Pentagon issues guidance on inflation and economic price adjustment in defense contracts

The Department of Defense has issued a memorandum to guide companies and contractors on how to manage cost increases due to inflation under existing contracts and provide considerations regarding the use of economic price adjustments when entering into new contracts.

The note indicates that the treatment of cost differences depends on the type of contract and that vendors should notify DOD that the costs incurred approximate the limits specified in the contract.

Upon notification, the Department may increase contract financing and the company is not obligated to continue performance of the contract beyond what can be achieved within the financed amount of the contract.

For fixed price incentive contracts, the government may adjust the target benefit if the supplier’s actual cost differs from the target costs.

The note signed by John TenagliaSenior Director of Pricing and Defense Contracts at DOD, states that under fixed price contracts with the EPA, the government will bear the cost risk up to the limit specified in the clause.

For fixed price contracts, contractors must bear the risk of cost increases and those associated with inflation. The department said it was responding to questions about the possibility of users requesting a fair adjustment to fight inflation under FFP contracts.

For contracts being drafted or negotiated during this period of unusually high inflation, an APE clause may be an appropriate tool to fairly balance inflation risk between the government and the contractor,” the document states.

Eleanor C. William