Inflation continues to be among the top problems facing government contractors, as it continues to rise and contractor’s resources to address the problem become depleted. Even falling gas prices is not enough to curb the steady rate of inflation. In the past two weeks, the Department of Defense (DOD) and General Services Administration (GSA) updated their guidance on contractual adjustments for inflation.  Although not perfect, the guidance is a step in the right direction. In this client alert, PilieroMazza attorneys offer key takeaways to help contractors find contract relief in response to these acute economic conditions.
 
Department of Defense
On September 9, 2022, DOD issued a new memorandum, “Managing the Effects of Inflation with Existing Contracts,” advising contracting officers on managing the effects of inflation on existing contracts (Updated DOD Guidance).  As previously reported, the prior memorandum, issued in May and titled “Guidance on Inflation and Economic Price Adjustments,” basically told contracting officers that they could not agree to adjust firm-fixed price contracts for inflation, unless the contract included an economic price adjustment (EPA) clause. This guidance offered little relief to contractors as few contacts include EPA clauses. However, an avenue plausibly remains open for contractors to negotiate an EPA clause into current contracts. At the same time, the guidance instructed contracting officers to consider adding EPA clauses in future contracts, especially contracts with performance lasting more than a year.
 
The Updated DOD Guidance memorandum provides contracting officers with additional avenues to address inflationary impacts on firm-fixed price contracts. While offering a glimmer of hope, these options leave much to be desired.
 
First, the Updated DOD Guidance suggests that contracting officers could reach mutual agreements to alter the contract. The two examples provided, however, are schedule relief and amending contractual requirements. In many cases, and in particular for service or construction contracts, schedule relief is often unhelpful, as it extends the contractor’s costs without increasing the revenue. On top of that, the contracting officer still needs to obtain “adequate consideration” from the contractor. That said, the prospect of amending contractual requirements opens the door for creative solutions between the contracting officer and contractor such as adjusting the payment schedule, adding an EPA clause, changing the specified materials, or reducing the levels of service may make a meaningful difference on a case-by-case basis.
 
Second, the Updated DOD Guidance raises the possibility that contractors may seek Extraordinary Contractual Relief under Public Law 85-804. This law grants the Secretaries of the Army, Navy, and Air Force to “enter into, amend, and modify contracts, without regard to other provisions of law related to making, performing, amending, or modifying contracts, whenever the President considers that such action would facilitate the national defense.”  But with extraordinary power comes extraordinary responsibility—or in this case, requires an extraordinary showing to qualify. To make a request for relief under Public Law 85-804, the contractor must submit a detailed request to the contracting officer explaining (i) the facts warranting the adjustment, (ii) the contractor’s financial condition, and (iii) information about contract performance. To make matters worse, historically, this type of relief is rarely granted.
 
While underwhelming, this memorandum is DOD trying to help. Unfortunately, DOD is constrained by its appropriations. Put differently, it needs Congress to step in and resolve this issue—or at least provide DOD the tools to resolve it. The three of the largest government contractor industry groups (Professional Services Council, National Defense Industrial Association, and the Aerospace Industries Association) met with DOD officials and are reportedly lobbying Congress to address inflation relief as part of ongoing negotiations over the continuing resolution that needs to be passed to fund the government after September 30, 2022.
 
In the meantime, contractors should provide DOD with the empirical data it needs by filing requests for equitable adjustments (REAs), offers to amend the contract by mutual agreement, and requests for extraordinary relief.
 
General Services Administration
On September 12, 2022, GSA issued a new acquisition alert, “Guidance on Addressing Inflation in GSA Contracts” (GSA Inflation Alert). GSA Inflation Alert “highlight[ed] various means the acquisition community has to address the impact of inflation on GSA contracts.” These tools included (1) using EPA clauses, (2) leveraging streamlined procurement vehicles to reduce procurement lead times, and (3) awarding shorter duration contracts.
 
For EPA clauses, GSA detailed the components of an effective EPA clause and provided sample language. It also noted that contracting officers should monitor EPA clause terms throughout performance and be willing to adjust the triggering indices if they are no longer meaningfully representing the costs and market conditions being faced by the contractor.
 
For streamlining acquisitions, GSA touted the importance of “speed in acquisition” and noted that “[e]xisting GSA purchasing program vehicles make it easier than ever to streamline procurement actions.”  In doing so, GSA highlighted the GSA Multiple Award Schedules, OASIS Small Business and OASIS 8(a), 8(a) STARS, VETS 2, and Polaris. It also encouraged, as a way to maximize time savings, contracting officers not applying FAR Part 15 procedures to buys against these vehicles or imposing unnecessarily complicated evaluation considerations. Instead, GSA recommends contracting officers use oral presentations to address contractor capabilities.
 
For shorter contract duration, GSA encouraged contracting officers to consider reducing the total period of performance “to help contractors more reasonably predict costs” and minimize the amount of risk.
 
This guidance supplements prior GSA efforts to minimize the impact of inflation, as we previously reported. In March, GSA temporarily suspended the enforcement of many limitations contained in several EPA contract clauses. This suspension allowed contractors to increase their GSA schedule prices more frequently than otherwise permitted.
 
Key Takeaways
Given the new guidance from DOD and GSA, contractors should consider taking the following steps:

  1. Contractors should review current contracts and determine whether any non-price changes to the contractual terms could offer some relief to the problems caused by inflation. If so, contractors should request adjustments, as suggested by the updated memorandum.
     
  2. Contractors should determine if their current circumstances with once-in-a-generation inflationary pressures warrant extraordinary contractual relief in light of the contractor’s specific circumstances and experiences.
     
  3. Contractors experiencing significant cost impacts due to inflation should file some formal request to the contracting officer (e.g., REA, Extraordinary Contractual Relief request), even if it has little chance of success so that DOD can obtain quantitative data on the scope of the problem.
     
  4. Contractors preparing bids should encourage contracting officer’s to amend solicitations to include EPA clauses, as well as submitting effective Q&As pertaining to the topic of inflation.

PilieroMazza attorneys are here to help ensure that you mitigate the negative impacts of inflation on your current and future government contracts. If you have questions, please contact Kevin Barnett or Lauren Brier, the authors of this client alert, or another member of the Firm’s Government Contracts Group. Please visit this link to register for Kevin and Lauren’s webinar on this important topic.