Prices are rising everywhere – at the supermarket, at the gas station and online – with no apparent relief in sight. Construction is feeling it too, with material costs skyrocketing. Unfortunately, based on recent Department of Defense guidance, federal contractors won’t have much recourse.
On May 25, 2022, the DOD addressed inflation and the resulting increase in contract costs for federal construction contractors. Many of them had hoped to receive a fair adjustment in their contracts, but in most cases this seems unlikely.
What the guidelines say
The DOD has recognized that “inflation has an impact on many segments of our economy” and understands that rising costs affect many contractors, often destroying their profit margins. However, most contracts do not provide for adjustments.
According to DOD guidelines, contracting officers (COs) must deny requests for equitable adjustments (REA) due to “unforeseen inflation” in the case of firm fixed price (FFP) contracts. The DOD has stated that inflation is not a change in scope of work; rather, it is a modified economic condition. Therefore, the compensation is not justified.
However, the guidelines provide an opening for inflation claims if the CO makes changes to the scope of work.
Additional DOD Guidance
The only exception to granting an adjustment to an FFP contract would occur if an Economic Price Adjustment (APE) clause was in place. An EPA would allow a contractor to request an adjustment. However, it is rare for FFP contracts to include such a clause. And even if there is an EPA, there is probably a cap on the amount of the adjustment.
This limitation aside, DOD has advised country offices to consider adding APEs to future contracts. He noted that “an APE clause can allow a contractor to accept a fixed-price contract without having to develop worst-case pricing to cover the cost risk attributable to unstable market conditions due to the mechanism of the EPA clause to mitigate these risks”. risk.”
What you need to know about EPAs
An EPA could be a welcome addition to your next contract, but make sure you understand everything it entails:
- An APE allows price adjustments only when certain conditions are met, such as the costs of a specific material. As such, the clause should be written to provide clear stipulations. Any vagueness can lead to denied requests, so be sure to protest any ambiguity.
- With EPA clauses, contractors often have to disclose sales information or financial information to the government, which will need to be verified. Therefore, you may object to any unreasonable disclosure requirement included in the clause.
- Keep in mind that EPAs can benefit both the contractor and the government, depending on how prices move. For example, a contractor may request an upward adjustment for increased costs, but the government may also request a downward adjustment if costs decrease.
This recent guidance signals that the agency is not keen on providing retroactive relief for inflationary pressure faced by contractors. However, this issue may change the way contracts are written in the future, and you can expect to see more contracts include EPA clauses.
Contractors should refine their change orders and understand the legal grounds for the claims they seek. For example, the submission of a change order on the basis of unforeseen price increases may be justified by force majeure, commercial impossibility or arguments based on non-performance of the subject of the contract. Whereas inflation, though it may be rampant, rarely results in price relief, per se. Therefore, be careful how you submit claims for price increases and make sure you argue properly in all construction documents. Remember the four steps to a good change order:
- Prepare the terrain.
- Review and cite the contract or legal arguments to justify payment for additional work or an extension of time.
- Submit the change order in accordance with the terms of your agreement.
Negotiate – contact your client, whether general contractor or landlord, to see if you can find a middle ground that both parties can understand.