On December 9, 2020, the Department of Defense Office of Inspector General (DoD OIG) released its Audit of Department of Defense Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act.  The audit assesses the DoD’s issuance of relief under Section 3610, which authorizes certain agencies to reimburse contractors for any paid leave, including sick leave, they provide to keep their employees or subcontractor employees in a ready state when doing so is in the best interest of the Government.  In order to qualify, contractors must not have been able to work due to closures or other restrictions, and must have job duties that cannot be performed remotely.

The audit identified 135 contracts for which a total of $68.3 million in leave costs had already been reimbursed, as of September 30, 2020, as well as an additional 157 contracts for which the contracting officers were planning to use Section 3610.  The majority of contracts under which Section 3610 reimbursements were issued were for contractor employees working at Government-owned facilities.  Where relief was denied, the DOD OIG determined that this was because (1) the contractor did not need to be in a ready state; (2) the subject employee for whom reimbursement was sought had violated DoD travel restrictions; (3) the contractor provided insufficient documentation; or (4) the contracting officer determined that there was insufficient funding available.

Generally, DoD’s use of Section 3610 authority has been limited, with DoD assisting only 96 contractors and subcontractors out of at least 781 that met the standards for relief.  The audit attributed this to (1) flexible and creative solutions on the part of contracting officers; (2) the defense industrial base being declared critical infrastructure; and (3) the lack of Congressional appropriations for Section 3610.  For example, one contracting officer administering a contract with more than 1,000 full-time equivalent employees authorized all the contractor employees to telework or gave them alternate work assignments rather than causing them to be laid off.  With respect to the defense industrial base being deemed critical infrastructure, certain companies were able to re-open and adapted to the pandemic conditions by rearranging their assembly lines and instituting social-distancing practices.  Finally, many contractors have not yet sought relief because they are waiting to see whether Congress will appropriate money for Section 3610—despite the fact that contracting officers are issuing reimbursements, nonetheless.  In fact, the audit noted that a number of contracting officers had resolved funding issues by transferring funds from other contract line items or by using funds that had already been earmarked for labor costs.

The audit sampled 37 contracts to review in greater detail, seeking to determine whether the respective contracting officers had complied with Office of Management and Budget and DoD guidance when approving Section 3610 relief—finding only one instance for which reimbursement should not have been granted.  Other irregularities included the reimbursement of more than 40 hours per week for an employee or allowing profit, but all such issues were in the process of being corrected.

One significant issue that the audit identified was the contracting officers’ reliance on contractors to self-certify that they were not using the same costs claimed under Section 3610 to seek relief under another source of funding, such as the Paycheck Protection Program (PPP), tax credits, or unemployment compensation programs.  Although contractors may seek relief under the PPP and Section 3610, contractors are prohibited from seeking relief for the same costs under both programs.  DoD contracting personnel stated that they were unsure of how to verify whether such double-dipping was occurring.  Nonetheless, the DoD OIG coordinated with the U.S. Small Business Administration to identify any instances in which a contractor who received Section 3610 relief had also received a PPP loan.  The report did not state that any violations had been identified, but it did note that several contractors had failed to disclose their receipt of PPP loans and that the DoD OIG had notified the respective contracting officers, DCMA, and DCAA.

The audit highlights the fact that many of the DoD’s affected contractors and subcontractors have not sought reimbursement under Section 3610.  Moreover, those who have applied, or intend to apply, should be mindful of providing adequate disclosures of any other sources of relief, such as the Paycheck Protection Program, tax credits, or unemployment programs, particularly because federal agencies may continue to coordinate their efforts in order to combat fraud and waste.