‘COVID penalty’ could cost Pentagon at least $10 billion in contractor claims

The Pentagon could soon be fielding upwards of $10 billion in coronavirus claims from defense companies looking for relief under COVID-19 relief legislation.

Ellen Lord, the Defense Department's top acquisition official, told the House Armed Services Committee the more funds were needed to pay for the "COVID penalty" or added costs to defense contracts resulting from costs incurred during the pandemic, including paid leave, personal protective gear, cleaning materials and services, and restructuring production facilities for social distancing.

Lord wouldn't specify the exact amount during the June 10 hearing on the coronavirus impact on DOD procurement but did say an unidentified prime planned to submit a claim of more than $1 billion in added costs to existing contracts.

Additionally, Lord said DOD has submitted the figures to the Office of Management and Budget and is also working on final guidance for coronavirus relief payments slated to come out in the next 30 days.

However, no claims have yet been submitted, Lord said. That's partly because contractors are concerned there will "only be one shot" at reimbursement and there's no appropriated funds. Lord also said that tier 2 and 3 contractors aren't yet forthcoming with their struggles.

Kim Herrington, the acting head of the Defense Pricing and Contracting Agency, told Congress that while DOD is still figuring out how to handle the expected deluge of claims under the Coronavirus Aid, Relief, and Economic Security Act, he thinks global settlements would be appropriate in some cases.

Wesley Hallman, senior VP for strategy and policy for the National Defense Industrial Association told FCW that coronavirus response measures are "costing more than planned to carry out contracts" at the local, state, federal, and, in some cases, international level where shipments have been turned away or employees not allowed to disembark to carry out a contractual duty.

Hallman said DOD's biggest challenge going forward will be fielding those requests for equitable adjustments and ensuring that contracting officers fairly award funds, should they be appropriated.

HASC Chairman Adam Smith previously expressed concerns that the pandemic could be used as an excuse to increase defense spending, saying that he wasn't convinced money couldn't be found from other areas where DOD was spending less.

But Hallman said it's possible that if pandemic costs aren't covered by additional appropriated funds, they'll eat into next year's budget. And with an ongoing pandemic and upcoming election, DOD could face a continuing resolution.

"This is a protracted process that may go into the next fiscal year," Hallman said, adding that the 2021 budget increase is half of a percent and doesn't cover inflation. "Adding on the bills for FY 2020 to FY 2021 will decrease the purchasing power in the Pentagon even further."