National Defense Authorization Act offers Inflation Relief for Department of Defense Contractors

Due to historic inflation, federal contractors have experienced rising costs for supplies and services during the past year. When these contracts were awarded as firm-fixed price, in many cases several years ago, these rising costs for supplies and services simply were not taken into account in determining “fair and reasonable” pricing. Recognizing the concerns of industry, the Department of Defense issued the DoD memorandum (see, DoD “Managing the Effects of Inflation with Existing contracts” Memorandum, dated September 9, 2022) to address inflation related price concerns and the General Services Administration (see e.g. GSA “Guidance on Addressing Inflation in GSA Contracts, GSA Inflation Alert,” dated September 12, 2022) also released guidance for contractors impacted by historic inflationary pressures.  Now, Congress has decided to act.

The National Defense Authorization Act for Fiscal Year 2023 (the “NDAA”), as proposed, includes a provision that would authorize DoD contractors to receive contract modifications for inflation-caused cost increases. Section 822 of the NDAA, titled “Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts,” would amend the law on extraordinary contractual relief (“ECR”), Public Law 85-804 (50 U.S.C. 1431), to give the Secretary of Defense temporary authority to modify fixed-price contracts where those contractors experience increased costs due solely to inflation.  More specifically, the proposed legislation authorizes a framework for inflationary relief:

• Increase ECR’s Monetary Thresholds. Previously, the authority to adjust contracts under Public Law 85-804 (50 U.S.C. 1431) required any adjustment over $50,000 to be approved at or above the level of an Assistant Secretary or their Deputy.  Section 822 of the NDAA increases that threshold to $500,000. Section 822 also increases the Congressional threshold notification from $25M to $150M. If passed, these amended approval and notice thresholds should facilitate increased use of the authority.
• Prime & Subcontractor Relief. Section 822 authorizes prime contractors to seek relief for increased costs experienced by subcontractors. If prime contractors do not seek relief, subcontractors are authorized to seek relief directly from DoD. Prime and subcontractors should coordinate any relief requests, even though Section 822 excuses privity of contract concerns.
• No Consideration Required. In connection with a request for relief, Section 822 prohibits contracting officers from seeking consideration for the change. In other words, contractors are not required to offer additional supplies or services or modified delivery dates to seek relief.
• Limited Duration. Section 822’s expanded authority expires on December 31, 2023.
  

Although the proposed relief under Section 822 is welcome news for contractors experiencing significantly increased operating costs, the legislation authorizes DoD with discretionary authority to grant such relief; the language does include mandatory relief.  Second, Section 822’s authority is limited to the DoD.  It remains to be seen whether Congress will grant civilian agencies the same or similar authority. Finally, the legislation is unclear as to the procedure by which DoD contractors request such relief, though Section 822 does require that within 90 days after the date of enactment of the NDAA, that DoD issue guidance implementing the authority.

GovContractPros will review any guidance offered by DoD subsequently to the NDAA’s passage. Use by contracting officers of Public Law 85-804 (50 U.S.C. 1431) is authorized under FAR Part 50, Extraordinary Contract Actions, so the ECR statute may very well serve as the contract modification authority for DoD.

For planning purposes, GovContractPros recommends contractors review their federal contract portfolios to identify eligible DoD contracts and determine whether they are experiencing increased costs solely due to inflation. At present, it is unclear what evidence (if any) contracting officers might require from contractors to substantiate their requests for relief.  Second, contractors should continue to have open discussions with their contracting officers regarding pricing pressures owing to inflation. These conversations can serve as the basis for utilizing the Section 822 authority for relief as soon as DoD releases its guidance.

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