September 23. 2022

Existing Firm Fixed-Price Contracts: US DoD May Provide Inflation Relief


On September 9, 2022, the Department of Defense (“DoD”) published updated guidance to the DoD acquisition community on the “range of approaches” contracting officers can implement to provide inflation relief to Defense Industrial Base (“DIB”) contractors on existing firm fixed-price (“FFP”) contracts. Feedback from DoD acquisition executives on the effects of inflation on DIB contractors triggered this guidance.

This updated guidance is a marked change in tone from DoD’s May 25, 2022 guidance, which explained that contractors “generally must bear the risk of cost increases, including those due to inflation.” At that time, DoD noted that in “the absence of an applicable contract clause, such as an [Economic Price Adjustment] 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.”

Given the current extreme market conditions, DoD is now recognizing its more expansive ability to provide relief to the contracting community. In its September 9 guidance, DoD recognizes that, in addition to providing schedule relief or amending contractual requirements based on mutual agreement of the parties, “each of the Secretaries of Defense, Army, Navy and Air Force has authority under Public Law 85-804, as implemented by Part 50 of the Federal Acquisition Regulation (FAR) and the Defense FAR Supplement (DFARS), to afford Extraordinary Contractual Relief.” Importantly, this relief can include an upward adjustment to the price of an existing FFP contract based on the inflation impacting DIB contractors. Under FAR Part 50, contractors have the burden to show this relief is warranted through facts and evidence. FAR 50.103-4 contains a detailed list that contracting officers can ask contractors to provide to support requests for relief. When responding, contractors must ensure the information they provide is accurate.

As DoD’s revised guidance explains, the government “will consider contractor requests to employ this authority, subject, of course, to available funding.” Moreover, DoD components must forward any request for extraordinary contract relief caused by inflation to the Defense Acquisition Executive within 10 days of contractor submission. The DoD will continually assess the market conditions and adapt its guidance accordingly to meet its requirements.

Impact on the DIB: This updated guidance may be welcome relief for DIB contractors—but it remains to be seen how often the DoD will use the authority it now recognizes it possesses under FAR Part 50. DIB contractors should thoroughly review FAR Part 50 and its procedures prior to submitting requests and ensure they have the requisite supporting evidence. In addition, DIB contractors should monitor the DoD website for any supplemental guidance on this topic.

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