The apportionment of risk of increased performance costs in a government contract depends primarily on the type of contract and its included clauses. If a specifically included contract clause assigns the financial risk of an event on either the government or the contractor, that clause usually dictates which party bears the increased costs of performance due to the occurrence of that event. However, even if the contract does not specifically contemplate the occurrence of a particular event, dispute adjudicative forums may look to relevant clauses included in the contract to determine which party must bear the increased costs. A good indicator of whether an included clause apportions the risk of increased performance costs on the government is if the clause points to the contract’s changes clause. In ASBCA No. 62712, a decision issued on October 2, 2024, the Armed Services Board of Contract Appeals (ASBCA) held the government liable for increased costs associated with COVID-19-related quarantine of contractor employees due to a specifically included contract clause dictating the health and safety requirements under the contract. Notably, the relevant clause also pointed to the clause at Federal Acquisition Regulation (FAR) 52.243-4 “Changes,” which was incorporated in the contract by reference.

The Air Force awarded the contract in question for the acquisition of operations and maintenance services at three isolated military facilities. These remote facilities were located on Aleutian Island, Wake Island, and King Salmon, Alaska. The contract was primarily firm-fixed-price with a few cost-reimbursable line items. Importantly, the contract incorporated the previous version of the clause at Air Force Federal Acquisition Regulation Supplement (AFFARS) 5352.223-9001, “Health and Safety on Government Installations (1997).” Among other requirements, that clause specified that while performing on a government installation, the contractor would be subject to the contracting officer’s (CO) directions regarding health and safety. As noted, the AFFARS clause also provided that any cost adjustments resulting from the CO’s health and safety-related directions would be in accordance with the changes clause of the contract. Finally, the AFFARS clause noted that any violations of the health and safety rules and requirements may be grounds for termination unless promptly corrected under the CO’s direction.

On March 11, 2020, COVID-19 was officially declared a global pandemic. In response, the government instituted various health and safety-related policies for traveling to the remote contract sites. One such policy required contractor employees to self-quarantine for a minimum of 14 days. In communicating this and other COVID-19-related policies to the contractor, the CO pointed to the AFFARS clause. The CO also instructed the contractor to timely assert its right to equitable adjustment after receiving a health and safety-related order that increased the cost of performance under the contract. Per the CO’s instructions, the contractor notified the government that its estimated cost to comply with the quarantine would be approximately $ 300,000. However, despite acknowledging the contractor’s right to file for equitable adjustment for additional costs of compliance with the COVID-19 policies, the government denied the contractor’s cost claims.

During the subsequent appeal at the ASBCA, the government attempted to invoke the sovereign acts doctrine to avoid liability, arguing that the COVID-19 restrictions applied to all personnel who wanted to access the installation and were not explicitly directed at the contractor’s personnel. However, despite its attempts to invoke this affirmative defense, the government failed to avoid liability because it could not establish the impossibility component of the affirmative defense. Notably, under the impossibility requirement, the government must show that the nonoccurrence of the act in question was a basic assumption of the contract. Additionally, the government must not have assumed the risk that such an act would occur. Stated another way, the government’s performance under the sovereign acts doctrine is only excused when the sovereign act in question renders the government’s performance of its obligations under the contract impossible.

Here, the government failed even to advance a well-reasoned argument demonstrating how it satisfied the impossibility requirement to assert the sovereign acts defense successfully. The ASBCA found no evidence in the record to hold that the non-occurrence of the quarantine restrictions was a basic assumption upon which the contract was based. The record was similarly devoid of any evidence to satisfactorily demonstrate that the government did not assume the risk of the increased costs due to the quarantine. In fact, the inclusion of the AFFARS clause in the contract’s terms was proof to the contrary. The clause expressly stated that the contractor would be subject to the directions of the CO regarding the health and safety standards required for performing the contract. Furthermore, the AFFARS clause placed the financial risk of increased compliance costs on the government by providing that any adjustments resulting from the government’s health and safety-related directions will be in accordance with the contract’s changes clause. Therefore, the ASBCA found that the government was responsible for the contractor’s increased performance costs due to the COVID-19 quarantine restrictions.

By understanding the proper allocation of financial risk in their federal contracts, contractors can be better equipped to handle unexpected increases in performance costs. Hence, contractors should carefully review the included clauses in their contracts to determine which party is responsible for the increased costs of performance in various scenarios. Contracts involving complex or unique requirements may cause the government to assume greater risk, especially when the detailed specifications or directions are provided by the government. When attempting to prove government responsibility for increased costs of performance in a specific situation, contractors should determine whether the circumstances constitute a change under the contract's changes clause. Additionally, contractors should review any included clauses relevant to the changed circumstances that refer directly to the changes or disputes clause of the contract. Finally, should the government attempt to avoid liability for increased costs by asserting the affirmative sovereign acts defense, contractors should be aware that the government may have agreed to bear the risk of increased costs of performance even in situations where it exercises its sovereign power.

This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.