The Defense Department said on September 12 that it issued updated guidance for its contracting officers on approaches for addressing inflation under existing firm-fixed-price (FFP) contracts.
The rate of inflation in the U.S. stood at 8.5 percent in July 2022, up from 7.0 percent in 2021, and just 1.4 percent in 2020.
DoD said its new updated guidance “is based on feedback from the Department’s acquisition executives about how inflation is presently affecting the defense industrial base and contractors’ ability to perform under existing firm-fixed-price contracts.”
“The memorandum advises Contracting Officers about the range of approaches available to them to make potential accommodations including schedule relief and amending contractual requirements, and in extraordinary circumstances, the use of Extraordinary Contractual Relief,” DoD said.
The bottom-line message in the new guidance appears to be that contractors performing under FFP contracts have to bear the brunt of inflation, but that some wiggle room may be possible for contractors if they can reach satisfactory arrangements with DoD.
“The ability to recognize any cost increases is largely dependent on contract type,” reads the memo from John Tenaglia, DoD’s Principal Director, Defense Pricing and Contracting.
“Contractors performing under firm-fixed-price contracts that were priced and negotiated before the onset of the current economic conditions generally bear the risk of cost increases,” the memo says. “However, there may be circumstances where an accommodation can be reached by mutual agreement of the contracting parties, perhaps to address acute impacts on small business and other suppliers.”
“For example, provided adequate consideration is obtained for the Government, such an accommodation may take the form of schedule relief or otherwise amending contractual requirements,” the memo says.
The document notes that the secretaries of the Defense, Army, Navy, and Air Force have authority to afford “extraordinary contractual relief” in “extraordinary circumstances where contractors have sought or may seek an upward adjustment to the price of an existing firm-fixed- price contract to account for current economic conditions.”
“While the law and regulation have established stringent criteria, the Department will consider contractor requests to employ this authority, subject, of course, to available funding,” the memo says.
Dr. Bill LaPlante, undersecretary of Defense for Acquisition and Sustainment, addressed the issue last week during an event hosted by Defense News on September 8.
“If you’re in an FFP contract that was signed in 2020, it’s gotta suck when it’s 2022 with an inflation rate of 10%. That’s what I’m worried about,” LaPlante said.
“We want to keep our industrial base whole, we want to keep them solvent. We need them. That’s what we’re after,” he said.
“One, can we loosen or broaden the definition of what an EPA [equitable price adjustment] clause can be used for, including for firm fixed-price? And can we use what’s called extraordinary circumstances in some cases to make people whole,” LaPlante said.
“What I’ve been asking of industry, though, is data. I need data about companies that are either potentially going under or not … that are affected by inflation.,” said LaPlante.