chevron-down Created with Sketch Beta.

Title

The Procurement Lawyer Archives

Microelectronics Shortages as Excusable Delay: Case Law and Best Practices for Contractors

Casey Braden and Annejanette Heckman Pickens

Summary

  • Examines supply chain shortages in microelectronics as a basis for a claim of excusable delay.
  • Reviews regulations regarding terminations for default and excusable delay.
  • Considers case law regarding excusable delay as a defense to a termination for default.
Microelectronics Shortages as Excusable Delay: Case Law and Best Practices for Contractors
YakobchukOlena via Getty Images

Jump to:

A rise in the use of microelectronics in globally manufactured products and supply chain disruptions stemming in large part from the COVID-19 pandemic have created significant issues both for companies selling consumer products and for defense contractors. This demand is partly driven by the surge in efforts to transform many consumer, and government, items into smart devices. This surge has challenged both manufacturers trying to keep up with the increasing demand for products containing microelectronics and defense contractors trying to timely fulfill government orders for products that contain these parts. The growing shortages and production delays recently prompted President Biden to issue an Executive Order on supply chain concerns, which asserts that “[t]he United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security.”

As the lead times for microelectronics parts grow, the likelihood increases that government contractors will be delayed in their performance under federal contracts, and ultimately could face default termination of those contracts due to such delays. The Federal Acquisition Regulation (FAR) provides that a contract shall not be terminated for default where the failure to perform is “excusable,” meaning that the failure was due to “causes beyond the control and without the fault or negligence of the contractor.” The FAR lists multiple examples of events that can constitute an excusable delay. Supply chain shortages are not among them. However, the list is not exhaustive, and a contractor impacted by shortages in the microelectronics supply chain may seek to establish that microelectronics-related shortages constitute an excusable delay and, thus, a defense to a termination for default.

Federal courts and Boards of Contract Appeals have considered delay claims in the context of other supply chain shortages. The case law provides some support for contractors seeking to assert that a supply chain shortage can be an excusable cause for delayed performance, while noting the challenges that a contractor is likely to encounter in establishing that a supply chain shortage constitutes an excusable delay. Chief among these challenges is the case law holding that a contractor is responsible for ensuring that it has the capacity to perform a federal contract, including by understanding the dynamics of its supplier base, placing timely orders with suppliers, and effectively managing its subcontractors. In order to overcome these challenges, a contractor who seeks to establish that the current shortages of microelectronics parts constitute an excusable delay should build contractual support for that position by taking steps such as documenting its efforts to obtain needed supplies and providing notice of delays in accordance with contract terms. Also, a contractor may wish to take additional, more broadly focused steps to adjust its supply chain requirements and thereby decrease its long-term difficulty in obtaining in-demand parts.

The Microelectronics Supply Chain

The Rise of Microelectronics and Resulting Supply Chain Shortages

Microelectronics are at the heart of all complex electronic and communication systems. These tiny electrical components mirror their larger counterparts, but on microscopic levels in order to maximize battery life, minimize the space needed for other components, and improve operability. End products that contain microelectronics range from common commercial products like consumer vehicles and smartphones to advanced military systems such as fighter jets and missile guidance packages. The demand for microelectronics in both the commercial and military worlds is not slowing down. The microelectronics industry saw roughly a 25 percent rise in overall revenues from 2016 through 2020, and forecasts from 2019 estimate demand levels rising by a minimum of 15 percent through 2022.

Demand for these parts has increased due to the rise in products that incorporate artificial intelligence (AI) capabilities. Adaptive electronics, which contain microelectronics, are being incorporated into military and consumer products, with continued expansion expected through 2025. The automotive, communication, and health care industries are on the frontline pursuing these AI products. These newer AI items, such as smart cars, medical devices, self-navigating drones, communication systems, and 5G networks, continue to use more microelectronics.

Over the last several years, suppliers of microelectronics parts increasingly have struggled to keep up with demand. In a 2018 Gartner report, the research firm identified supply issues surrounding raw materials shortages affecting delivery lead times and overall shortages of materials. These manufacturing delays have been attributed to many causes, including a decrease in the number of U.S. companies producing microelectronics, failure to adequately incentivize U.S. long-term productivity, growing global competition, and geographic supply concentrations. In the last 20 years in the U.S., microelectronics manufacturing has decreased from a high of 37 percent in 1990 to roughly 12 percent of global production today. As the U.S. percentage of global production has declined, the industry has shifted to a concentration of manufacturing in Asian countries, which now lead the microelectronics supply industry.

The COVID-19 pandemic and the resulting economic impacts have exacerbated shortages of microelectronics parts while the demand for products using these components has increased. Pandemic restrictions on workplaces limited the output of production lines and strained shipping and transportation systems, resulting in manufacturing and delivery delays and disruptions. Normal lead times are forecasting on average a 26-week delivery schedule, up from an average of 12 weeks in 2018.

Along with pandemic concerns, there have been other unforeseen disruptions such as the massive fire at the Renesas Electronics microchip factory in Japan. Renesas Electronics manufactures roughly 30 percent of the automotive sector’s microelectronics. Purchasers of Renesas chips must now seek other sources to fulfill new orders, creating greater demand in the already-stressed microelectronics industry.

At the same time, massive numbers of people worldwide shifted to working and learning in settings that required increased reliance on electronics and telecommunication equipment. As the pandemic forced people to stay indoors, consumers and businesses began buying technology products that use microelectronics at incredible rates. For example, in 2020, the world saw the largest rise in consumer computer purchases in over 10 years. Shipments of personal computers soared to new heights in 2020, reaching 275 million units delivered, an increase of nearly five percent from 2019 globally and topping over 20 percent growth over 2019 in the U.S. alone. This rise was a corollary of stay-at-home orders, remote working conditions, and online learning directives.

As consumer demand spiked, supply chains began to break down. Early in the pandemic, automakers began canceling microchip orders due to a 30 percent decrease in automotive demand. But by the middle of the pandemic, automotive demand surged, creating a massive need for the canceled orders, which were purchased by other industries. As an example, General Motors stopped production at six plants due to the chip shortage, and the delays will likely result in a loss of roughly $2 billion for the major auto manufacturer.

Government contractors likewise have been impacted by these delays and shortages. Delays arising from the uptick in demand impacted downstream fulfilment orders on contractors purchasing microelectronics. Out of the six major component sectors (memory, power management, analog integrated circuits, discrete devices, passive components, and wireless communication chips), all are experiencing additional delays in delivery times. The new anticipated lead times have increased across all the components, ranging from 10-week to 52-week delays.

The Defense Priorities and Allocations System

The Defense Priorities and Allocations System (DPAS) may provide some U.S. defense contractors assistance in their efforts to obtain microelectronics parts, to the extent that DPAS applies to their government contract. DPAS prioritizes defense-related contracts and orders, allowing for preferential fulfillment of orders when deemed necessary for national defense. The Commerce Department has extended DPAS to other critical infrastructure-related contracts, like defense, energy, homeland security, and general services, on a case-by-case basis. Because DPAS requires priority for rated orders over unrated orders, it may allow a U.S. government contractor to jump the queue and obtain supplies, like microelectronics, that are in high demand.

However, many orders that support government work are not DPAS-rated, and a U.S. government contractor without a rated order may be in competition with car manufacturers, computer makers, and any other companies seeking computer chips and other microelectronics components for their commercial products. Government contractors with unrated orders will likely face greater competition from commercial companies for microelectronics parts due to the ability of many commercial companies to buy in larger quantities, allowing them better leverage for order fulfilment.

Executive Order 14017, “America’s Supply Chains”

These supply chain shortages in microelectronics and related industries have prompted early attention from the Biden Administration. On February 24, 2021, just 34 days into the new administration, President Biden issued Executive Order (E.O.) 14017, “America’s Supply Chains,” in which he directed the U.S. government to undertake a comprehensive review of critical U.S. supply chains and to identify risks, address vulnerabilities, and develop strategies to promote resilience. Microelectronics, in particular semiconductors, were identified as one of four key products on which the government review would focus.

In June, the task force created by E.O. 14017 issued a report, Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth, which details the extent of the shortages and vulnerabilities in the four priority products. The report identified several drivers of supply chain vulnerabilities, including insufficient U.S. manufacturing capacity; misaligned incentives and a short-term focus in private markets; industrial policies adopted by allied, partner, and competitor nations; geographic concentration in global sourcing; and limited international coordination. The report details six categories of recommendations to address these supply chain vulnerabilities: (1) boost U.S. production capabilities, (2) support the development of the current market, (3) leverage the government’s role as a purchaser in the acquisition of critical goods, (4) strengthen international trade rules, (5) work with allied partners to decrease supply chain vulnerabilities, and (6) monitor supply chain disruptions during post-pandemic reopening.

With respect to the supply chains of government contractors, the report focused on expanding production in critical defense industries. In particular, the report recommends a new focus on the use of DPAS to expand production of supplies and strengthen supply chains in covered industries. These recommendations will continue to be evaluated and will take time to implement. Although the recommended steps may eventually help to address supply chain shortages faced by U.S. government contractors, in the interim, contractors may need to look to existing means of addressing the ramifications of supply chain delays, particularly if a U.S. government agency indicates that it will terminate its contract for default due to delayed performance stemming from a supply chain shortage. Facing that dire possibility, a contractor may look to build a defense of “excusable delay” based upon the widespread nature of supply chain shortages in microelectronics, particularly when those shortages have been exacerbated by the COVID-19 pandemic.

Termination for Default and Excusable Delays Under the Federal Acquisition Regulation

A contractor who is delayed in the performance of a contract with a federal agency faces a number of potential negative repercussions, including, but not limited to, a negative past performance or Contractor Performance Assessment Reporting System (CPARS) evaluation, reduced award fees, and the assessment of liquidated damages by the agency. The most significant potential consequence is a termination for default. Termination for default can be an enormous blow to a contractor’s current reputation, its financials, and its opportunity to be awarded future contracts.

“Termination for default is generally the exercise of the government’s contractual right to completely or partially terminate a contract because of the contractor’s actual or anticipated failure to perform its contractual obligations.” The FAR provides that a contractor terminated for default is not entitled to payment for undelivered work, and may be required to repay the government for any advance or progress payments associated with the undelivered work. The contractor may be required to pay the government for the costs of acquiring similar supplies and services to those that were terminated, to the extent that the government pays more than what it would have paid for the terminated work. The government also may assess liquidated damages if the government is entitled to them under the contract. The contracting officer will report the default termination in the government-wide contractor performance and integrity database. Since contracting officers are required to check the database prior to awarding most new work, a termination for default very likely will limit the contractor’s ability to win future contracts from federal agencies.

If a contractor can establish that a failure to perform was “excusable,” then its contract shall not be terminated for default. The FAR provides that, in order for a failure to perform to be deemed excusable, the failure must be due to “causes beyond the control and without the fault or negligence of the contractor.”

The excusable delay clause applicable to a given contract varies depending on the type of contract entered; for example, fixed-price construction, fixed-price research and development, or cost-reimbursable. Yet, all variations of the language include a common foundation for determining whether an excusable delay exists. The excusable delay language applicable to fixed-price supply and service contracts is representative. It states:

(c) Except for defaults of subcontractors at any tier, the Contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance the failure to perform must be beyond the control and without the fault or negligence of the Contractor.

(d) If the failure to perform is caused by the default of a subcontractor at any tier, and if the cause of the default is beyond the control of both the Contractor and subcontractor, and without the fault or negligence of either, the Contractor shall not be liable for any excess costs for failure to perform, unless the subcontracted supplies or services were obtainable from other sources in sufficient time for the Contractor to meet the required delivery schedule.

The existence of an excusable delay is a defense against a termination for default. A contractor who establishes the existence of an excusable delay may be entitled to additional time to perform. If a contracting officer already has terminated a contract for default, and the contractor subsequently demonstrates that its failure to perform was excusable, then the termination for default will be considered a termination for the convenience of the government, which may entitle the contractor to certain payments and fee adjustments, as well as the removal of the default termination from its performance record.

Case Law on Excusable Delay as a Defense to a Termination for Default

Courts and Boards of Contract Appeals have long considered a termination for default “a drastic sanction which should be imposed (or sustained) only for good grounds and on solid evidence.” One way that a contractor may avoid this sanction is to establish that it is entitled to an extension of the performance period in the contract due to an excusable delay. As stated by the Federal Circuit, “[t]o establish entitlement to an extension based on excusable delay, [a contractor] must show that the delay resulted from ‘unforeseeable causes beyond the control and without the fault or negligence of the Contractor.’ In addition, the unforeseeable cause must delay the overall contract completion; i.e., it must affect the critical path of performance.” A contractor also must “prove that it took reasonable action to perform the contract notwithstanding the occurrence” of the excusable delay.

Thus, the mere occurrence of one of the events listed in the FAR clauses addressing excusable delay is not, on its own, sufficient to establish the existence of an excusable delay. The Supreme Court itself has addressed this issue. In U.S. v. Brooks-Callaway Co., the Court considered whether a contractor was entitled to an extension of time based on flooding, which is one of the occurrences listed in the excusable delay language in both the current FAR provisions and in the standard government contract at issue in the case, which predates the adoption of the FAR. The Court opined that “[t]he purpose of the proviso to protect the contractor against the unexpected, and its grammatical sense both militate against holding that the listed events are always to be regarded as unforeseeable, no matter what the attendant circumstances are. Rather, the adjective ‘unforeseeable’ must modify each event set out in the ‘including’ phrase.” The Court remanded the case to the U.S. Court of Claims, the predecessor to the present U.S. Court of Federal Claims, to consider whether the flooding was foreseeable.

Supply Chain Shortages as Excusable Delays

The list of potential causes of an excusable delay in the FAR provisions is not exclusive, and courts and boards have found that supply chain shortages can constitute excusable delays even though the FAR clauses do not specifically include such shortages as examples. However, the issue of foreseeability, referenced by the Supreme Court in the Brooks-Callaway decision above, as well as the expectation that a contractor is responsible for ensuring that it has the means of performing the contract, can be difficult to address for a contractor seeking to demonstrate that it has experienced an excusable delay based on a shortage of critical parts, such as the microelectronics needed to perform many government contracts. Courts and boards have held that a contractor is responsible for understanding its supply chain, placing timely orders for supplies, and managing the performance of its subcontractors. As a result, when a federal prime contractor fails to timely perform due to a shortage of needed supplies, that contractor faces a challenge in demonstrating that it was without fault and had no ability to avoid the problem. Without making such showings, the contractor is not entitled to a defense of excusable delay.

Over 100 years ago, the Supreme Court addressed the challenge faced by a prime contractor attempting to demonstrate that unexpected difficulty in creating new products could constitute an excusable delay for purposes of a federal contract. In the 1916 case of Carnegie Steel Co. v. U.S., the Court reviewed a contractor’s claim that delays in production were unforeseeable where the government was buying a newly engineered product. The contract was for 18-inch-thick ballistic armored plates that had never been manufactured, developed, or created at such a thickness anywhere in the world. Due to engineering difficulties associated with the new product, Carnegiehad significant issues creating the product and was unsuccessful in several attempts to satisfy the government’s ballistic testing criteria, resulting in an overall delay in delivery. Roughly four months after the date of delivery, Carnegie finally fulfilled the contract.

Carnegie’s argument was based on a contract provision that allowed for extra performance time due to “unavoidable causes,” i.e., causes such as fires, storms, and labor strikes. Unfortunately for Carnegie, the Court found that the delays were not due to unavoidable causes within the meaning of the contract and did not make the contractor’s performance impossible. Even if this type of product had never been created, the Court believed proper “due diligence and despatch [sic]” prior to entering the contract would have provided Carnegie with the essential knowledge to fulfill the delivery requirements. The Court stated that “[i]t would seem that the very essence of the promise of a contract to deliver articles is ability to procure or make them. . . . [I]t would seem to have been an obvious prudence to have preceded manufacture, if not engagement, by experiment rather than risk failure and delay.” Since the contractor had not experienced delays that were beyond its control, the Court affirmed a lower court’s decision in the government’s favor.

Courts and boards subsequently have addressed the issue of whether a supply chain shortage can constitute an excusable delay in several decisions. Some of these decisions stem from the oil shortages of the 1970s and address resulting shortages in fuel and epoxy. Others examine less-well-publicized or more-localized shortages, such as a shortage of cement or aluminum. These cases may serve as guideposts for a contractor seeking to establish that the current shortage of microelectronics parts constitutes an excusable delay.

Appeals of Phillips Construction Co. is an example of a Board of Contract Appeals decision in favor of a contractor asserting an excusable delay based on a supply shortage. The case stems from a significant diesel fuel shortage that arose in Montana during the 1979 construction season. Prior to the onset of the fuel shortage, Phillips entered a government contract to construct and repair several miles of highway. Phillips was drastically delayed in completing the work due to the fuel shortage. The contractor requested time extensions to allow for this shortage; however, the contracting officer denied and ultimately terminated the contract for default. Phillips appealed the termination.

The Board noted that the government bears the burden of proving that the contractor defaulted; then the contractor may rebut such default by showing the delayed performance falls within the excusable delay clause stated in the contract. The rebuttal must present factual information that the excuse stemmed from “causes that were unforeseeable, beyond his control, and that neither he, his subcontractor, nor his supplier were at fault or negligent.”

Evidence was presented that the fuel shortage was widely known and of concern to all industries, similar to the current global microelectronics shortages. Phillips presented letters, newspapers, testimony, telephone transcripts, and a variety of other factual data that all pointed to the “severe” fuel shortages. Due to the detailed evidence presented, the Board found that the fuel shortage was unforeseeable and beyond the contractor’s control, and had occurred without the fault or negligence of the contractor or its suppliers and subcontractors. The Board held that the contractor had established an excusable delay and converted the termination for default to a termination for the government’s convenience.

The U.S. Court of Claims in Consolidated Molded Products, Inc. heard another case regarding an excusable delay originating from the energy shortage of the 1970s. At issue in that case was a shortage of petroleum-based epoxy resin necessary for the contractor to complete final product orders. Similar to the current microelectronics shortage, there was a disruption in obtaining the required materials necessary for product completion. On-hand reserves of the epoxy could only meet immediate deadlines, and there were zero assurances for future deliveries. “The severity of the shortage was such that normal supply channels were completely exhausted and large volume buyers were placed on allocation schedules based upon their prior utilization records.”

Due to the severity of the shortage, the contracting officer determined that the shortage constituted an excusable delay under the contract’s default clause, which predated the standard FAR language now but contained similar verbiage. The contracting officer granted an extension of time to complete the orders.

Likewise, the U.S. Court of Claims found an excusable delay in J. D. Hedin Construction Company v. U.S., a case unrelated to the 1970s oil shortages. In that case, the court considered whether a construction contractor whose contract had been terminated for default was entitled to an excusable delay based on a shortage of cement. The court determined that the shortage constituted an excusable delay, noting that a contractor is not expected “to have prophetic insight and to take extraordinary preventive action which it is simply not reasonable to ask of the normal contractor.” The contractor had made “heroic efforts to obtain cement,” seeking supplies from all reasonable or practical sources. The court determined that the contractor was not in default when the contract was terminated and ordered further trial proceedings to determine the length of the excusable delay.

Although the outcomes of these cases turned on the specific facts of the supply chain shortage at issue, and the actions of the contractor in response to the shortage, these cases collectively may provide a foundation for a contractor to build a case that the supply chain shortage in microelectronics parts can constitute an excusable delay. Like the oil shortages of the 1970s, the current microelectronics shortages have prompted many reports, studies, and articles on the shortages and their impacts on contractors. As detailed in Phillips, this evidence may provide the baseline factual support upon which a contractor can construct the foundation for an extension of a contractual performance period based on excusable delay and, if necessary, the conversion of a default termination to a termination for convenience.

That said, existing case law suggests several challenges likely to be faced by a contractor seeking to establish that a supply chain shortage constitutes an excusable delay.

First, a contractor is expected to be knowledgeable about its supply base, and a shortage of needed supplies will not constitute an excusable delay if the shortage was foreseeable by a contractor with such knowledge. In a case that makes this point, Appeal of Eppco Metals Corp., a contractor argued that a delay in its delivery of items under a contract to manufacture ammunition drum cases was a direct result of an alleged national aluminum shortage. The Armed Services Board of Contract Appeals opined:

While unforeseeable raw material shortages may give rise to excusable delay, such shortages do not per se relieve a contractor of its performance obligations. We have long held that conditions in an industry are presumed to be “within the [contractor’s] knowledge and contemplation in accepting the contract.” We also have held that “[a] contractor has the responsibility to investigate sources of supply and delivery terms prior to submitting its bid,” and that “every reasonably prudent contractor prior to bidding should obtain assurance that the materials needed to complete the work in accordance with the contract terms will be furnished.”

The Board found no evidence that the contractor had made efforts, prior to submitting its bid, to ensure that it would have sufficient aluminum rings available to perform under the contract. The Board also found that the contractor had delayed ordering the rings and had delayed notifying the government of the issue. The Board concluded that “the delay [in the contractor’s performance] cannot be said to be without [the contractors’] fault or negligence.” The Board held that the government had properly terminated the contract for default.

The Civilian Board of Contract Appeals likewise has addressed this issue of supply chain shortages as the basis for an excusable delay, in the context of shortages in labor needed to perform a contract with the federal government. In the 2017 case of Yates-Desbuild Joint Venture, the Board considered whether an inability to hire skilled laborers to complete a contract could constitute an excusable delay. The contractor alleged that it was unable to hire sufficient labor to support a construction project in India for the State Department due to an unprecedented boom in construction in the relevant Indian city, which was absorbing all available labor.

The Board determined that the contractor had provided insufficient evidence that a change in the labor market had impacted its work, stating:

A contractor is responsible for providing the labor needed in order to perform the contract, and its failure to do so is not an occurrence beyond its reasonable control and without its fault or negligence except in the most unusual circumstances, such as where the Government contributes to the unavailability of the labor or where abnormal circumstances exist which could not have been anticipated.” Although it is perhaps somewhat unsettled as to what types of “abnormal circumstances” might justify an excusable delay arising from labor problems, those circumstances do not include “a general labor shortage, the unavailability of skilled operatives or technical specialists, [or] the loss of employees on whose assistance a contractor may have counted.” That is, a contractor’s “general difficulties in obtaining the required labor” do not create a basis for excusable delay, and “[p]erformance of a contract is not excused by unusual or unexpected expense.”

The Board concluded that the labor shortages did not constitute an excusable delay.

Thus, a contractor seeking to establish that a shortage of microelectronics parts constitutes an excusable delay will be expected to demonstrate that it investigated the sources for these parts prior to submitting a proposal for a government contract, and that it otherwise took all reasonable steps to ensure that needed parts would be available to complete the work in accordance with the contract. Contractors should anticipate that they will face a high bar in establishing an excusable delay if any alleged difficulty in obtaining certain microelectronics components is considered typical under the current situation.

This concept leads to a second challenge. A contractor seeking to establish that the present supply chain shortage in microelectronics parts constitutes an excusable delay is unlikely to be able to make that showing where a shortage of a particular part or supply was known, or knowable, to the contractor prior to the time it signed the contract. An example of this is shown in Prestex, Inc. v. United States. In this 1983 U.S. Claims Court case, the contractor entered a bid to produce certain oxford cloth for the Defense Supply Agency. Following the initial bid, the contractor agreed to two bid extensions requested by the government. Due to the extensions, the contractor was aware that future supply issues were inevitable before it entered the contract.

The court found that the contractor submitted its bid “knowing that delivery delays [for raw materials] were most probable.” The court found that the contractor’s delayed performance was not excusable, stating:

This plaintiff knew about the probability of delivery delays before it agreed to extend its bid. . . . [T]his plaintiff risked the consequences of delivery delays in order to procure a large contract. Consequently, the delivery delays, under the circumstances of this case, cannot be considered as beyond the control of plaintiff or without its fault or negligence.

Likewise, in the 2007 case of Appeal of Demusz Manufacturing Co., Inc., the Armed Services Board of Contract Appeals rejected a contractor’s claim of excusable delay stemming from its failure to meet the delivery date for engine parts. The contractor was required to purchase the parts from three specified sources. Prior to the contractor’s proposal submission, one of the required sources ceased operations and filed for bankruptcy, and the other two sources merged, thus resulting in only one approved supplier. The Board stated, “[a]s a matter of law, it is a contractor’s responsibility to determine sources of supply prior to bidding and to obtain assurance that the materials needed to complete the work for timely delivery will be obtained.”

In light of Prestex and Demusz, a contractor seeking to establish that a shortage of microelectronics parts constitutes an excusable delay is unlikely to be able to make that showing where the contractor knew, or should have known, about a shortage of a particular part or supply prior to entering the contract.

A third challenge likely to be faced by a contractor seeking to establish that a supply chain shortage constitutes an excusable delay is that the delay must not be the result of a subcontractor’s failure to perform, or of a prime contractor’s failure to manage a subcontractor effectively. FAR 52.249-8(d) provides:

If the failure to perform is caused by the default of a subcontractor at any tier, and if the cause of the default is beyond the control of both the Contractor and subcontractor, and without the fault or negligence of either, the Contractor shall not be liable for any excess costs for failure to perform, unless the subcontracted supplies or services were obtainable from other sources in sufficient time for the Contractor to meet the required delivery schedule.

The Federal Circuit has interpreted the FAR language on excusable delay as establishing a rule that “[t]he contractor alone is responsible for the deficiencies of its suppliers and its subcontractors absent a showing of impossibility.”

Some have attempted to rely on a difference in the excusable delay language in the commercial item clause at FAR 52.212-4, which does not specifically reference nonperformance by a subcontractor in connection with excusable delay, and the language in FAR 52.249-8, which specifically addresses nonperformance by a subcontractor, as a basis for an argument that, for a commercial item contract governed by FAR 52.212-4, the prime should not be held liable for a subcontractor’s default when the prime acted reasonably in selecting the subcontractor. However, the Federal Circuit has rejected this suggestion that a commercial item contractor has any greater flexibility in establishing an excusable delay due to a subcontractor’s failure to perform than would a contractor subject to FAR 52.249-8 and the other similar FAR clauses. In its 2008 decision in General Injectables & Vaccines, Inc. v. Gates, the Federal Circuit concluded, “we interpret the default rule, absent contractual language to the contrary, to be that contractors are bound by the unexcused nonperformance of their subcontractors.”

On a related point, Boards of Contract Appeals have refused to find the existence of an excusable delay where the prime contractor has failed to properly manage its subcontractors. Boards have concluded that the contractor was responsible for delays that resulted from the contractor’s failure to order supplies from a subcontractor in a timely manner; the contractor’s failure to pay one subcontractor for prior work such that a second subcontractor would not agree to perform new work for the contractor; and a lower-tier subcontractor’s delivery of the wrong materials to a higher-tier subcontractor.

Thus, a contractor must be vigilant in assessing whether a delay due to a supply shortage experienced by its subcontractor constitutes an excusable delay as articulated in the case law. If a supply shortage is not beyond the control and without the fault or negligence of both prime and subcontractor, and if both parties did not take reasonable action to perform notwithstanding that shortage, then a contractor is unlikely to establish that a supply shortage experienced by its subcontractor constitutes an excusable delay for purposes of the underlying prime contract with the federal agency.

Epidemics and Quarantine Restrictions as Excusable Delays

In addition to the cases discussed above, a contractor experiencing a shortage of microelectronics parts may be able to look to cases addressing epidemics and quarantine restrictions as support for a position that a performance delay is excusable. The COVID-19 pandemic is inherently tied to the current supply chain shortages in the microelectronics industry. Demand for microelectronics was driven in part by an increased need for technology resources during the pandemic, and pandemic restrictions, such as quarantine mandates and facility closures, which led to many production challenges and delays in the industry.

Epidemics and quarantine restrictions are independent bases for an excusable delay, separate from whether a delay should be excused due to a parts shortage. The FAR clauses on excusable delay specifically identify epidemics and quarantine restrictions as examples of excusable delays when those events are beyond the contractor’s control and without its fault or negligence. Depending on the facts of the particular situation, a contractor seeking to establish that a supply chain shortage is an excusable delay also, or alternatively, may be able to assert an excusable delay based on the COVID-19 pandemic and quarantine restrictions. Such an assertion might be made in conjunction with, or separately from, an assertion that an excusable delay exists due to a supply chain shortage like those addressed in the cases in the preceding section.

Several cases provide guidance to a contractor seeking to establish an excusable delay based on an epidemic and related restrictions. In a case dealing with delays alleged to arise from an epidemic, Appeal of Ace Electronics Associates, Inc.,the Armed Services Board of Contract Appeals addressed an allegation that a flu epidemic seriously crippled a contractor’s workforce, thus directly impacting the contractor’s ability to deliver on schedule.

Considering a government contract clause that predates the FAR, the board in Ace Electronics stated:

Although listed in the Default clause as one of several causes of excusable delay, such enumeration does not make the occurrence of an epidemic an excusable cause per se. . . . It is incumbent upon [the contractor] to establish not only the existence of an excusable cause for delay but also that such cause actually contributed materially to such delay as well as the extent of the delay so caused.

The Board found that the contractor had failed to present sufficient evidence that the flu epidemic had delayed its work. The Board listed several key elements that a contractor claiming delay due to an epidemic should present in order to demonstrate that the delay was excusable:

[W]hen the flu epidemic occurred or its precise duration, what personnel were affected and the periods during which they were absent for that reason, whether such absences in fact caused delay in its preproduction testing program and if so the extent of such delay, and what efforts were made during such absences by the use of overtime or other measures to keep the work going.

The Ace Electronics decision may serve as a guide for future contractors seeking to establish the existence of an excusable delay based on the COVID-19 pandemic.

The questions asked by the board in Ace Electronics give insight into the type of information that a court or board may expect a contractor to produce in support of the existence of an excusable delay. Contractors should consider using these questions as they gather documentation of a delay and what steps were taken to address it.

This point was emphasized in a 1995 decision by the Government Printing Office Board of Contract Appeals, In the Matter of the Appeal of Asa L. Shipman’s Sons, Ltd. There the contractor asserted that a New York City flu epidemic should excuse its delivery delays. Referring to Ace Electronics as “the lead case for the rule regarding epidemics as an excuse for nonperformance,” the Board stated, “[t]he essence of the ‘Ace Electronics’ test is the requirement that a defaulted contractor prove that an epidemic was the sole cause, not merely a contributing cause, of the performance delay.” The Board found that the contractor had presented no evidence satisfying the list of factors identified in Ace Electronics, such that the contractor had demonstrated neither that the flu epidemic was “a materially contributing cause of the nonperformance,” nor the actual extent of the delay caused by the epidemic. In fact, the contractor stated that, even without the flu epidemic, it could not have delivered on time as it lacked the necessary supplies. The Board affirmed the default termination of the contract.

Not all contractors experiencing shortages of microelectronic parts will be able to establish entitlement to an excusable delay defense based solely on the COVID-19 pandemic and related restrictions. As with all claims of entitlement to an excusable delay defense, the inquiry is fact specific. There may be scenarios where a shortage of particular parts predates the COVID-19 pandemic, which may undermine an assertion that the pandemic or related quarantine restrictions are the cause of contract performance delays. Likewise, using the “sole cause” reasoning in Asa L. Shipman’s Sons, the fact that a parts shortage contributed to performance delays may undermine an effort to establish an excusable delay defense based on the COVID-19 pandemic and related restrictions. Nonetheless, for a contractor that can demonstrate that the pandemic or related restrictions have delayed its performance, the cases above may provide support for the position that the contractor is entitled to an extension of the performance period, or to the conversion of a default termination to a termination for convenience, based on an excusable delay.

Recommendations and Best Practices to Support an Excusable Delay Claim Related to the Microelectronics Parts Shortages

The scale and duration of the growing shortages in microelectronics parts are unknown. Government contractors may anticipate that their deliveries to customers eventually may be delayed due to these shortages, yet they still are scrambling to find other sources for needed parts in the hope that these delays may be averted. Government contractors contemplating that they may eventually seek to establish the existence of an excusable delay due to shortages of microelectronics parts should consider building the factual support for that position early, by taking steps such as those suggested below. Contractors also may wish to take additional, more broadly focused steps, both to provide support for the position that microelectronics shortages constitute excusable delays and to decrease the difficulty of obtaining in-demand parts long term. These steps may minimize the likelihood of a default termination of a federal prime contract and may increase the likelihood of a success in challenging such an action.

Contract-Based Tips and Best Practices

Know the contract. Identify the specific excusable delay clause applicable to the prime contract with the government customer. Also know the notice requirements in the contract for performance delays.

Closely coordinate with internal supply chain and manufacturing teams regarding parts availability. Work together to closely monitor whether sufficient parts are available to fulfill new government orders before accepting them. If a contractor decides to pursue an excusable delay claim, it will be important to identify whether a bid or proposal was submitted before or after insufficient parts were available to perform. Additionally, be mindful that whether a shortage of parts is foreseeable will vary over time. A lack of foreseeability will be easier to establish earlier in the development of a shortage rather than later.

Document the factual bases for an excusable delay, as well as all steps taken to mitigate the delay. Case law suggests that contractors should gather the following types of information to support the existence of an excusable delay.

  • When did the shortage or other delaying event occur?
  • What was the precise duration of the event?
  • What parts or other supplies needed to perform the contract were affected? Be specific about the parts or supplies impacted.
  • How did these absences or shortages cause delay?
  • What production facilities or suppliers were affected?
  • What efforts were made to keep the work going on the original schedule? Document the specific suppliers and sources contacted, their responses, as well as all other steps taken to mitigate the impact of the delay.
  • Did any other factors contribute to the delay?

Give notice and request an extension of the time to perform. Promptly prepare and provide all required delay notices to the federal agency in a timely manner. Request an extension of time to perform due to the excusable delay, and provide the documentation (for example, the information identified above) that supports the request. Additionally, consider notifying a customer of a potential delay even before it is certain that the delay will occur, in order to avoid surprising the customer and to facilitate planning for the potential delay.

Advise the contracting officer of all steps being taken to mitigate the delay. It is important for contractors to “[a]dvise the Contracting Officer of the actions that the company is taking in reaction to the [shortage] and how to minimize the impact . . . on contract schedule and costs and invite the Contracting Officer to suggest additional or different approaches.” Presenting the information gathered about the mitigation steps will further discussions of the contractor’s entitlement to additional time to perform.

Utilize Defense Priorities and Allocations System ratings. If the subject matter of a government contract could appropriately be subject to a DPAS rating, consider raising with the government customer whether an order could be issued with a DPAS rating to facilitate contractor efforts to obtain in-demand supplies. FAR 11.603(g) states:

Contracting officers, contractors, or subcontractors at any tier, that experience difficulty placing rated orders, obtaining timely delivery under rated orders, locating a contractor or supplier to fill a rated order, ensuring that rated orders receive preferential treatment by contractors or suppliers, or require rating authority for items not automatically ratable under the DPAS, should promptly seek special priorities assistance in accordance with agency procedures (see 15 C.F.R. 700.50–700.55 and 700.80).

This may help to prioritize microelectronics orders in support of federal contract work and to avoid or limit possible manufacturer delays. The recently issued report on Executive Order 14017 specifically states, “[b]oth the DPAS regulation and the delegation of authority to [the Department of Defense] specifically note that placing priority ratings for stockpiling purchases is permitted, so to the extent that DoD needs to place priority ratings under the DPAS for strategic and critical materials—either for [National Defense Stockpiling] purchases or operational requirements—it has the ability to do so.”

Seek subcontract terms that facilitate performance under the prime contract with the government. When negotiating with its suppliers and subcontractors, a government contractor should seek terms that will position it to perform its contract obligations in a timely manner. A contractor may consider including a “most favored customer” clause in its supplier and subcontractor agreements so as to obtain priority in the fulfillment of orders. A contractor also may consider including a liquidated damages provision for late delivery by a subcontractor or supplier to incentivize timely performance.

Additional Steps for a Contractor to Consider

Seek alternative sources. Contractors should use reasonable diligence regarding all possible options for acquiring parts. Look to different vendors and have discussions with current suppliers about adhering to delivery times and minimizing delays where applicable. Look for interchangeable parts that can serve as substitutes for parts that are in short supply, with government approval for a substitution as needed.

Directly contact lower-tier suppliers and sources. If a parts shortage stems from a secondary manufacturer, contacting the original source supplier, and perhaps contracting directly with that supplier, may help to alleviate delays. Additionally, brokers, although a costlier choice, also may help identify key microelectronics parts that are in short supply.

Bring component manufacturing in-house where feasible. Some contractors, particularly larger contractors, may want to consider taking on the manufacturing of some parts and components that are in short supply. Such contractors also may consider acquiring a supplier of needed parts to minimize overhead costs and to limit the need for outside sources.

Product redesign. Consider a physical redesign of the product to eliminate the need for parts and components that are difficult to obtain. Many noncommercial government items contain outdated and difficult-to-procure electronics, and a redesign could help the government and contractors alike with respect to both delivery times and costs. Contractors would be able to seek multiple supply sources for parts that are newer and easier to acquire. The government may benefit by being provided more up-to-date technology, thereby creating better operability and longer service life. Product redesigns may necessitate new testing, approval, and certification efforts by government customers, so contractors should allow sufficient lead time for a product redesign to alleviate supply chain shortages.

Conclusion

Shortages of microelectronics parts appear likely to persist and grow in the foreseeable future. Contractors who need these parts in order to perform under federal government contracts are well-advised to take steps to minimize the possible losses of revenue and opportunities due to these shortages, as well as losses of contracts via terminations for default due to delayed performance or nonperformance.

Existing case law provides some support for a contractor who may seek to establish that a supply chain shortage of microelectronics parts constitutes the basis for an excusable delay, such that additional time must be allowed to perform, or a default termination should be converted to a termination for the government’s convenience. To support the existence of an excusable delay, a contractor should build the factual support for an excusable delay as soon as it becomes aware of a possible parts shortage. Contemporaneous documentation will be indispensable. A contractor also may wish to pursue more wide-ranging efforts to alleviate its supply chain challenges, perhaps by seeking alternative sources or by redesigning its product.

The road to a successful conversion from a default termination to a termination for the government’s convenience is inherently difficult, as can be the path of avoiding a default termination in the first place. Taking the steps recommended in this paper may help to smooth the course for a contractor whose delayed performance or nonperformance stems from a shortage of these increasingly necessary microelectronics parts.

    Authors