On May 25, 2022, the Department of Defense (DOD) released Guidance on Inflation and Economic Price Adjustments (Guidance) to address steadily rising contract costs due to inflation confronting federal contractors. Unfortunately for many federal construction contractors, the Guidance closes the door on requests for equitable adjustment based solely on increased costs resulting from inflation.
The Guidance explains that for firm-fixed-price (FFP) contracts that do not include an economic price adjustment (EPA) clause, contracting officers (COs) should reject requests for equitable adjustment (REAs) based on “unanticipated inflation.” DOD reasons that inflation is a changed economic condition rather than a government-directed change to the scope of work, and therefore cannot be compensated under the Changes clause. An EPA clause would permit a contractor to seek an equitable adjustment on the basis of increased costs, but such clauses are exceedingly rare in FFP contracts.
The Guidance also provides direction for inflation-based cost increases for cost reimbursement and fixed-price incentive contracts, both of which permit varying degrees of compensation for contractors.
In addition, the Guidance instructs COs to consider whether an EPA clause is appropriate in new contracts. COs are instructed to use an EPA clause in FFP contracts when relevant markets may be volatile for an extended period during contract performance. One of the primary considerations in determining whether to use an EPA clause is the length of the contract. The Guidance also instructs COs to limit the EPA clause to those costs that are expected to be unstable, and to base the recovery calculation on indices that most accurately capture the market movements of the costs covered by the EPA clause.
The Guidance does not change a contractor’s entitlement to compensation for changes or delay, but it may embolden COs to resist legitimate requests for costs. Before a contractor accepts the government’s position that the contractor cannot recover for the significant effects of unanticipated cost escalation and supply chain shortages and disruptions, the contractor should consult with an experienced government contracts attorney to discuss its particular situation.
Credit to Jacob W. Scott, Partner of Smith, Currie & Hancock, “June 7, 2022”