COVID-19 FAQ: Government Contracting

May 2020

The COVID-19 pandemic has caused widespread disruption to business operations across all industries. In the face of prolonged uncertainty, government contractors can play a pivotal role in the urgent response to the crisis. There are also specific measures to take that can mitigate the financial impact on businesses.
 
Here are answers to some of the most frequently asked questions for government contractors, along with relevant resources to help organizations in their response to the pandemic and in planning for the future.
 
To learn more and access numerous insights, resources and webinars, visit our COVID-19 crisis response resource center here.

A. In responding to the global public health crisis, the private sector has shown its resilience and innovative spirit by working in tandem with the public sector to help address local and national challenges. For example, manufacturers have repurposed supply chains to make sorely needed products like hand sanitizer and personal protective equipment. Also, President Trump signed an executive order in mid-March to invoke the Defense Production Act of 1950 (DPA), which enables the government to require private companies to prioritize government orders of essential supplies.
 
As a government contractor (GC), you have an inherent advantage in working with the public sector. You are already familiar with how the procurement process works and have a network of government contacts to help evaluate relevant opportunities under the DPA. This is also a good time to reach out to your Contracting Officer, because many GCs are struggling to connect with federal buyers who are currently being pulled in many directions at once.
 
Just as your firm knows the ins and outs of working with government entities, community-based organizations have the best vantage point for evaluating community-based needs. Both public and private sector entities can work together to empower local leadership by offering to collaborate inside—and beyond—their own organizational silos for the greater public good. By doing so, organizations can reinforce the concept of power to the edge, which involves the empowerment of individuals at the edge of an organization to positively impact the larger community. Power to the edge reinforces agility, better situational awareness, collaboration and other principles key to persevering through and surviving beyond the pandemic, which could ultimately help your organization come out on the other side of this stronger than before.
 
In a time of revenue uncertainty, GCs should also think about other government agencies or levels (i.e., federal, state or local governments) that may benefit from their expertise, and then map out how their organization can help address public sector needs during the pandemic. For those GCs experiencing cash flow issues, it’s worthwhile to know that financial incentives are also permissible to private industry to expand production and capacity for necessary supplies and resources. 
 
For more information, view our insight: The Defense Production Act: What Government Contractors Need to Know.

A. The COVID-19 outbreak has disrupted supply chains due to widespread travel restrictions, the forced closure of nonessential businesses and related workforce shortages. For government contractors, this has caused a sharp increase in product and service delays from subcontractors, potentially endangering relationships with their government customers. Furthermore, some subcontractors may also be in danger of financial default due to business interruption and revenue losses.
 
When multiple links in a supply chain falter, it becomes harder to ascertain how and when the chain will recover. Still, GCs must do their best to understand the impact of COVID-19 disruptions on lead times, inventory and product variability from subcontractors and other suppliers. Since GCs have varying levels of control over each source of risk, they need to quantify the expected effects of these risks, defined by probability and business impact.
 
Focusing on the needs of your government customers can help prioritize ordering. For example, the federal and respective state governments are diverting resources to produce critical emergency medical supplies like personal protective equipment (PPE) and ventilators, as well as ensuring that remote federal employees have the tools necessary to do their jobs in a remote environment. Communicating with your Contracting Officer (CO) about how your organization can support this effort will allow you to home in on the elements of the supply chain that are critical during the pandemic. Maintaining consistent communication with these critical subcontractors and suppliers on inbound orders and inventory status can help to mitigate delays amid shifting government needs.
 
In the longer term, it’s prudent to consider diversifying subcontractors and other suppliers where possible to help expand the business’ options during a period of scarcity. While product cost is typically a determining factor in choosing a supplier, availability and order fulfillment time take on greater importance when an organization needs to address disruptions to the usual supply chain. By optimizing current inventory and developing a more dynamic sourcing footprint, a business can manage some key aspects of disruption to supply chains.
 
For more information, view our insight: How Manufacturers Can Navigate the Novel Coronavirus’ Supply Chain Impacts.

A. Government contractors must be prepared for an extended crisis environment as the pandemic fuels significant threats, including cyberattacks, fraud, regulatory changes, supply chain disruptions and bankruptcies. In the short term, business continuity planning has taken center stage. GCs are focused on setting up secure remote working environments to maintain both the safety and productivity of employees, as well as monitoring cash flow in order to continue operations.
 
Unlike other industries however, GCs can take solace in the fact that their customers—the federal and state governments and the corresponding agencies that serve them—continue to be open for business and are looking for COVID-19-related assistance from trusted partners. It's also important for all GCs to closely monitor developments related to funding for state and local governments that could be a part of federal stimulus programs. This funding would be particularly beneficial to contractors who provide services within discretionary budget allocations in states with large deficits.
 
While it’s understandable that GCs are in ‘reactive’ mode, it’s prudent to take a step back and put together a crisis management team and response program that includes executive leaders, investment advisors, communications and account staff that interact with federal buyers. They can methodically assess how to maintain as much normalcy as possible while limiting exposure risks to both their own employees and the constituencies they serve. Liquidity and sustainability must also be given equal weight as short-term and, gradually, longer-term decisions are being made. For government contractors, the crisis should be viewed as a catalyst for needed change, because the sense of urgency, cooperation, need for innovation and decisiveness that emerges during this time can also help secure viability in the long term.

A. To understand the impact of COVID-19 on your organization’s revenue, you need to determine the answers to numerous questions, such as:

  • How many of your offices, production sites, subcontractors and other suppliers and government customers are in locations with larger outbreaks of COVID-19?
  • What facilities or other assets can you convert to serve other functions that would be more useful during this time?
  • How you can insulate your supply chain from disruption?
  • What alternative sources of supply are at your disposal?

Once you gain a better understanding of your potential risk areas—and mitigation strategies—you can build scenario models to determine the varying levels of risk to revenue and then execute against a plan that aims for the lowest impact. This use of range forecasting can condition your company to think in terms of uncertain outcomes. 

A. Companies of all types and sizes are likely able to leverage some aspect of the economic stimulus packages passed by the federal government. For small businesses and nonprofits, the CARES Act includes two disaster loan programs, The Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan program (EIDL), which are available through the Small Business Administration (SBA).

The PPP is a forgivable loan program that significantly expands which organizations are eligible for SBA loans. Small government contractors (as determined by SBA standards per NAICS codes) seeking assistance can work with a participating SBA 7(a) lender, bank or credit union to apply for a loan. The federal government also released a second round of funding aimed at assisting small businesses in April. For GCs facing financial strain as a result of COVID-19, these loans can help offset a variety of costs. Significantly, the loans will be forgiven so long as the funds are used to keep employees on the payroll and for certain other expenses. This is a key benefit for GCs, which often employ people with highly specialized skills. The PPP can help ensure the retention of those critical employees and the competitiveness of small businesses in the federal market.

Employers who don’t take advantage of the PPP would be eligible for a 50% credit on qualifying wages paid to employees between March 13 through December 31, 2020, if they either:

  • Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) as a result of COVID-19; or
  • Experience a significant decline in gross receipts during the calendar quarter, relative to a comparable quarter in 2019.

All employers are eligible to defer their social security tax liability due March 27 through the earlier of PPP loan forgiveness, if applicable, or December 31, 2020.

The CARES Act also provides funds for the EIDL program, which is available to small businesses and nonprofits in a declared disaster area. Currently, all 50 states, the District of Columbia, Puerto Rico, Guam and the Northern Mariana Islands have all been declared disaster areas for purposes of the EIDL Program. These loans are processed directly through the SBA. Government contractors can apply for loans under both SBA programs, as long as they don’t cover the same expenses.

In addition to these loans, the CARES Act also includes a number of tax savings opportunities, including AMT credits, net operating loss carryovers/carrybacks, and tax-deductible charitable contributions.

While there are many opportunities available in the stimulus bills, eligibility for some provisions is dependent on company size and other factors, and many benefits are mutually exclusive or have other implications, such as cost allowability. Given the level of complexity in deciding which relief measures to pursue and in securing them, it is critical that organizations consult with professionals in order to maximize their savings and direct relief where it will matter most.
 
To learn more, view our webinar: COVID-19: An Update for Government Contractors.

A. As shelter-in-place orders and remote working have become common during this crisis, your organization needs to equip its employees with the knowledge and tools necessary to maintain proper security protocol. More than half (60%) of workers in management, business and finance positions can work from home, and more than a third (42.5%) of workers in professional and related roles can do the same.
 
Cybersecurity is of the utmost importance for government contractors, particularly for those with employees working on sensitive projects with the Department of Defense (DoD). In fact, the DoD’s Cybersecurity Maturity Model Certification (CMMC) framework, released earlier this year, will require any company doing business with the DoD—as either a prime contractor or subcontractor—to meet specific cybersecurity requirements in order to continue doing business with the agency (though COTS providers may be exempted).
 
Some employees may not be as comfortable in their technology skills and may struggle to adjust to processes necessary for maintaining security during remote work. It’s important that you take the time to make sure your workforce has the resources and training needed to stay safe and secure and meet all mandated government requirements on the issue. Measures to address this can include training each employee on best practices for secure remote work; sharing additional guidance on tactics that hackers are exploiting more during this time; reviewing data regulations and making relevant information available to employees; and maintaining clear and consistent communication to employees on security and best practices, changing regulations, evolving vulnerabilities and any other concerns as they arise. 
 
For more information, view our insights: Top Cybersecurity Recommendations Amid COVID-19 and COVID-19 Data Security.

A. Each organization has a unique risk profile, so conducting a business continuity risk assessment is vital to developing an action plan to mitigate that risk. In the short-term, the risk profile for government contractors includes the location of their facilities and the nature of their business. GCs should identify possible disruptions to operations according to these variables and then prepare a set of processes to minimize the probability of each one. The business continuity risk assessment should also include an evaluation of any applicable third-party vulnerabilities with suppliers, vendors and your government customers. Scenario planning for a range of circumstances can also help identify potential risks for the medium term that may not yet be apparent.
 
Many government contractors also face significant risk to the supply chain as a result of the COVID-19 pandemic. This has led to significant delays in the availability and delivery of goods and services. Some subcontractors and other suppliers may also be in danger of financial default. Focusing on fulfilling orders that support the government’s needs for emergency medical supplies and equipment to inhibit the spread of COVID-19, will help you to home in on the elements of the supply chain that are critical during the pandemic and manage them accordingly. Maintaining consistent communication with suppliers of these critical goods and services can help to ensure that you have the most up-to-date information about key issues, including availability and order fulfillment time. To mitigate these supply chain issues, GCs can also explore possibilities for diversifying suppliers and using alternate supply sources if permissible in your contract.
 
Cybersecurity is another critical source of risk, particularly for those working on sensitive projects with the Department of Defense (DoD). The expansion of remote work creates more vulnerability and additional entry points for threat actors, and cyber threats have risen during the crisis. Your IT department can help protect against this risk by using tools for access control, audit control, intrusion detection and data loss prevention to ensure system security. For those GCs with DoD contracts, IT administrators should also be cognizant of the department’s Cybersecurity Maturity Model Certification (CMMC) framework, which outlines specific cybersecurity requirements.
 
In the longer term, GCs must enhance their ability to anticipate and prepare for risk before the next crisis occurs. They can use the current crisis to analyze their business’ resilience in its day-to-day operating environment and identify areas for improvement.
 
For more information, view our insight: Managing Your Risk During the COVID-19 Crisis.

A. Section 3610 of the CARES Act provides discretionary funds to agencies to reimburse federal contracting firms for paid leave (including sick leave) for eligible employees to ensure they remain in a “ready state” to work when needed.

This potential reimbursement is applicable to federal contractors with employees who:

  1. “cannot perform work on a site that has been approved by the Federal Government” during the COVID-19 public health emergency due to facility closures or other restrictions; and
  2. “cannot telework because their job duties cannot be performed remotely.”

Reimbursements for paid and/or sick leave apply until September 30, 2020. Payments cannot exceed an average of 40 hours per week per eligible employee, and they are based on the minimum applicable contract billing rate. Section 3610 also carries cost allowability and allocability considerations, some of which has been addressed by deviations to the cost principles.

For more information, view our insight: CARES Act Aids Employers Who Continue to Pay Employees.

A. In the short term, government contractors should consider leveraging any tax strategies that can help offset costs and increase cash flow. These include provisions in the stimulus packages, such as payroll tax credits and delays, AMT credits, net operating loss carrybacks, and tax-deductible charitable contributions.

Outside of the existing stimulus bills and other response measures, government contractors should also consider measures to reduce their total tax liability that were already available prior to the start of the pandemic, such as state and federal research and development (R&D) tax credits that can offset the costs of the design and development of proprietary technology and other supplies for government clients. Companies that operate internationally should also assess the tax relief options being offered in the countries in which they operate.

While there are many tax savings opportunities available, eligibility for some provisions is dependent on company size and other factors, and many benefits are mutually exclusive or have other tax implications that could affect an organization’s total tax liability. Given the level of complexity in tax planning during this time, it is critical that organizations consult with tax professionals in order to maximize their savings and understand the long-term impacts of their tax strategies.
 
For more information, view our insight: A Global Tax Tool: COVID-19 Fiscal and Financial Measures to Support Businesses and Individuals.

A. Many management teams and investors are hitting the pause button on deal activity. The economic realities are changing fast, and so too are deal threats and potential opportunities. Although government contractors have an inherent advantage compared to other industries because their main customer, the government, remains open for business, COVID-19 has nevertheless introduced significant uncertainty. There are risks caused by product delivery delays and shortages from subcontractors and uncertainty around revenue and cashflow.
 
Buyers, sellers and lenders are currently assessing the situation and will be making decisions to proceed, adjust or discontinue deal processes based on critical factors including crisis management, performance outlook, valuation changes and COVID-19’s lasting impact on the economy. But during this time of upheaval, it’s difficult to make such determinations with any sense of certainty. Ultimately, and hopefully sooner rather than later, the near-term outlook will become clearer and provide some stability to sellers and buyers.
 
For more information, view our insight: Pre-Transaction Considerations When Evaluating Acquisition Targets.