Defense Dept. Issues Updated Guidance on Managing the Effects of Inflation

On September 9, 2022 the Department of Defense ("DoD") issued updated guidance for DoD contracting officers regarding approaches for addressing inflation related to firm-fixed-price contracts.

According to DoD's press release, the guidance, issued by John M. Tenaglia Principal Director, Defense Pricing and Contracting, is based on "feedback" from DoD acquisition executives about how inflation is presently affecting defense contractors and their ability to perform under firm-fixed-price contracts.

Under firm-fixed-price contracts, the contractor traditionally is the party that bears "maximum risk and full responsibility for all costs and resulting profit or loss." FAR § 16.202-1. Given the financial strain that this method of contracting can bring on contractors during inflation, the guidance says that for "extraordinary circumstances" where contractors may want an upward adjustment to the price of an existing firm-fixed-price contract, authority exists under Public Law 85-804, as implemented by the Federal Acquisition Regulation ("FAR") Part 50 (and DoD supplement) to afford "Extraordinary Contractual Relief."

Notably, the guidance also says DoD would only "consider" a contractor’s request, which still would be subject to funding availability.

To seek Part 50 relief, contractors must show that relief isn’t otherwise available through other means, and they must then navigate a host of FAR Part 50 requirements where the request isn't otherwise limited under the regulation. For example, a contractor's request must be detailed, and include, among other things: the precise adjustment, essential facts, summarized chronologically in narrative form, the contractor’s conclusions, and a certification.

Further, contracting officers can also request that contractors furnish a litany of other facts and evidence, including: a brief description of the contracts involved, the dates of execution and amendments, the items being acquired, the price or prices, a detailed analysis of the request’s elements, a list of persons who have factual knowledge, and other information. In sum, overcoming the hurdle for extraordinary relief under FAR Part 50 (and DFARS) is no small feat.

Takeaway

The guidance is welcome news because it signals to industry that DoD is listening. That said, contractors seeking relief should be prepared for a challenge given the difficult burden and requirements under FAR Part 50. And, with the "consider" and "available funding" caveats in the guidance, this type of "Extraordinary Contractual Relief" might just be reserved for but a select few contractor situations whose performance is essential to the national defense. Still, the guidance shows that DoD acknowledges the inflationary concerns that are unduly impacting firm fixed-price contracts and provides encouragement to impacted defense contractors to work with their contracting officers to find a solution to these urgent issues, under this guidance or otherwise.

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