2020, if allowable under other contracting authorities (i.e., other than § 3610).

Class Deviation 2020-O0021 establishes structured processes for contractors and contracting officers to follow when making and reviewing such requests, including an “abbreviated” process for reimbursement requests under a single contract below $2 million; a “multipurpose reimbursement” process for requests related to a single contract or multiple “homogeneous groups of contracts,” such as contracts for a single program or with a single contracting activity or DoD Component; and a “global reimbursement” process for requests that seek reimbursement at a business unit or segment level, which should be submitted to the contractor’s assigned Cognizant Federal Agency Official.

The new guidance also addresses procedures for subcontractor requests, whether as part of a prime contractor’s own request or as a pass-through. All subcontractor requests are to be submitted to the prime and should include the same supporting information and documentation that is required from the prime contractor. Although the subcontractor must provide at least the amount of its request to the prime (for submission to the contracting officer), the subcontractor may submit all other supporting information directly to the contracting officer under separate cover. The guidance states that the prime contractor should evaluate its subcontractor’s submission and provide, with its own request, an opinion regarding the subcontractor’s eligibility as an “affected contractor.”

Following submission of a request, the contracting officer will determine, in writing, if the contractor is an “affected contractor,” the reimbursement amount, and the amount of funds available using the provided template Memorandum for Record. The contracting officer shall modify the affected contract(s) to provide for reimbursement through a bilateral modification that includes the new clause DFARS 252.243-7999 Section 3610 Reimbursement. (DEVIATION 2020-O0021). The clause requires contractors who receive any other relief specifically identified with the COVID-19 pandemic, such as credits or PPP loan forgiveness, to notify their contracting officer within 30 days, and to agree to a reduction in the reimbursement by the same amount received by other means up to the entire amount reimbursed under § 3610.

Although these processes are only guidance and contracting officers have discretion to tailor these processes to fit specific circumstances, contractors should expect contracting officers to hew closely to these processes and be prepared to provide the types of detailed cost and other information identified in the “checklists,” which apply to all contract types, including for commercial items.

The DPC also issued guidance regarding implementation of these deviations in connection with Other Transaction Authority Agreements. Crowell & Moring is continuing to monitor these developments.

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Rebuilding America’s aging and technologically challenged infrastructure is increasingly seen as an imperative. The need to invest in and mobilize resources for critical infrastructure projects has become an ever greater priority given the role project development can play in lifting the U.S. economy in dire times.

Congress and the Administration are actively exploring various forms of infrastructure-related stimulus and associated legislation. We are closely monitoring, and are in regular contact with key officials who are driving the efforts. We are also working with companies focused on impacting the contours of such funding avenues and enabling legislation. Drawing upon our market-leading status in government contracting, we are also assisting clients to position themselves to be on the front end of the coming wave of infrastructure projects.

There are many moving pieces looming in the infrastructure space, with crucial questions to be answered. Among them:

  • What infrastructure line items are likely to appear in forthcoming legislation?
  • Who will be the major players in driving legislation development, negotiations, and enactment?
  • Which industry sectors stand most to gain, or lose, depending on the outcomes?
  • How will the specifics of COVID-19 experience drive project development and the formulation of new law?
  • What does infrastructure even mean in our digital age?
  • How can and will defense sectors, and government contracting agencies, participate?
  • What regulatory, court, and arbitral litigation will fall out of these legislative and development efforts, and how will savvy businesses prepare?

With all this swirling, we are pleased to offer a webinar series focused on both the immediate opportunities associated with government stimulus and the broader set of strategic issues for companies focused on not being left behind in the coming wave of infrastructure projects in this rapidly evolving landscape.

The first program in the series will be a workshop-style brainstorming session, to make sure a broad set of perspectives is explored.

Click here to register for the first webinar in the series, “Infrastructure Stimulus Panel: How to prepare for, and influence, the extent, scope and funding of US infrastructure projects,” on September 10, 2020.

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In this episode, hosts Jacinta Alves and Mana Lombardo discuss the Paycheck Protection Program, which was established by the CARES Act, and FCA risks associated with receipt of those funds. “Let’s Talk FCA” is Crowell & Moring’s podcast covering the latest developments with the False Claims Act.

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In Peraton Inc., GAO sustained a challenge to the scope of an agency’s corrective action. The State Department awarded a task order to ManTech. Peraton challenged that award on numerous grounds, including on the basis that the awardee’s letters of commitment for key personnel did not satisfy solicitation requirements. After an outcome prediction alternative dispute resolution teleconference in which GAO informed the parties that it believed this challenge to be meritorious, the agency undertook corrective action by reopening discussions to confirm the availability of proposed key personnel, update letters of commitment, and validate proposals.

During the corrective action, Peraton requested the agency expand the scope of corrective action to allow it to replace several of its key personnel that were no longer available. The agency did so, but refused a subsequent request from Peraton to also permit further revisions to offerors’ technical and price proposals to account for the changes in the proposed key personnel.

Peraton protested that the agency’s proposed scope of corrective action was unreasonably narrow, arguing that it forced offerors to submit a proposal that is facially inconsistent and would not comply with the solicitation’s requirement that key personnel and staffing be aligned with an offeror’s technical approach. The agency complained that “no good deed goes unpunished” as it allowed for key personnel substitution to accommodate the protester, but GAO agreed with the protester that the corrective action was unduly restrictive because it should have permitted changes to other sections of the technical proposal affected by the key personnel changes, which were discussed at length in Peraton’s technical proposal. However, GAO agreed with the agency in finding that the restriction on changes to price proposals was reasonable, as there was no clear reason to believe pricing would be affected by substitution of key personnel and the awardee’s price had already been disclosed.

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This week’s episode covers Section 889, federal network security, and COVID fraud news and is hosted by partner Peter Eyre and counsel Nkechi Kanu. Crowell & Moring’s “Fastest 5 Minutes” is a biweekly podcast that provides a brief summary of significant government contracts legal and regulatory developments that no government contracts lawyer or executive should be without.

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On August 4, 2020, the Small Business Administration (SBA) released a Frequently Asked Questions (FAQs) addressing numerous technical issues on PPP Loan Forgiveness. On August 11, 2020, the FAQs were updated to include additional guidance for recipients of both PPP Loans and Economic Injury Disaster Loans.

The following are the major takeaways from the FAQs:

Loan Forgiveness Application. The FAQs clarify that sole proprietors, independent contractors and self-employed individuals who had no employees at the time of the loan application and who did not include any employee salaries in the computation of average monthly payroll in their loan application form, qualify to use the Loan Forgiveness Application Form 3508EZ or lender equivalent.  The FAQs also clarify that copies of signed loan forgiveness documents, as well as E-signatures or E-consents are acceptable if otherwise consistent with applicable law.

Deferred Payment of Loan. Borrowers submitting a loan forgiveness application within ten months of the completion of their Covered Periods are not required to make any payments until the forgiveness amount is remitted to the lender by SBA. To the extent only a portion of the loan is forgiven, or the loan forgiveness application is denied, borrowers must repay the remaining balance of the loan on or before the maturity date (reflecting either a two or five year term). Interest accrues during the time between the disbursement of the loan and the SBA remittance of the forgiveness amount. Borrowers are responsible for paying the accrued interest only on the amount of the loan that is not forgiven. The lender is responsible for notifying the borrower of remittance of the forgiveness amount by the SBA and, if applicable, the date on which borrower’s first payment of the remaining balance is due.

Economic Injury Disaster Loan (EIDL) Deduction: The SBA will deduct the amount of any Economic Injury Disaster Loan (EIDL) advance received by a PPP borrower from the forgiveness amount remitted to the lender. The lender will be able to confirm the amount of the EIDL advance that will be automatically deducted by SBA from the forgiveness payment by reviewing the borrower’s EIDL advance information in the PPP Forgiveness Platform. In the event the amount of the EIDL exceeded the amount of the PPP loan, the borrower will be responsible for repaying the entire amount of the PPP loan.

Eligible Payroll Costs. Prior SBA guidance provided that payroll costs are considered paid on the date that paychecks are distributed or paid via electronic deposit and payroll costs are considered incurred on the day that the pay is earned. The FAQs reiterate the prior guidance that (i) payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period are eligible for forgiveness if paid on or before the next payroll date and (ii) payroll costs incurred before the Covered Period are eligible for forgiveness if paid during the Covered Period. The FAQs also clarify that those borrowers who use a twice a month or less frequent payroll cycle would need to calculate payroll costs for partial pay periods. Borrowers who use a biweekly or more frequent payroll cycle may avoid calculating payroll costs for partial pay periods by electing to use an “Alternative Covered Period” which begins on the first day of the first pay period following the PPP disbursement.

The FAQs clarify that for purposes of calculating cash compensation, borrowers should use the gross amount of such compensation before deductions for taxes, employee benefits payments and similar payments and should include all forms of cash compensation paid to employees, including tips, commissions, bonuses and hazard pay, subject to the per employee limitation of $100,000, on an annualized basis. Employer expenses for employee group health care benefits that are paid or incurred during the Covered Period or Alternative Covered Period are eligible for loan forgiveness. However, neither the employee share of any group health care benefit nor expenses for group health care benefits accelerated from periods outside of the Cover Period or Alternative Covered Period are eligible for loan forgiveness. Employer contributions for employee retirement benefits that are paid or incurred during the Covered Period or Alternative Covered Period are eligible for loan forgiveness. However, such amounts should not include any retirement contributions deducted from employees pay or otherwise paid by employees. In addition, employer contributions for retirement benefits accelerated from periods outside of the Covered Period or Alternative Covered Period are not eligible for loan forgiveness.

Owner Compensation. With respect to determining the amount of owner compensation eligible for loan forgiveness, the FAQs clarified that such determination is dependent on the business type and whether the borrower is using an eight-week or 24-week Covered Period.  The FAQs provided specific guidance with respect to C Corporations, S Corporations, Self-employed Schedule C (or Schedule F) filers, General Partners, and LLC owners, set forth below. In addition to caps specific to the business type, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake. For borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week Covered Period, this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses. The examples below are for a borrower using a 24-week Covered Period.

  • C Corporations: The employee cash compensation of a C-corporation owner-employee, defined as an owner who is also an employee (including where the owner is the only employee), is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, for the amount paid by the borrower for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of the 2019 employer retirement contribution. Payments other than for cash compensation should be included on lines 6-8 of PPP Schedule A of the loan forgiveness application (SBA Form 3508 or lender equivalent), for borrowers using that form, and do not count toward the $20,833 cap per individual.
  • S Corporations: The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at least 2% owner under the family attribution rules of 26 U.S.C. 318, because those contributions are included in cash compensation. The eligible non-cash compensation payments should be included on lines 7 and 8 of PPP Schedule A of the Loan Forgiveness Application (SBA Form 3508), for borrowers using that form, and do not count toward the $20,833 cap per individual.
  • Self-employed Schedule C (or Schedule F) filers: The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34) (or for new businesses, the estimated 2020 Schedule C (or Schedule F) referenced in question 10 of “Paycheck Protection Program: How to Calculate Maximum Loan Amounts – By Business Type”). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income.
  • General Partners: The compensation of general partners that is eligible for loan forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by box 12 section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion claimed on oil and gas properties) multiplied by 0.9235. Compensation is only eligible for loan forgiveness if the payments to partners are made during the Covered Period or Alternative Payroll Covered Period. Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness.
  • LLC owners: LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.

Eligible Non-Payroll Costs. The FAQs clarified that (i) eligible business mortgage costs, eligible business rent or lease costs and eligible business utility costs incurred prior to the Covered Period are eligible for forgiveness if paid during the Covered Period and (ii) nonpayroll costs incurred during the Covered Period and paid after the Covered prior are eligible for forgiveness if paid on or before the next regular billing date. The FAQs also clarified that Borrowers electing to use the Alternative Covered Period for purposes of payroll costs, should use the Covered Period, beginning on the date the loan was disbursed, for non-payroll costs.

Non-payroll costs eligible for forgiveness include interest on business mortgages on real or personal property (such as an auto loan) but do not include interest on unsecured credit. Payments made on renewed leases or interest payments on refinanced mortgage loans are eligible for forgiveness if the original lease or mortgage existed prior to February 15, 2020.

With respect to eligible utility costs, the FAQs clarified (i) that the reference in the CARES Act to “utility payment for a service for the distribution of … transportation… for which service began before February 15, 2020” was intended to refer to transportation utility fees assessed by state and local governments, and (ii) the entire electricity bill payment is eligible for loan forgiveness, including supply charges, distribution charges and other charges such as gross receipts taxes, even if such charges are invoiced separately.

FTE Reduction Exceptions. The FAQs clarified that, in calculating its loan forgiveness amount, a borrower may exclude any reduction in FTE employees if the borrower is able to document in good faith (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and (ii) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual. The FAQs also clarified that a seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness.

The FAQs clarified that when a borrower is calculating the FTE Reduction Exceptions in Table 1 of the PPP Schedule A Worksheet on the Loan Forgiveness Application (SBA Form 3508 or lender equivalent), borrowers should include employees who made more than $100,000 in 2019 (those listed in Table 2 of the PPP Schedule A Worksheet). The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application (SBA Form 3508 or lender equivalent).

Salary/Hourly Wage Reduction Safe Harbor. In the event the salary or hourly wage of a covered employee (defined as an individual who (i) was employed by the borrower at any point during the Covered Period or Alternative Payroll Covered Period and whose principal place of residence is in the United States; and (ii) received compensation from the borrower at an annualized rate less than or equal to $100,000 for all pay periods in 2019 or was not employed by the borrower at any point in 2019) is reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period, the portion of such reduction in excess of 25% reduces the eligible forgiveness amount unless the borrower satisfies the Salary/Hourly Wage Reduction Safe Harbor (as described in the Loan Forgiveness Application (SBA Form 3508 or lender equivalent)). For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages.

Crowell & Moring will continue to monitor and provide updates regarding developments in the PPP.

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Today, August 13, the Office of Management and Budget (OMB) published a series of changes to the OMB Guidance for Grants and Agreements, including the addition of 2 CFR 200.216, Prohibition on certain telecommunication and video surveillance services or equipment, which prohibits grant and loan recipients and subrecipients from using federal funds to enter into, or renew, contracts for equipment, services, or systems that use covered telecommunications equipment or services as a substantial or essential component of any system or critical technology as part of any system. This change is intended to implement the prohibition on Huawei, ZTE, and other covered telecommunications equipment and services issued in the 2019 National Defense Authorization Act Section 889. OMB has added a new definition for telecommunications and video surveillance costs and has clarified that costs for telecommunications and video surveillance services or equipment are allowable except for covered telecommunications equipment and services which are unallowable. Federal awarding agencies are required to prioritize funding for entities to transition from covered communications equipment and services, to procure replacement equipment and services, and to ensure the communication service to users and customers is sustained.

For additional information about recent Section 889 updates, see Crowell’s previous alerts:

FAR Council Published 2019 NDAA Section 889(a)(1)(B) Interim Rule Further Prohibiting Use of Huawei, ZTE, and Others’ Telecommunications Technology by Contractors

GSA Requiring Mass Modification to MAS Solicitation and Will Issue Mass Bilateral Modifications to All Multiple Schedule Contracts to Prohibit Use of Huawei/ZTE Equipment

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On August 10, 2020, the U.S. Court of Appeals for the Federal Circuit rejected the government’s jurisdictional and waiver defenses in The Boeing Co. v. United States, and remanded the case to the U.S. Court of Federal Claims (COFC) for examination of Boeing’s substantive claim that FAR 30.606 illegally barred the Contracting Officer from evaluating simultaneous unilateral accounting changes under the Cost Accounting Standards based upon the aggregate net impact and not just those changes increasing costs allocable to government contracts.

Specifically, Boeing argues that eight multiple simultaneous changes to its cost accounting practices did not require payment to the government because there was no “aggregate increased cost” under FAR 52.230-6(k)(2). The government disagreed because another regulation, FAR 30.606(a)(3)(ii)(A), provides that the contracting officer shall not “combine the cost impacts of . . . . [o]ne or more unilateral changes” “unless all of the cost impacts are increased costs to the government.” Consequently, the government asserted a claim against Boeing to recover increased costs (plus interest) stemming from two of Boeing’s eight cost accounting practice changes, disregarding the changes that lowered costs to the government “in the aggregate.” Boeing appealed the decision to the COFC, raising breach of contract and due process claims. The trial court held that Boeing waived its breach of contract claim by failing to object to FAR 30.606 before entering into the relevant contracts and that it lacked jurisdiction to consider Boeing’s illegal exaction claim.

The Federal Circuit reversed and remanded, concluding that the trial court misapplied the doctrine of waiver and misinterpreted the jurisdictional standard. With respect to Boeing’s alleged waiver to challenge FAR 30.606, the Federal Circuit held that Boeing did not waive its challenge because no effective remedy was available pre-contract, and therefore, any pre-award challenge would have been futile. To the extent the government urged such an approach to avoid waiver, the Federal Circuit held that the government failed to identify a judicial forum, pre-contract formation, in which Boeing would clearly have been entitled to obtain a ruling on the merits of its subsequently asserted objection. With respect to the jurisdictional question, the Federal Circuit held that Boeing’s illegal exaction claim asserted one of the three acknowledged bases for Tucker Act jurisdiction, specifically where “a party that has paid money over to the government and seeks its return must make a non-frivolous allegation that the government, in obtaining the money, has violated the Constitution, a statute, or a regulation.”

The Government Contracts Group is pleased to announce that our GC 101 and OOPS conferences have been scheduled for 2020. GC 101 will be held September 21-25, 2020 and OOPS will be held October 19-22, 2020. Both will take place virtually over the course of several days. The format will be different, but our practitioners will still provide the same high quality information. Registration information, including agendas, can be found here for GC 101 and here for OOPS. We hope you will join the Crowell team for these special events!

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On August 10, the Federal Emergency Management Agency (FEMA), under the Department of Homeland Security, will be extending and revising a Temporary Final Rule (first issued in April this year) that invokes the Defense Production Act (DPA) to allocate certain Personal Protective Equipment (PPE) for domestic use and prohibit exportation of that PPE from the U.S. without express FEMA approval. The revised and extended rule will be effective from August 10 through December 31, 2020 and authorizes Customs and Border Protection to detain outbound shipments of PPE until FEMA determines whether to return the shipment for domestic use, issue a DPA-covered order against the PPE, or allow the export of all or part of the order in the interest of national defense. Importantly, the revised rule amends the definition of covered PPE (“covered material”) to account for domestic supply and demand changes since April and now includes only:

  • Surgical (not industrial) N95 Filtering Facepiece Respirators (FFRs) (narrowed in scope compared to the original rule that included all N95 FFRs)
  • PPE Surgical Masks (same as the original rule)
  • Level 3 and 4 Surgical Gowns and Surgical Isolation Gowns (new addition)
  • PPE Gloves or Surgical Gloves (same as original rule)

The rule removes other FFRs; elastomeric, air-purifying respirators; and related FFR filters/cartridges from the covered material list. It continues the exemptions in the original rule and those supplemental exemptions published after the initial rule which permit the export of covered material under limited circumstances. FEMA published a fact sheet in April describing the exemptions and providing additional information with respect to submission of the letter of attestation required to claim certain exemptions.

For additional information on the allocation rule, see our April 8 publication, “FEMA Allocates Certain Scarce PPE for Domestic Use and Restricts Exports.