RGCI - Did the Door Just Open for Inflation Relief on DoD Fixed-Priced Contracts

Yes, the door just opened for potential relief from unanticipated inflation on fixed-priced contracts, but what’s beyond the door is still unclear. This year’s National Defense Authorization Act (NDAA) includes Section 822, Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts, which builds upon DoD’s September 9, 2022, inflation guidance through use of FAR Part 50, Extraordinary Contractual Actions and the Safety Act, requests submitted to your contracting officer to provide an upward adjustment (increase contract value) and this can be done for prime and subcontractors. Note that this NDAA section does not create an obligation for the Government to pay for unanticipated inflation, but it is a “discretionary” expenditure where the Government may pay for the effects of unanticipated inflation. What remains to be seen is exactly how and how much will be provided to your contract(s).

This section of the NDAA and the DoD September 2022 inflation guidance shows a departure from DoD’s initial May 2022 inflation guidance which discussed requests for equitable adjustment (REA) in the absence of an economic price adjustment (EPA) clause included in a contract. It was in that guidance where it was reinforced that contracting officers do not approve REAs as a remedy for unanticipated inflation since there was no contracting officer directed change to contract terms, a requirement for REAs and to implement the Changes clause in a contract (FAR 52.243-1 or 52.243-3). Section 822 and the September 2022 guidance appear to use FAR 50-103-2(a)(1) as a justification for potential contractor fixed-priced unanticipated inflation cost remedy where it states:

When an actual or threatened loss under a defense contract, however caused, will impair the productive ability of a contractor whose continued performance on any defense contract or whose continued operation as a source of supply is found to be essential to the national defense, the contract may be amended without consideration, but only to the extent necessary to avoid such impairment to the contractor’s productive ability.”

There is little guidance at this point on how Section 822 will be implemented, measured, and paid. Specific DoD guidance is due by the end of March 2023 (90 days after the NDAA enactment) and this temporary remedy is only available through December 31, 2023. It is also subject to available funding. That means no specific funding has been tied to this relief. However, the fact that DoD is implementing this in its NDAA is clearly a good sign that Congress recognized that contractors/subcontractors need relief due to unanticipated inflation. Section 822 even allows for subcontractors to work through their prime contractors to seek relief for themselves but does not specifically define whether this remedy is available to lower tier subcontractors such as second or third tier subcontractors. The NDAA Section 822 changed the thresholds for higher-level approvals from $50,000 to $500,000 thus making fewer subject to high-level approvals. 

As noted above, the vehicle for achieving relief due to inflation is FAR Part 50. Although not specifically known what format will be required, we do know the requirements of FAR Part 50. Specifically, FAR Part 50.103-2 does allow for contract modifications, such as increased costs due to inflation, although it is not specifically mentioned, without the contractor making additional consideration such as giving up something or other contract concessions. It should be noted that this addresses primarily labor, materials, and indirect costs, but not the loss of associated profit.

What Information May Be Needed?

It depends upon your situation. It may include supply chain issues that increased contract material costs or limited availability of required labor that increased costs. Section 822 also allows related indirect costs. Information to be researched could include labor and material costs proposed versus what was used in the execution of the contract and provided evidence of unanticipated inflation beyond contractor control. This could be higher union wages, parts or raw materials supply chain issues and associated higher resulting costs (unanticipated inflation) as well as indirect costs impacted by inflation such as fuel costs. What really may be needed here is the overall harm to your company and its contracts.

So, What Should You Being Doing Now?

First, I recommend speaking with your contracting officer regarding your problems with inflation and the impact to your fixed-priced as well as time and material contracts. Then, I recommend starting to collect the facts that you want to put forward in your FAR Part 50 request for inflation relief. Beyond the facts, concentrate on the conclusions of these facts: why it is equitable for your company to be provided relief on its contracts for unanticipated inflation.

FAR 50.103-3 provides direction for the request:

  • Generally, in the form of a letter, stating your specific request, in this case request for relief due to unanticipated inflation;
  • Providing the essential facts and evidence in chronological format in a narrative form;
  • Contractor conclusions based on the facts, and contract terms and why the contractor considers itself entitled to an adjustment;
  • Contract payment background and details of payment assignment; and
  • Required certification - if over the simplified acquisition threshold, FAR 50.103(b) requires a contractor/subcontractor certification.

Remember that time is of the essence. This is only available until December 31, 2023, and this is a discretionary expenditure meaning that the Government is not required to pay. A further complication is any request may be subject to available funding. So, the early bird may not only get the worm, but in this instance, the relief needed for your fixed-priced and time and material contracts issues due to the unanticipated inflation and economic and supply chain issues. Still, the door has opened which is more than what the DoD May 2022 guidance provided, and it is time to prepare to go beyond the door. So, at this time, discuss with your contracting officer, research, and assemble the information; draw conclusions to state your case for additional funds due to unanticipated inflation, but be prepared to go through the opened door and submit when the further guidance comes during March 2023. It is not far off.

Redstone Government Consulting with its experienced accountants and lawyers can help: through the facts and evidence collection, preparation of your FAR Part 50 submission as well as Government contracting discussions. Make them part of your team!

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Written by David G. Fix, CPA, CFE

David G. Fix, CPA, CFE David (Dave) Fix is a Director with Redstone Government Consulting, Inc. He provides Government Contract Consulting services to our Government contractors primarily related to compliance with Federal Acquisition Regulations and Cost Accounting Standards, equitable adjustment claims, and business systems. Prior to joining Redstone Government Consulting, Dave served in a number of capacities with DCAA for over 35 years. Upon his retirement, Dave was a Regional Audit Manager with DCAA. Dave began his DCAA career in 1986 as an auditor-trainee with the General Electric Suboffice in Pittsfield, Massachusetts. He progressed from auditor to DCAA management ranks serving in DCAA offices in Upstate New York, Columbus, Ohio and Greensboro, North Carolina in audits of major and non-major contractors. Dave served DCAA in three overseas tours, all as Branch Manager, in Kuwait/Iraq (2007), Afghanistan (2010-2012) and Kuwait (2014). Dave was promoted to Regional Special Programs Manager (RSPM) in 2015 before ultimately becoming a Regional Audit Manager (RAM) in October 2019. While a RSPM, Dave worked with DCAA’s other three RSPMs with updating the Agency-wide audit planning process including assigning priorities and determining funded/unfunded audits that is currently being used by DCAA. While a RAM, Dave had overall management responsibility for audits performed by approximately 140 employees including one of DCAA’s largest shipyards. During his career, he served as guest instructor at DCAA’s Defense Contract Audit Institute (DCAI) bringing field perspective to “Advance Auditing Issues” and “Supervisors’ Course” as well as served as a DCAI adjunct instructor over DCAA auditors’ initial two-week training course prior to his retirement. Dave served 36 years in the Air Force Reserve/Air National Guard in both enlisted and officer positions retiring at the rank of Lieutenant Colonel. His last duty station was Air Force Reserve Command (AFRC) Headquarters, Robins Air Force Base, Inspector General Office serving as the Chief, Contracting Inspections leading inspections of AFRC’s 10 contracting offices as well as assisting in inspections of AFRC finance offices. Dave currently specializes in preparing clients for more complex DCAA audits, providing advice on FAR cost principles and contracts regulatory provisions and in assisting clients in anticipating and addressing audit.

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Topics: Compliant Accounting Infrastructure, Contracts & Subcontracts Administration, DFARS Business Systems, Government Regulations