Both the General Services Administration (“GSA”) and the Department of Defense (“DOD”) are recognizing the impact of the eight percent rate of inflation on federal contractors. On September 9, 2022, DOD released a memo providing guidance to contracting officers “about the range of approaches available to them” to manage the effect of inflation on existing firm fixed price contracts. Similarly, GSA provided new direction to its contracting officers permitting easier access to the economic price adjustment clause in GSA contracts.
Unfortunately for contractors, this does not mean an automatic, or necessarily an easy, path to recouping the costs lost to inflation. However, it does mean that the government is recognizing the concerns and considering avenues of relief on firm-fixed price contracts, perhaps providing some wiggle-room on the long-held position that contractors bear the risk of cost increases under firm fixed price contracts, even with the onset of extenuating circumstances.
The memo from DOD’s Principal Director, Defense Pricing and Contracting (DPC) states that where there are “extraordinary circumstances” effective immediately, DOD will consider adjustments to the contract price in order to “address acute impacts on small businesses and other suppliers.” Notably, while calling out small businesses, the Memo leaves the door open to other contractors and does not limit the application. DOD advised that it will contemplate these upward adjustments under Part 50.101 of the Federal Acquisition Regulation (FAR), which governs relief under Public Law 85-804. Traditionally, obtaining relief under Public Law 85-804 (a 1958 law allowing amendments to contracts to facilitate national defense) is an incredibly challenging path. The applicable sections of FAR Part 50 permit contracting officers to demand detailed supporting documentation in furtherance of any request for relief, including details on the impacts to contractor profits for approval or denial of the request, company financial statements, analysis as to how the adjustment was determined, interviews with personnel with personal knowledge, analysis of any mitigation steps taken by the contractor and any other “contemporaneous evidence” that supports the request. The recent DOD memo does not change those requirements, nor does it alleviate the likelihood of a DCAA audit. Contractors will need to be prepared to show what inflation rate was assumed at the time of bid, and any other underlying bid assumptions as to their pricing, as well as any documentation they have that substantiates the increase of the firm-fixed price contract. In short, the DOD’s Memo reminds contracting officers that avenues for relief do in fact exist for contractors, and that the traditional government position that contractors bear all of the risk for their firm fixed price contracts, need not necessarily be the case in the face of the current economic circumstances.
On September 12, 2022, the leading procurement executives at GSA informed their contracting officers, that they no longer needed “additional approvals” to invoke the economic price adjustment clause (GSAR Clause 552.216-70) contained in the GSA contracts.
In GSA contracts, a ceiling percentage for upward adjustments is usually set forth in the solicitation. However, in March of this year, GSA issued a memorandum establishing “temporary flexibility” and lowered the approval level to “one level above the contracting officer” and also relaxed the time limitations and constraints on the number of price adjustments that a contractor could request. Now, with the most recent memorandum, the authority to consider the equitable price adjustment rests directly with contracting officers, and there is an emphasis on the quick review and resolution of the requests.
Yet, despite this optimistic news from GSA, unlike DOD contracts, the GSA changes are not applicable to firm fixed price contracts, unless the contractor can establish government-caused delay. GSA’s senior procurement official clarified:
“In a fixed-price contract lacking an EPA clause, the contractor is obligated to perform at the fixed-price, and can only recover for increases to the fixed price that are the result of changes or other actions/inactions by the government. As a general rule, since inflation is not a government-directed change, it cannot form the basis for an equitable adjustment. However, if the inflated costs are the direct result of government action (for example, when government delays the work into a period when higher costs are encountered), compensation is appropriate.”
Practical Effects for Contractors
Contractors with GSA supply contracts need to verify the presence of the economic price adjustment clause in their respective contracts. The inclusion of this clause opens the door to the contracting officer’s ability to provide pricing relief beyond the ceiling percentage contained within the applicable solicitation. However, despite the temporary moratorium on time limitations, contractors should promptly make the requests for adjustment including detailed analyses explaining the necessity of the adjustment.
Those contractors with firm-fixed price contracts for DOD should also promptly make any inflation or supply chain related requests for equitable adjustment, as DOD warned that such requests were “subject to available funding.” In making these requests contractors must outline the basis for the request, including the underlying bid assumptions, and provide a clear and detailed supporting package in order to minimize the back and forth with the contracting officer. The more thorough and supported the request, the more likely the contracting officer will approve and the quicker the contractor will experience relief. Contractors should meticulously prepare both the package for submission, and the relevant team members for interviews with DOD and DCAA.
As inflation continues to rise, and the fear of recession looms, there is likely to be more relief from other federal agencies and/or updated guidance from DOD and GSA. In the interim, careful job cost records should be maintained to document the need for any future requests and contractor teams should regularly be tracking their bid assumptions against the current market costs to ensure they are not missing an opportunity to recoup lost costs.