The DoD is Considering Contract Adjustments for Inflation

The DoD is Considering Contract Adjustments for Inflation

On September 9, 2022, the Department of Defense (DoD) issued guidance to help manage the effects of inflation for federal contracting officers that are in existing fixed-price contracts. The Memorandum, issued to various United States’ Agency Commanders, empowers the government agencies to extend contractual relief to some contractors that have been uniquely impacted due to this extraordinary economic climate. This new guidance builds upon a prior memo dated May 25, 2022, that highlighted the ability or inability of a contracting officer to recognize and accommodate cost increases is largely dependent upon contract type. Notably, contracting officers in already-existing fixed-price contracts may be left with the burden.

The DoD provides possible opportunities that federal government contractors can actualize and reduce the impact of inflation in fixed-price contracts if/when the contract was priced and negotiated before the onset of the current inflationary economic condition. Here’s what you need to know:

Possible Paths for Contractors to Pursue

One approach is for the contracting officer to reach out to the involved contract parties and seek a mutual agreement of scheduled relief or otherwise amend contractual requirements, provided that the Government receives something in return.

In extraordinary circumstances, another path is for the contracting officer to seek an upward adjustment to the price of an existing fixed-price contract without the Government receiving something in return. The memo clarifies that each of the Secretaries of Defense (Army, Navy, and Air Force) are empowered to use the authority provided under Public Law 85-504 in order to afford extra-ordinary contractual relief. Public Law 85-504 has stringent criteria to satisfy, but the memo considers the current inflationary impact of some contracts as satisfying this ‘extraordinary contractual relief’ standard, subject to available funding.

Understanding Public Law 85-804

The authority of the government under Public Law 85-804 is broad but has limitations, including:

  1. Only available when no other adequate legal authority exists for relief;
  2. Additional funding must not exceed the appropriated amounts (except when used to approve indemnification agreements;
  3. Any contract amendment can only be to the “extent necessary to avoid such impairment to the contractor’s productive ability”;
  4. Contractor must suffer a “loss, and not merely a decrease in anticipated profits; and
  5. Contractor must submit a request for contract amendment before all obligations under the contract have been discharged.

The memo concludes with an acknowledgement that additional adaptations may be necessary as conditions warrant. For contractors grappling material impacts due to current inflation, the DoD comments can provide optimism for a contract that is struggling with the impact of inflation.

Next Steps for Contractors

Contractors may want to examine any existing fixed-price contracts and identify elements of the contract that are acutely and significantly impacted by high-inflation. The next step would be to request relief from the contracting agency with reasonable and specific accommodations.

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