DoD Will Consider Contract Adjustments Addressing Inflation

On Friday September 9, 2022, the Principal Director for DoD Protection Pricing and Contracting (DPC) issued a Memorandum titled “Running the Effects of Inflation with Current Contracts.”  The Memorandum provides steering to Contracting Officers about the assortment of approaches offered to deal with the effects of inflation on the Protection Industrial Foundation.  Of observe, it highlights two paths contractors might pursue to recuperate for inflation under fastened-rate contracts.

To start with, the Memorandum notes that the ability to recognize value improves is mainly dependent on contract sort, asserting that “[c]ontractors executing less than organization-fastened-selling price contracts that were priced and negotiated ahead of the onset of the present-day economic disorders frequently bear the threat of expense raises.”  This is comparable to advice DPC issued in May perhaps encouraging Contracting Officers to contemplate including economic cost adjustment (EPA) clauses in new contracts but expressing skepticism about contractors’ ability to recuperate for inflation under present fixed-price contracts.  Nonetheless, the new Memorandum lets that “there may be situation the place an accommodation [such as schedule relief or amended contract requirements] can be achieved by mutual arrangement of the contracting functions, perhaps to handle acute impacts on tiny company and other suppliers.”

Next, the Memorandum states that DoD “will consider” contractor requests for “Extraordinary Contractual Relief”—including likely upward value changes underneath organization-fixed-price tag contracts—under Community Law 85-804.  That law, as executed at Much Element 50, makes it possible for DoD (and other limited companies) to amend contracts without thought when accomplishing so is crucial to the nationwide protection, when a contractor suffers a reduction less than a protection contract mainly because of Govt motion, and/or to appropriate or mitigate the outcome of faults.  The Government’s authority below 85-804 is broad but has particular essential limitations, which includes: (1) 85-804 authority might not be relied upon in which other adequate legal authority exists (2) the funding must not exceed appropriated amounts (other than when used to approve indemnification agreements) (3) any amendment can only be to the “extent important to steer clear of this sort of impairment to the contractor’s effective ability” (4) the contractor ought to suffer a “loss,” and not merely a reduce in predicted revenue and (5) the contractor must submit a ask for for deal modification ahead of all obligations underneath the contract have been discharged.  The Memorandum notes that requests for Incredible Contractual Relief must satisfy “stringent standards,” but the reality that DPC is encouraging these kinds of requests signals a prospective willingness by DoD to meaningfully contemplate them and might provide hope for contractors battling with the consequences of inflation.

In light of this new advice, contractors impacted by inflation really should (1) continue to scrutinize their current contracts for probable treatment granting clauses that would deal with inflation (2) consider requesting the two price and non-value lodging and (3) consider whether to look for Incredible Contractual Reduction less than Community Law 85-804.