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The Department of Defense (“DoD”) recently issued a
memorandum to contracting officers (“COs”) providing
guidance on the use of economic price adjustment (“EPA”)
clauses to address inflation-related cost increases. The
memorandum, entitled Guidance on Inflation and Economic Price
Adjustments, comes as the year over year inflation rate rose to
8.6% for the month of May and contractors with
fixed-price contracts seek ways to recover their rising costs. EPA
clauses allow the parties to mitigate cost risks that present
themselves as a result of circumstances beyond the contractor’s
control, e.g., inflation and supply chain price fluctuations.
Generally, an EPA clause will dictate that the Government bear the
cost risk up to a mutually-agreed-upon ceiling. EPA clauses apply
to the cost portion of a contract, but do not normally apply to the
profit. DFARS PGI 216.203-4.
Memorandum: No CO Authority to Grant Contractual Relief Absent
an EPA Clause
The memorandum states that, absent an existing EPA clause, COs
do not have the authority to provide contractual relief for
unanticipated inflation under a firm-fixed-price contract.
Some contractors who entered into contracts without EPA clauses
have looked elsewhere in the FAR to solve their inflation woes. The
FAR provides for equitable adjustments to contract terms based on
government-directed changes to the contract through requests for
equitable adjustment (“REAs”). However, the memorandum
specifically disallows the use of REAs to address unanticipated
inflation. The DoD reasons that inflation is not a CO-directed
change to the contract and, therefore, REAs are not
appropriate.
Although the memorandum does not have the force of law on these
points, it will influence the actions of COs who are considering
contractors’ attempts to recover for price increases.
Considerations for Use of EPA Clauses
The memorandum advises COs on when and how to include an EPA
clause into a prospective contract. EPA clauses cannot be
integrated into all government contracts. The memorandum advises
COs that EPA clauses based on established prices or on the actual
cost of labor and material may only be used when the contract term
extends at least six months past the date of award. DFARS
216.203-4(1)(ii).
EPA clauses that are based on cost indices of labor and material
(such as the Bureau of Labor Statistics Producer Price Index or the
Employment Cost Index) may only be used when the contract demands
that significant costs be incurred beyond one year after the start
of performance. When a cost index is used to negotiate the price of
the contract, the same index should be used to adjust the price
under an EPA clause. The memorandum further advises COs to limit
the scope of EPA clauses to those costs most likely to be impacted
by inflation and to select narrow indices that are specifically
relevant to contract performance, such as the North American
Industry Classification System (“NAICS”) Product
Codes.
The memorandum stresses that any EPA clause should be fair to
both parties. Contractors should be mindful to ensure that an
agreed-upon EPA clause include both a formula for the computation
of authorized upward and downward adjustments, as well as a list
that clearly identifies the events that trigger the EPA clause.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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