Unprecedented inflation levels have caused substantial hardship on government contractors during the last year – especially those with firm fixed-price contracts. Fortunately, meaningful help may be on its way. The Senate recently passed the National Defense Authorization Act (NDAA) of Fiscal Year 2023, which authorizes future spending of appropriations and outlines Department of Defense (DOD) policy priorities for the next fiscal year.
According to Section 822 of the bill, prime contractors may request a contract modification when “due solely to economic inflation, the cost to a prime contractor of performing such eligible contract is greater than the price of such eligible contract.” While the required guidance will bring clarity to the new DOD authority, the provision gives a broad overview of what relief will look like.
Only DOD contractors may enjoy relief from the new authority
Previous government guidance provided avenues for contractors selling to other agencies to seek relief, however, the DOD has largely been left out. In mid-March, the General Services Administration (GSA) released a memorandum explaining how contractors performing on firm-fixed-price (FFP) contracts can secure relief by lifting a cap on the number of Economic Price Adjustments (EPA) a company could request and encouraging contractors to ask the government for EPAs. Contracting Officers (CO) were deputized with broader authority to award EPAs to companies, and reviews are now done on a contract-to-contract basis.
In late May, the DOD followed suit, but it argued it did not have the authority to provide avenues of relief to those performing on FFP contracts. Then, in September, the DOD released guidance advising COs to help fight rising costs by making accommodations by “mutual agreement” for those performing on FPP contracts and providing a potential avenue to relief through Public Law 85-504 (50 U.S.C. 1431) – legislation that allows the president to amend contracts, “but only to the extent necessary to avoid such impairment to the contractor’s productive ability.” Section 822 would amend Public Law 85-504 providing the necessary authority to “remit to such covered contractor the difference, if any, between the original price of such eligible contract and the price of such eligible contract.”
The language provides a great deal of discretion
Section 822’s language is highly discretionary and a bit ambiguous about the criteria used to determine whether the Secretary of Defense will choose to amend or modify an eligible contract. The provision’s language states, “The Secretary of Defense…may…make an amendment or modification to an eligible contract when, due solely to economic inflation, the cost to a prime contractor of performing such eligible contract is greater than the price of such eligible contract,” giving a vast amount of discretion to the DOD to determine when a modification is warranted.
Section 822 highlights eligible contractors are those who are performing on contracts where the costs are outpacing the price “due solely to economic inflation,” however, there is a dearth of clear guidance related to how the decision to award relief will be made. We will have to wait until the guidance – statutorily required within 90 days of the NDAA’s passing and appropriations becoming available – is released to understand the eligibility requirements fully.
Subcontractors can also lobby for relief
The provision provides relief to subcontractors, as well as prime contractors. Prime contractors are authorized to seek relief for themselves and those costs borne by subcontractors, but a subcontractor need not rely on the prime contractor. If a prime contractor fails to seek relief for its affected subcontractor, the sub is authorized to seek relief directly from the DOD.
No consideration necessary, but continued performance is required
The provision makes it clear: the Secretary of Defense “may not request consideration from such prime contractor [or subcontractor] for such amendment or modification,” however it does condition relief on a contractor’s continued performance. While the provision allows for a one-way administration of aid.
The provision also amends Public Law 85-804 to widen its applicability. Public Law 85-804 required approval for adjustments over $50,000 and required the DOD to notify Congress when adjustments amounted to more than $25 million. Section 822 raised thresholds to $500,000 for approvals and $150 million for Congressional notification.
The new authority expires on December 31, 2023. This is meant to be a temporary remedy for inflationary pressures. This could present problems as the guidelines will be promulgated once money is appropriated. If money is unavailable until after the holidays, the guidelines might not be released until Q2 of 2023, leaving only a little over six months to apply and enjoy relief. Defense contractors should be ready to submit their applications for relief, as they likely will only have 12 months to do so.
Inflation has hit the defense industrial base hard and threatens to impair innovation and readiness at a time when the U.S. faces unprecedented and novel threats. The provision is a significant next step and shows there is an appetite in Congress to support the contracting community. However, the full scope and effect of the provision are yet to be determined. The enabling guidance, which should be promulgated within the next three months, will hopefully clarify the eligibility criteria for relief and provide an outline for the application process. Our firm will continue to monitor the provision as President Biden signs the FY23 NDAA and will provide an update once the implementing guidelines are released.
For more information on the firm’s Government Contracts Practice, and specifically, assistance on the new NDAA provision, contact the author at email@example.com.