Inflation Relief for Government Contractors: We’re Here to Help, Chapter Two

Earlier this month, the Undersecretary of Defense for Acquisition and Sustainment announced that the Department of Defense (“DoD”) sympathized with federal contractors, especially small business contractors, who are racking up losses under existing fixed price contracts as a result of unprecedented inflationary pressures. Two days later, the Principal Director for Defense Pricing and Contracting for DoD issued a memorandum that implemented the Undersecretary’s announcement, the message of which was to encourage Contracting Officers to provide contractors with some relief from the impact of inflation. You can review the memo here.

This memo suggests a fairly substantial course correction from guidance issued by the Director this past May. About three months ago, I wrote a blog post entitled “Government Contractors: Help! Inflation’s Killing Us—Government: We’re Here to Help (or not).” There, I discussed the Director’s memorandum issued in May regarding inflation and economic price adjustments.

That memo began with hopeful guidance to Contracting Officers to consider “whether it is appropriate to recognize cost increases due to inflation [and to] offer considerations for the proper use of” of Economic Price Adjustment (“EPA”) clauses. Generally, EPA clauses are inserted into contracts only if the Contracting Officer makes an advance determination “that it is necessary either to protect the contractor and the Government against significant fluctuations in labor or material costs or to provide for contract price adjustment in the event of changes in the contractor’s established prices.” See FAR § 16.203-3. While there are provisions for price adjustments under GSA’s regulations that govern the Federal Supply Schedule, fixed price contracts generally don’t have EPA clauses. For that reason, the memo suggested Contracting Officers consider including EPA clauses in future solicitations.

That, of course, provides no relief under existing contracts. In the absence of EPA clauses, the memo delivered a clear, blunt message that Contracting Officers should not grant equitable adjustments under a contract’s changes clause “[s]ince cost impacts due to unanticipated inflation are not a result of a contracting officer-directed change [to the work or contract], COs should not agree to contractor REAs submitted in response to changed economic conditions.”

Well, DoD’s acquisition leadership must have gotten an earful. In response, the Director’s new memo was issued to provide guidance “about the range of approaches available to” Contracting Officers to address “how inflation is presently affecting the Defense Industrial Base and contractors’ ability to perform under existing firm-fixed-price contracts. . . .”

This “range” essentially boils down to two options. The first option is to devise “an accommodation . . . by mutual agreement of the parties . . . provided [for example] adequate consideration is obtained for the Government.” It states that “such an accommodation may take the form of schedule relief or otherwise amending contractual requirements.” I’m not sure how an adjustment to the schedule would be helpful, but it seems to me that the concept of “otherwise amending contractual requirements” affords the Government and contractors with considerable latitude to devise creative approaches for defining the value provided to the Government as consideration for providing price relief.

The second option is to invoke a rarely used mechanism known as “Extraordinary Contractual Relief” under Public Law 85-804 and Executive Order 10789 as implemented in the regulations found in Part 50 of the FAR and part 250 of the DFARS. There are a number of hoops to jump through and fairly high-level approval of such a request is necessary; however, there is no need to provide contractual consideration to the Government in exchange for an adjustment.

Obviously, it’s too early to see how the glimmer of hope expressed in this memo will play out; however, it’s gratifying to see high-level recognition that inflation is having a profound impact on contractors in which they have few options available to them for weathering the storm.