A Lesson from the CBCA on Recovering COVID-19 Related Costs on Your Government Contract

A recent decision from the Civilian Board of Contract Appeals (“CBCA”) serves as a warning to government contractors as they incur increased expenses stemming from the ongoing COVID-19 crisis. However, it also reveals what contractors can do to protect themselves.

In Pernix Serka Joint Venture, CBCA 5683 (Apr. 22, 2020), a government contractor, Pernix Serka Joint Venture (“Pernix”), had a firm fixed price contract with the State Department to construct a rainwater capture and storage system in Freetown, Sierra Leone. However, when an Ebola epidemic began there in March of 2014, Pernix reached out to its contracting officer (“CO”) for guidance on how to proceed. The CO responded by telling Pernix that “the decision for your people to stay or leave for life safety reasons rests solely on your shoulders”. Shortly thereafter, the World Health Organization declared the Ebola outbreak an “international public health emergency” and Pernix made the unilateral decision to shut down the project and evacuate its personnel. Several months later, Pernix submitted a request for an equitable adjustment on its contract to the State Department to compensate it for the additional costs it incurred in responding to the Ebola outbreak. When the State Department denied its request, Pernix appealed to the CBCA.

Pernix’s key arguments on appeal were that the Ebola outbreak caused a “cardinal change” to the contract and/or a “constructive change”. The CBCA first rejected the argument that a cardinal change had occurred and described a cardinal change as one “so drastic that it effectively requires the contractor to perform duties materially different from those found in the original contract.” The CBCA then explained that there was no cardinal change to Pernix’s contract because its duties under the original contract remained entirely unchanged. Instead, it was simply Pernix’s own unilateral decision to modify its performance in response to the Ebola outbreak.

Similarly, the CBCA then rejected Pernix’s argument that a constructive change occurred by explaining that a constructive change is one “where a contractor performs work beyond the contract’s requirements without a formal order, either by an informal order or due to the fault of the government.” Thus, the CBCA again explained that the government never directed Pernix to do anything and was not otherwise at fault for the burden placed on Pernix by the Ebola outbreak. In summarizing its holding in favor of the government, the CBCA stated that Pernix simply failed to cite to “any clause in the contract that served to shift the risk to the government for any costs incurred due to an unforeseen epidemic.”

Despite this seemingly harsh result, the CBCA’s decision does not appear to foreclose all recovery for contractors making similar decisions in response to the COVID-19 pandemic. Instead, considering the key element in the CBCA’s decision was Pernix’s unilateral decision-making, to the extent contractors obtain guidance from their respective agencies or contracting officers, courts are likely to view such circumstance much differently. Encouragingly, in light of the much wider effect that the COVID-19 epidemic is having, many agencies, government facilities, and contracting officers have been providing the kind of guidance that was lacking in the CBCA’s decision in Pernix. However, contractors should nonetheless ensure they make every effort to verify whether such guidance is in place before making decisions in response to the ongoing COVID-19 crisis.