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.
DOD Caveats
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.
GSA Policy
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.
Conclusion
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.
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guide to the subject matter. Specialist advice should be sought
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