The FY2023 James M. Inhofe National Defense Authorization Act (FY2023 NDAA) included several important provisions for government contractors. We described several of those important FY2023 NDAA provisions in a presentation earlier this year. Section 822 of the FY2023 NDAA – Modification of contracts to provide extraordinary relief due to inflation impacts (Section 822) – provides potential inflation relief to contractors working with the Department of Defense (DoD). However, the relief provided under Section 822 is set to expire on December 31, 2023. Defense contractors who need relief from inflation should closely review Section 822 and should seek relief under that section soon.
The annual inflation rate in the United States at the end of the 2022 calendar year was 6.5 percent. The annual inflation rate for the 12-month period ending in May 2023 was 4 percent. While inflation rates have only recently moved lower from all-time record highs, they are still abnormally high and government contractors have continued to face significant problems since 2021 caused by inflation.
As the inflation problem has progressed, the DoD has issued varying guidance about the relief that defense contractors may receive to address inflationary impacts. For example, on May 25, 2022, the DoD issued a memo to provide guidance to contracting officers about when it is appropriate to recognize cost increases due to inflation under existing contracts as well as to offer considerations for the proper use of economic price adjustment clauses when entering into new contracts. Significantly, the May 25, 2022 memo made clear at that time, that contractors performing firm-fixed-price (FFP) contracts should not expect any inflation relief from the DoD because “contractors performing under [FFP] contracts generally must bear the risk of cost increases, including those due to inflation.” The May 25, 2022 memo also instructed contracting officers to reject contractors’ requests for equitable adjustment seeking inflation relief because “cost impacts due to unanticipated inflation are not a result of a contracting officer-directed change. . . .” Therefore, as of May 25, 2022, contractors with a FFP contract with DoD had very little hope of receiving any monetary relief for the impacts of inflation.
However, later in the year, the DoD issued its September 9, 2022 memo that notably opened the door to allowing contractors, including those with FFP contracts, to obtain relief from the impacts caused by inflation under FAR Part 50. The September 9, 2022 memo started by acknowledging that DoD was providing an update from its earlier guidance “[b]ased on feedback from the [DoD’s] acquisition executives about how inflation is presently affecting the Defense Industrial Base and contractors’ ability to perform under existing [FFP] contracts. . . .” The September 9, 2022 memo acknowledged that DoD had earlier confirmed on May 25, 2022 that contractors bear the risk of cost increases under FFP contracts, but then stated: “However, there may be circumstances where an accommodation can be reached by mutual agreement of the contracting parties, perhaps to address acute impacts on small business and other suppliers.” The September 9, 2022 memo further stated that “[f]or extraordinary circumstances where contractors have sought or may seek an upward adjustment to the price of an existing [FFP] contract to account for current economic conditions, 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.” Therefore, in a notable about-face from its May 25, 2022 memo, the DoD confirmed in its September 9, 2022 memo that it would consider giving contractors with FFP contracts a price increase in certain circumstances under the extraordinary relief authority provided by FAR Part 50.
FAR Part 50, which implements Pub. L. 85-804, authorizes agencies “exercising functions in connection with the national defense to enter into, amend, and modify contracts, without regard to other provisions of law related to making, performing, amending, or modifying contracts. . . .” FAR 50.101-1. Therefore, while typically a FFP contract cannot be amended to increase the price due to inflation because — by definition — the price is fixed, FAR Part 50 authorizes certain agencies in certain circumstances to amend or modify those contracts “without regard to other provisions of law” if it is in the interests of national defense. Significantly, the September 9, 2022 memo made clear that DoD was open to consider price increases under FAR Part 50 to address the impacts of inflation in certain circumstances.
Section 822 in the FY2023 NDAA builds on the guidance provided in DoD’s September 9, 2022 memo by greatly expanding the provisions under Pub. L. 85-804 and FAR Part 50 through which contractors can seek relief “due solely to economic inflation.” For example, Section 822 provides authority to DoD to amend or modify 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 the eligible contract. 50 U.S.C. § 1431(b)-(c)(1). Therefore, Section 822 gives the Secretary of Defense authority to raise the price of a FFP contract when “due solely to economic inflation,” the actual cost to perform that contract exceeds the amount the contractor is entitled to be paid. The Secretary of Defense is also given this same authority in relation to subcontracts. 50 U.S.C. § 1431(c)(2).
Section 822 also amended Pub. L. 85-804 to increase funding authority to address inflation while also decreasing the government approvals and notice requirements necessary to use this extraordinary authority. For example, before the enactment of Section 822, the authority to modify contracts or increase prices under Pub. L. 85-804 could not exceed $50,000 “without approval by an official at or above the level of an Assistant Secretary or his Deputy, or an assistant head or his deputy, of such department or agency, or by a Contract Adjustment Board. . . .” 50 U.S.C. § 1431 (2019). However, after the implementation of Section 822, those approvals are now required only when the costs exceed $500,000, which is a $450,000 difference. 50 U.S.C. § 1431(a) (2023). Similarly, while the previous statute required certain congressional committees to receive written notice before DoD committed more than $25 million under this authority, Section 822 significantly increased that threshold so that Congress must now be notified only if the use of this authority exceeds $150 million. In short, Section 822 significantly expanded DoD’s authority to use Pub. L. 85-804 and FAR Part 50 to directly address the impacts of inflation.
Therefore, government contractors that need relief from inflation under DoD contracts should closely review Section 822 and FAR Part 50 and should seek relief now from their contracting officers because the program is currently set to end on December 31, 2023. See 50 U.S.C. § 1431(e). While the Section 822 changes are currently moving through the FAR amendment process and are not yet included in the FAR, contractors can review and rely on the current guidance provided in FAR Part 50 for making these types of requests for extraordinary relief. For example, FAR 50.103-3 identifies how contractors may submit a request for relief and FAR 50.103-4 identifies the facts and evidence that contractors should be prepared to submit. Contractors should review these sections and submit their requests now, along with a citation to the Section 822 authority, to ensure that their requests will be considered before the opportunity expires.
Section 822 provides potential significant relief to contractors with FFP DoD contracts that have been impacted by record-high inflation. Since the Section 822 authority is set to expire on December 31, 2023, contractors should review Section 822 and FAR Part 50 now and should quickly submit their requests for relief.
If you have any questions about Section 822, FAR Part 50, or about government contracting generally, please contact the author of this alert or your regular Womble Bond Dickinson attorney. Womble Bond Dickinson’s Government Contracts Team has extensive experience with FAR compliance, including the submission of claims and requests for equitable adjustment, and handling disputes about payment.