As PilieroMazza has reported, rising costs due to inflation have been one of the most significant issues facing contractors with fixed-price contracts for the past year. Although the Department of Defense (DOD) and General Services Administration (GSA) have taken some steps to ameliorate the situation, those solutions have left contractors wanting. But true relief may be in sight. Congress included a provision in the National Defense Authorization Act (NDAA) for Fiscal Year 2023 that would authorize DOD contractors to receive contract adjustments for inflation-related cost increases.

The NDAA is the annual legislation that authorizes funding and programs for the DOD, and it is often used as a vehicle to pass federal procurement policy. It has been passed each year since 1960, and it appears that this year will be no different. Earlier this week, the House and Senate Armed Services Committees released a compromise version of the NDAA. This version resulted from the “conferencing” process, where differences between the House and Senate versions of a bill are ironed out. The House passed the bill yesterday, and the Senate is expected to pass the bill in the coming days.

Section 822 of the NDAA, entitled “Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts,” would amend the law on extraordinary contractual relief (ECR), Public Law 85-804, to give the Secretary of Defense temporary authority to modify the fixed-priced contracts of contractors facing increased costs solely due to inflation.

In doing so, Congress has committed to providing DOD with the authority to offer inflationary relief on fixed-price contracts. In its Joint Explanatory Statement, Congress explained that “[i]n order to support a robust [defense industrial base], we believe [DOD] needs additional temporary authorities to respond to the effects of recent and current inflation levels. We believe these authorities coupled with funding to mitigate inflation impacts will enable the [DOD] to provide a measure of relief to the [defense industrial base] where appropriate.” In addition, the NDAA requires DOD’s Under Secretary of Defense for Acquisition and Sustainment to issue guidance implementing this new authority within 90 days, which, depending on how quickly the NDAA is passed, should be sometime in March 2023.

In the meantime, the proposed legislation lays out the framework of the authorized inflationary relief:

  • Limited to DOD Contractors: The proposed legislation extends the new authority solely to the Secretary of Defense. This means that contractors for civilian agencies will not be able to benefit from this expanded authority without additional Congressional intervention.
  • Relief Available to Subcontractors: The proposed legislation authorizes prime contractors to seek relief for increased costs borne by subcontractors. And, if a prime contractor does not seek such relief, subcontractors are allowed to seek the available relief directly with DOD.
  • No Consideration Required: The proposed legislation explicitly prohibits DOD from requesting additional consideration from contractors seeking relief under this expanded authority. This means that a contracting officer could not demand new delivery dates or other accommodations in exchange for the inflationary relief, for example.
  • Limited Time Period: The bill only grants the expanded authority until the end of next year—December 31, 2023.
  • Discretionary: While the proposed legislation says that DOD “may” grant contractors inflationary relief, it does not mandate it. DOD’s forthcoming guidance will be crucial in defining the scope and process of determining eligibility for the inflationary relief.
  • Raises ECR’s Monetary Thresholds: Previously, the authority to adjust contracts under Public Law 85-804 required any adjustment over $50,000 to be approved at or above the level of an Assistant Secretary or his Deputy. The NDAA proposes raising that threshold to $500,000. Likewise, the proposed legislation increases the Congressional notification threshold from $25 million to $150 million.

Many significant open questions remain. From a procedural perspective, the proposed legislation does not explain how contractors should go about applying for such relief. DOD’s forthcoming guidance will need to answer this question.

More significantly, the legislation raises some questions about what costs are eligible for relief. When describing the costs that are eligible for reimbursement, the legislation parrots the phrase cost increases “due solely to economic inflation.” This could present significant evidentiary issues if DOD tries to untangle any specific causes of inflation (i.e., COVID-19, war in Ukraine, and other supply chain issues) from economic inflation itself.

Along the same lines, the legislation allows—but does not require—DOD to consider increases to indirect costs. Instead, it says only that such indirect costs of performance may be recoverable “as the Secretary of Defense determines appropriate.” This determination will be significant for any contractors who purchase supplies in bulk to be used across several contracts.

PilieroMazza attorneys are here to help ensure that you can effectively use all available tools to mitigate the negative impacts of inflation on your current and future government contracts. If you have questions, please contact Kevin Barnett, Lauren Brier, or James Rhodes, the authors of this client alert, or another member of the Firm’s Government Contracts or Government Contract Claims & Appeals practice groups.