Inflation and the increased cost of doing business are having a nationwide impact — and there is no exception for Government Contractors. As we recently covered here, contractors experiencing material cost escalation on firm-fixed-price (FFP) contracts face a difficult road to recover those increased costs from the Government.
In response, the Department of Defense (DOD) issued new Guidance on Inflation and Economic Price Adjustment. The DOD Guidance is essential reading for all contractors bidding for and winning new work.
Economic Price Adjustment (EPA) Clauses
The DOD Guidance focuses on the use of EPA clauses for contracts “developed or negotiated during this period of unusually high inflation.” By including an EPA clause in a FFP contract, the Government can more equitably balance the risk of on-going or even rising inflation: “[A] contractor [can] accept a fixed-price contract without having to develop pricing based on worst case projections to cover the cost risk attributable to unstable market conditions.”
The Guidance advises Contracting Officers to consider a number of factors when including an EPA clause in a contract. For example, citing DFARS 216.203-4(1)(ii), the Guidance advises that a contract of less than six months should not include an EPA clause because of the contractor’s ability to assess shorter term market conditions. The Guidance also advises Contracting Officers to carefully tie the EPA clause to the appropriate cost index and limit the scope to only those costs likely to be subject to market fluctuations.
Practical Advice for Contract Negotiations
Contractors bidding for or executing new DOD contracts should be mindful of this Guidance moving forward by:
(1) monitoring industry and market conditions to stay aware of cost trends and
(2) using that information to push Contracting Officers to add appropriate EPA clauses to RFPs moving forward.
But What About My Current Contracts ?
Not surprisingly, DOD’s Guidance takes a hard line against awarding equitable adjustments on existing FFP contracts that do not include an EPA clause or other toehold for inflation-based modifications: “Since cost impacts due to unanticipated inflation are not a result of a contracting officer-directed change, COs should not agree to contractor REAs submitted in response to changed economic conditions.”
Contractors seeking adjustments on current contracts need to be more creative. That can include tethering the increased costs to alleged Government-caused changes or delays. Contractors unable to procure materials due to supply chain issues can also explore force majeure arguments related to the impracticability or impossibility of performance.
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