With inflation in the United States ballooning 8.2% since April of 2022, government contractors with firm fixed price (FFP) contracts are looking for relief. Unfortunately, the Department of Defense (DoD) recently issued a memorandum indicating that requests for equitable adjustments will not mitigate inflation’s impact to existing FFP contracts.

On May 25, 2022, DoD issued a memorandum providing “Guidance on Inflation and Economic Price Adjustments.” In this memo, the DoD acknowledged that “under cost reimbursement type contracts, the Government bears the risk of increased costs, including those due to inflation.” However, for FFP contracts, DoD states that the contractor “generally must bear the risk of cost increases, including those due to inflation” and that Contracting Officers should not use requests for equitable adjustment to mitigate the impact of inflation on contractors with FFP contracts:

In the absence of an applicable contract clause, such as an EPA clause authorizing a contract price adjustment as a result of inflation, there is no authority for providing contractual relief for unanticipated inflation under an FFP contract. We are fielding questions about the possibility of using requests for equitable adjustment (REAs) under FFP contracts to address unanticipated inflation. REAs entail a contractor’s proposal to the CO seeking an equitable adjustment to the contract terms based on a contracting officer-directed change within the scope of the contract, in the areas defined by the applicable Changes clause, or by another contract clause that authorizes an equitable adjustment based on specific actions taken. Since cost impacts due to unanticipated inflation are not a result of a contracting officer-directed change, COs should not agree to contractor REAs submitted in response to changed economic conditions.

Accordingly, contractors with existing FFP contracts should not plan on receiving relief from the government from inflationary pressures, in the absence of a change in the scope of the contract. 

The DoD memorandum does at least provide some hope that contractors will have alternatives in the future. The memorandum advises that for new contracts being developed or negotiated, contracting officers may consider including an economic price adjustment clause (FAR 16.203-4 or DFAR 216.203-4) in the contract. An economic price adjustment clause allows the price of a contract (or a portion of the price) to be adjusted (upward or downward) based on changes in an agreed-upon index.  The changes would only happen if certain specific contingencies occurred.  Any change would be subject to a floor (for downward adjustments) or ceiling (for upward adjustments).

During this period of increased inflation, contractors may want to consider if a proposed sole source contract or solicitation contains an economic price adjustment clause and, if it does not, consider asking that it be included.”

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney