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DoD Speaks Again on Inflation

Defense contractors have been letting DoD acquisition folks know that inflation is impacting their ability to perform firm fixed price contracts.  So, DoD issued another memo advising contracting officers about a “range of approaches” available to contracting officers when it comes to adjusting firm fixed price contracts in response to inflation. (Click here for Cassidy Law Post on last DoD Inflation Memo).

I don’t know if the memo actually provides a “range of approaches” but, it does provide two approaches.   The memo also acknowledges that small businesses and other suppliers may need some accommodation from the government as they manage the impact of inflation.

Interestingly, even before discussing possible approaches for working with firm fixed price contractors struggling due to inflation, the memo noted that firm fixed price contractors, including contractors who negotiated their contracts before this inflationary period hit, “generally bear the risk of cost increases.”

Available Approaches

The first available approach mentioned in the memo is that contracting officers may adjust firm fixed price contracts in response to inflation if the contracting officer and the contractor mutually agree to an accommodation. The memo provides an example of an accommodation – revising the performance schedule or “otherwise amending contractual requirements.”  It is not clear if the “contractual requirements” that could be amended include the requirement for the government to pay the contractor a fixed price.

The other option in the range of approaches is using FAR Part 50 and DFAR Part 250 which allow for “extraordinary” relief for contractors.  The memo notes that these regulations have “stringent criteria” for when this extraordinary relief may be granted.  And, it further states, that extraordinary relief “of course” is available subject to funding.

Although extraordinary relief does have a lot of criteria and its use is limited, the DoD memo explains that to be sure defense acquisition professionals are aware of any FAR Part 50 requests based on inflationary pressures, requests for relief must be sent to DoD Pricing and Contracting.  This seems to be a positive sign that DoD will, as the memo notes, “continue to adapt” its approaches to inflation to makes sure DoD can fulfill its mission which includes having contractors willing and able to provide goods and services.

FAR Part 50 – Extraordinary Contractual Actions

Even without explaining FAR Part 50, by its title alone “Extraordinary Contractual Actions”, you can probably tell that it won’t be easy to get your CO to use FAR Part 50.  FAR Part 50 is essentially a regulation to execute Public Law 85-804, a law that says the President can give federal agencies the right to enter, amend or modify contracts without regard for other laws around contracting when needed for national security reasons.  As an aside, contracting officers may have some familiarity with how FAR Part 50 works since some agencies used it during COVID, especially when the pandemic first hit.

To get extraordinary relief, the agency must conclude that the action is needed to “facilitate national security.”  To establish the need for relief, contractors must put their request in writing to their CO and explain the facts that are dictating the need for the adjustment.  And, depending on the type of adjustment a contractor is seeking, the contractor may need to provide salaries of its employees, a breakdown of its costs, including contingency allowances and profit, and much much more. You can read further on these requirements here.

Leading Thinkers on National Security and DoD Policy Are Pressing for More From Congress and DoD 

The National Defense Industry Association (NDIA) put out a white paper drafted by three former DoD comptrollers, How Inflation Hurts America’s National Defense and What Can We Do About It.  The paper explains that inflation needs to be addressed to shore up national security.  To support this position, the article explains that in FY2021 and FY2022 DoD experienced a $50 billion dollar loss in buying power because of inflation.  In light of this, it calls on Congress to reflect this reality as it considers DoD funding.  The white paper also explains how inflation is having a greater impact on the small businesses that are part of the DoD ecosystem.  The white paper includes a case study on how inflation can impact a small business contractor, such as, increasing its overhead costs as well as its costs to hire and retain talent.

The Center for Strategic and International Studies likewise had an article, Inflating the Risk?  Contracting in the Face of Inflation, with some insightful questions and answers on how DoD has handled inflation in the past.  First, it noted that DoD has not really faced an inflation situation since the early 1980’s. It also noted that even with inflation, DoD is pressed to control its costs. Like the DoD memo and the NDIA article, the CSIS article also noted that small businesses are more likely to be impacted by inflation because they generally are more inclined to use firm fixed price contracts.  Even so, as of the date of the article, December 2022, CSIS remarked that although it is of the opinion that defense contractors have been and will continue to be impacted by inflation, DoD was not yet convinced it needed to take more action to address its contractors’ inflation induced challenges.

What’s a DoD Contractor To Do?

In the end, parsing the DoD memo does not provide clear guidance for contracting officers or for contractors.  It may seem daunting to establish for your CO that you are in an “extraordinary” situation as a result of inflation and by failing to act our national defense will be impacted.

But, don’t be discouraged.  The DoD inflation memo suggests that it will consider use of FAR Part 50 to address inflation in some circumstance.

Given that, if you have a firm fixed price contract, especially if you are a small business, it may be worth asking your contractor to adjust your price.  You will need to provide your contracting officer with the information as required by FAR Part 50.  And, you should also explain why you are indispensable to DoD and to national security.  Providing this type of information to the government comes with my usual reminder… DON’T FORGET THE FALSE CLAIMS ACT.  So, be sure all the information you provide to support your request for extraordinary relief is current, accurate and complete.

Finally, even if you don’t get the upward price adjustment you were hoping for, it seems that DoD may be evaluating these types of requests to assess if it needs to do more going forward to support contractors with firm fixed price contracts.

“Lowering prices is easy. Being able to afford to lower prices is hard.”  Jeff Bezos

Unfortunately, inflation is essentially lowering your prices.

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