Pentagon Releases Inflation Guidance to Industry.

• Author: Freling, Scott A.
• Position: GOVERNMENT CONTRACTING INSIGHTS

In response to industry-wide questions about price adjustments for inflation, the Defense Department released guidance May 25 about when and how contracting officers may provide financial relief to defense contractors working on fixed-price contracts.

The department's guidance recognizes that "inflation is impacting several segments of our economy" and has caused increased performance costs for many contractors. Those increases have eroded the profit margin of contractors working under fixed-price contracts, which are generally not subject to any price adjustment based on increased performance costs.

As an exception to that general rule, contracting officers may make an equitable adjustment to a fixed-price contract in cases covered by the standard "Changes" clause under Federal Acquisition Regulation 52.243-1, or similar adjustment clauses. The Defense Department explains that it has been "fielding questions about the possibility of using requests for equitable adjustment" under the standard Changes clause to help contractors "address unanticipated inflation."

Unfortunately for fixed-price contractors, the department has adopted a narrow view of when to grant an inflation-related adjustment. The guidance states that "since cost impacts due to unanticipated inflation are not a result of a contracting officer-directed change, [contracting officers] should not agree to contractor [requests for equitable adjustment] submitted in response to changed economic conditions." In other words, this guidance discourages contracting officers from granting equitable adjustments based purely on inflation.

That said, the guidance leaves open the possibility of inflation-related claims when a contracting officer has directed changes. That could include situations where a contracting officer directs a different method of performance because of changed economic conditions--for example, directions to use a component other than the one specified or to meet a different schedule of performance. Indeed, contractors experiencing increased costs should think broadly about potential changes caused by the contracting officer, which could open the door to adjustments.

The department's guidance offers a modest solution for contractors performing under certain fixed-price agreements. It encourages contracting officers to provide relief under "economic price adjustment" clauses, often referred to as EPAs. The FAR provides a list of standard clauses, allowing for economic...