On May 25, 2022, the Department of Protection (DOD) issued Steering on Inflation and Financial Cost Adjustment (Steerage Memorandum). It was long overdue. Inflation is steadily soaring and, as a result, contractors with fastened-price contracts are compelled to shoulder skyrocketing source fees due to the fact set-rate contractors bear the hazard of amplified expenses. As these price increases erode income margins and carry on to drive contracts into loss positions, contractors are searching for some style of relief. PilieroMazza lately hosted a webinar, Provide Chain Ache: How Contractors Can Get Relief from a Source Chain-Linked Claim, detailing aid options and greatest techniques when a contractor faces inflation and source chain delays. DOD previously delivered some high-level feelings about inflationary difficulties facing contractors in a letter to Congress. But now, DOD has included coverage-amount path to contracting officers detailing the agency placement on allocating inflation pitfalls in ongoing contracts and new contracts. Contractors afflicted by inflation on their federal contracts ought to shell out near notice to this direction as they negotiate and enter new governing administration contracts.
DOD Confirms Willingness to Contain EPA Clauses in New Contracts
The Direction Memorandum provides hope to contractors at the moment negotiating contracts. It highlights that “DOD contractors and contracting officers (COs) alike have expressed renewed curiosity in applying economic value adjustment (EPA) clauses.” Beyond that, it confirms that “an EPA clause may possibly be an appropriate software to equitably equilibrium the danger of inflation between the Governing administration and contractor.” In specific, DOD notes that an EPA clause could be appropriate in contracts that will not be carried out inside the up coming six months. This course offers COs with no new authority Much 16.3203-2 presently makes it possible for incorporating an financial price adjustment clause when (i) there is serious question about the steadiness of industry or labor circumstances that will exist during an prolonged period of deal performance, and (ii) contingencies that would or else be provided in the deal cost can be discovered and coated independently in the agreement. Nonetheless, the Steering Memorandum will likely make convincing COs to use that authority an easier proposition.
Over and above encouraging the use of an EPA clause, the Steerage Memorandum also provides path to COs pertaining to how to correctly craft an EPA clause. It stresses a number of vital components, like:
- things to consider for selecting an index to measure inflation that is connected to expense parts that are most unstable
- limits on the scope of the EPA to exclude expenses that are unlikely to be afflicted by inflation
- allowance for both of those upward and downward adjustments in rate and
- establishing formulas for calculating the new pricing instead of merely reopening price tag negotiations.
DOD Signals Unwillingness to Change Current Contracts
On the other hand, the Steerage Memorandum features sobering tips for contractors with current fastened-selling price contracts. It parrots the situation used by lots of contracting officers that “[i]n the absence of an relevant deal clause, these kinds of as an EPA clause authorizing a deal cost adjustment as a outcome of inflation, there is no authority for providing contractual aid for unanticipated inflation below an FFP deal.” Dependent on that policy, the Advice Memorandum reinforces that without having an applicable agreement clause or modify, contracting officers may well not concur to a contractor’s requests for equitable adjustment. This unlucky decree aligns with the information offered through our webinar, telling contractors that they really should floor any needs for adjustments in either (a) an financial price tag adjustment clause (b) an option deal clause that authorizes cost adjustments or (c) by pinpointing some federal government way that can be construed as a modify or govt-prompted delay.
This steerage will come throughout as disingenuous given the statements DOD beforehand created to Congress. In early Might, DOD responded to a record of Congressional thoughts. In that response, DOD attempted to obfuscate the problem of contractors facing inflation, proclaiming that contractors experienced filed several requests for equitable adjustment because of to inflation. But it is unclear why DOD envisioned contractors to file this kind of adjustment requests specified that DOD previewed—and now in the Direction Memorandum, officially confirmed—that contracting officers must not grant equitable adjustments with out EPA clauses. As a substitute of providing reduction under the present deal, DOD explained to Congress that it expects contractors to raise charges on foreseeable future contracts to make up for people losses—separate from any value boosts needed to accommodate possibility.
As outlined before, federal government contractors should really review and fully grasp the implications of the Assistance Memorandum prior to bidding for their future agreement and pursuing reduction less than existing contracts. There are at minimum a few crucial takeaways:
- Contractors should thrust contracting officers to increase EPA clauses to any solicitation but could want to goal these requests to adjustments for the element(s) with the most instability.
- Contractors really should couch any request for adjustments of present-day contracts on a contractual provision or other governing administration motion that entitles contractors to relief (i.e., adjustments/hold off).
- Contractors ought to take into account raising costs for upcoming contracts to make up for the elevated inflationary costs incurred on current contracts.