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Small Business Contractors Experience Diverse Results Under Coronavirus

Some firms suffer amid COVID-19, while others benefit from prescient agencies.
The Government Accountability Office (GAO), which sits atop the federal contracting process, often has rules allowing flexibility in contracts that can be of assistance to small businesses confronting challenges during the COVID-19 shutdown.

The Government Accountability Office (GAO), which sits atop the federal contracting process, often has rules allowing flexibility in contracts that can be of assistance to small businesses confronting challenges during the COVID-19 shutdown.

The COVID-19 coronavirus has been a mixed bag for small business contractors working with the federal government. Some are facing unique challenges as they try to fulfill their contractual obligations amid site shutdowns, while others are able to meet their obligations relatively seamlessly under contracts designed for telework.

Small business problems range from workers’ compensation details to meeting contractual specifications when not allowed to work on government sites. These problems may be the tip of the iceberg as the government moves forward in the post-COVID-19 era, experts say.

Yet some contracting bodies lessened the impact by awarding contracts that allowed, or even encouraged, telework and other alternate workplace requirements. Ultimately, structuring future contracts along these lines, where applicable, may hold the key to prevent challenges if similar situations unfold.

Uncertainty is the overriding concern of federal small business contractors, says Forrest Burke, CEO of Connected Logistics. He relates that the federal government has shown flexibility in the move toward telework, and that flexibility has helped the transition become more seamless. But the top priority for many small businesses is to maintain their staff, and that often requires out-of-pocket outlays to keep people on payroll.

The biggest impact on federal small business contracts has been on the traditional reliance on on-site workload integrated with the government workforce, states Sumeet Shrivastava, president and CEO, Array Information Technology. Business processes and systems have been built around that type of interaction, and they were not ready for a move to telework. When bases closed, people couldn’t show up for work and were not authorized to work from afar.

By nature of its activities, industry has been better prepared for distance working, especially small businesses. They have an inherent ability to transition to teleworking off-site, as opposed to government offices rooted in on-site activities. Small companies needed this flexibility as part of their business plan, Shrivastava states, but government focused on its facilities. “The culture of the federal government in general, in particular the Defense Department, has predominantly been about ‘show up on my site, integrate with my people and go from there,’” he says.

But not being able to work on a federal contract site has put many small businesses in a bind, Shrivastava points out. Most are paying their employees with little to no hope of remuneration. Some vendors have check-based payments, which requires physical access.

Some portions of the bill recently passed by Congress incentivize small businesses to continue to maintain their payroll, he notes. But the real issue becomes timing. “Do you have enough in your working capital line of credit; the smaller the business you are, the less likely you have a decent line of credit to tap into,” he says. “Can you cover these costs until these processes get sorted out?”

Many of the potentially catastrophic fiscal byproducts of not being able to work on-site need not happen, Shrivastava says. In many cases, contract officers can waive some requirements as part of their contract authority. Burke notes that the cost of employees can be transferred back to the federal government through the employer. But items such as additional personal protective equipment (PPE) and employment practice liability insurance are direct allowable costs that were not foreseeable and factored into prices. Contracting officers can make fair and equitable adjustments to changes in circumstances that were not caused by the contractor, he points out.

Most contracting officers are willingly making these types of necessary adjustments, Burke continues. However, not all of them are that flexible, especially those in a fixed-price environment.

Insurance, insurability and indemnification requirements remain to be determined. Burke points out that businesses that are agreed to be critical must continue their mission, so they must ask employees to enter work circumstances in which adequate PPE may not be available. For example, implementing mission-critical upgrades may require on-site visits where a mission commander is reticent about admitting outside personnel. Mixing the two types of people can increase the chances of the virus spreading, which forces the small business to grapple with risk management.

And if contractor personnel do fall ill, there may be no indemnification in the law, Burke continues. Work-related exposure claims might not be covered under workers’ compensation, employment practices liability or even umbrella policies. “There are a lot of small businesses that don’t have a tiered insurance approach,” he states. Work-related claims have the potential to cripple or kill some small firms, and surviving companies may see high increases in quotes for workers’ compensation and health insurance. Burke calls for the Defense Department to seek some form of reasonable indemnification for contractors performing critical missions, even legislation if necessary.

“When all parties are acting in good faith, there should be some forms of limitation and indemnity,” he states.

For contract adjustments, the Federal Acquisition Regulation (FAR) has many provisions that allow contractors to make these kinds of adjustments, Burke observes. The challenge for small businesses is to find and point out all of these provisions and to get their contracting officers to agree to make the needed changes, he adds.

Other related contract challenges loom. Sick leave mandates may affect the availability of the workforce, even with telework. For many contracts, business solvency is determined by reaching a number of productive, billable hours within a certain period. Small businesses could be affected by fewer cost pools to absorb government-mandated changes. Again, contracting officers can alleviate this problem.

Even travel is affected. Contractors use government per diem guidelines for their travel policy. For travel between long-distance points, air is the least expensive medium. Yet airline restrictions, along with the desire to minimize exposure to other people, have compelled some small businesses to shift to land-based travel. The Defense Department can direct its contracting officers to consider temporary travel exceptions for essential missions, Burke offers.

Just breaking the mold for on-site work has presented unforeseen challenges. Shrivastava cites one example of a major program trying to perform a test cycle for deploying a significant capability to the warfighter. This test historically has been done on physical premises, but there is no reason it cannot be done virtually, he offers. The only drawback is that it has never been conducted virtually, so engineers are trying to redefine the infrastructure so that people can join an online forum to perform the exact same test while sitting at their own machines. The delivery date has had to be changed, but the only real issue is that it hasn’t been done before, he says.

One federal agency offers that it was well-positioned to address the challenges confronting small businesses. The Defense Information Systems Agency (DISA) had many telework capabilities already written into its contracts when COVID-19 hit, says Douglas Packard, DISA, procurement services executive and director, Defense Information Technology Contracting Organization. “We believe we planned for this for a decade-plus,” he declares. “We have alternate workplace requirements in all of our service contracts, which we have executed to the maximum extent possible, to do so for all of our contractor firms, small or large.”

He explains that the agency issued government laptops so individuals could work at an alternate work site. The agency has been a global telework workforce for some time, and this has worked extremely well for the military and civilians as well as for industry partners. “Industry has been phenomenal partners in this COVID response,” Packard declares.

Carlen Capenos, director, Office of Small Business Programs, DISA, explains that her office is the source of support for small business contractors. Yet surprisingly, she relates, it has been fairly quiet for COVID-19 issues. “We were prepared,” she declares. “Yet, I think things will come up and come out, and between our contracting officers helping to solve instant issues or folks coming to my office to seek assistance if they don’t know where to go, we’ll just deal with the issues as they come up one by one.”

DISA’s contracts are set up for remote work as a standard business practice, so the agency has not felt the same impact as other federal organizations. The office is assisting small businesses with any payment issues they may be having, along with continuing fiscal year 2020 acquisition execution and providing information. The office takes active steps to resolve any payment issues, she adds.

Capenos continues that DISA’s small business contracts generally are set up on a firm-fixed-price basis, so success is determined by deliverables rather than hours of work. Even if a contractor has faced internal challenges from the coronavirus, the agency can still pay it as long as the deliverables are met. Other agencies without that approach have a problem with cashflow for contracts, she allows.

Yet DISA had to change one small business services contract—for janitorial work. Its adjustment was directly related to the coronavirus in that the services provided had to change. Capenos explains that the agency issued an undefinitized contract action, or UCA, to add deep cleaning for areas of the headquarters that have had to deal with the virus outbreak. Overall, DISA has increased cleaning and sanitizing efforts at the headquarters. This allowed the agency to meet mission requirements while also increasing the work for the contractors and allowing them to add PPE under the contract, she allows.

Packard says that other federal contracting organizations must “play what-ifs” to help prevent similar challenges from emerging in future crises. Everyone must apply lessons learned after the COVID-19 pandemic has passed and not forget them a few months from now, he offers. “Understand that, when you get to a crisis, you really have to respond—be hard-thinking, offer an immediate course of action, manage risk—and make sure you support … the citizens that rely on the federal government.”

Ultimately, says Shrivastava, the big challenge for other agencies and small businesses will be writing future contracts that allow for the nonphysical nature of business. Technology-oriented small businesses, especially those that provide information technology services, will be well-positioned to adapt for this future. However, it will not come without snags. “We’ll see seams—that we’re seeing even now—where we’re ready to do something, the client’s ready to do something, and we realize, ‘oh wait, contractually, we need somebody to issue a modification to allow us to do it this way,’” he says.

For example, in data center consolidations and the cloud, contracts were written with explicit specifications for activities in a particular environment, as opposed to allowing actions in an operating environment that can adapt or evolve. Those types of contracts need to be written with more flexibility to allow for this approach, Shrivastava says.

Small business leaders may be more concerned about long-term issues than short-term challenges. Shrivastava reports that many are worried about future budgets, especially in terms of allocations and resolutions.

Burke reiterates the potential for legislation to remove many of the indemnification impediments facing small businesses. Some of the related costs that businesses face can be charged against government contracts, and modest levels of indemnification would “go a long way” toward reducing total cost to government, he offers.

Burke adds that government also can help by generating a greater push for small business contracts. “Because of the disproportionate impact on small business coming out of this, we would certainly advocate that government continued to do what it can to capitalize on the responsiveness of small business for innovation and growth by meeting or exceeding its current targets for small business,” he declares.​