With continued inflation putting pressure on the defense supply chain, the Department of Defense (“DoD”) has released guidance encouraging contracting officers to provide mutually agreeable relief to fixed-price contractors facing untenable costs.

DoD’s guidance, dated September 9, 2022 and available at the link here, follows a similar guidance earlier this summer which recommended that contracting officers consider including economic price adjustment clauses in new solicitations.  We previously wrote about that guidance here.

The latest guidance acknowledges that firm-fixed-price contractors face the burden and risk of cost increases due to inflation.  Through this guidance, DoD expresses sympathy for contractors in this situation, and as a potential remedy, encourages contracting officers to work with contractors to combat the impacts of rising costs by “mutual agreement.” For example, DoD provides that contract amendments could be executed to the benefit of both parties, such as schedule adjustments for contractors in exchange for “adequate consideration” for the government.  It is not entirely clear what is meant by adequate consideration—nor is it clear how a schedule extension would alleviate rising costs.  However, the latest guidance provides support for contractors in difficult situations to approach their contracting officers and seek a negotiated solution.

The guidance also indicates that DoD contracting officers may account for current economic conditions by granting requests for “Extraordinary Contractual Relief” under Public Law 85-804, as implemented by Subpart 50.1 of Federal Acquisition Regulation.  Although this authority can only be used “to facilitate the national defense” when “other legal authority . . . is deemed to be lacking or inadequate” to remedy the situation—amongst other “stringent criteria” that must be met—it ultimately allows for the amendment of contracts without consideration

DoD’s invocation of Public Law 85-804 is a promising sign for contractors, and it remains to be seen how DoD will use this authority.  Public Law 85-804 has traditionally been invoked, for example, to provide indemnities to contractors working on hazardous projects.  But it has a broader potential application in cases affecting the national defense, and it is welcome news for the contractor community to see the Department recognizing this in the current economic climate.  The memorandum also provides that DoD will be collecting all Public Law 85-804 requests related to inflation.

While this guidance isn’t exactly a homerun for firm-fixed-price contractors, it is slightly more optimistic than DoD’s previous guidance, which primarily denied remedies for contractors under firm-fixed-price contracts and instead focused on language that could be included to avoid a similar fate under future contracts.  Even for contractors that ultimately decide against submitting a Public Law 85-804 request, this slightly more sympathetic tone from DoD may encourage contracting officers to take a harder look at requests for equitable adjustments or find common ground for a contractual amendment.

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Photo of Scott A. Freling Scott A. Freling

Scott is sought after for his regulatory expertise and his ability to apply that knowledge to the transactional environment. Scott has deep experience leading classified and unclassified due diligence reviews of government contractors, negotiating transaction documents, and assisting with integration and other post-closing…

Scott is sought after for his regulatory expertise and his ability to apply that knowledge to the transactional environment. Scott has deep experience leading classified and unclassified due diligence reviews of government contractors, negotiating transaction documents, and assisting with integration and other post-closing activities. He has been the lead government contracts lawyer in dozens of M&A deals, with a combined value of more than $76 billion. This has included Advent’s acquisition of Maxar Technologies for $6.4 billion, Aptiv’s acquisition of Wind River for $3.5 billion, Veritas Capital’s sale of Alion Science and Technology to Huntington Ingalls for $1.65 billion, and Peraton’s acquisition of Perspecta for $7.1 billion.

Scott also represents contractors at all stages of the procurement process and in their dealings with federal, state, and local government customers. He handles a wide range of government contracts matters, including compliance counseling, claims, disputes, audits, and investigations. In addition, Scott counsels clients on risk mitigation strategies, including obtaining SAFETY Act liability protection for anti-terrorism technologies.

Scott has been recognized by Law360 as a MVP in government contracts. He is a past co-chair of the Mergers and Acquisitions Committee of the ABA’s Public Contract Law Section.

Photo of Evan R. Sherwood Evan R. Sherwood

Evan Sherwood counsels federal contractors on Contract Disputes Act (CDA) claims, the cost accounting standards (CAS), cost allowability, requests for equitable adjustment (REAs), contract terminations for convenience/default, and related audits, litigations, and investigations. He also advises on contract compliance and formation issues, including TINA/defective pricing…

Evan Sherwood counsels federal contractors on Contract Disputes Act (CDA) claims, the cost accounting standards (CAS), cost allowability, requests for equitable adjustment (REAs), contract terminations for convenience/default, and related audits, litigations, and investigations. He also advises on contract compliance and formation issues, including TINA/defective pricing, data rights, mandatory disclosure rules, ethics, conflicts of interest, teaming arrangements, and other transaction agreements (OTAs). He has litigated matters before the Court of Federal Claims, the Armed Services Board of Contract Appeals, the Government Accountability Office, and the Federal District Courts.

In his work for defense and civilian agency contractors, Evan:

  • Prepares CDA claims and REAs;
  • Litigates matters involving CAS compliance, cost accounting practice changes, and cost allowability under the FAR and grant rules;
  • Defends contractors during audits and investigations involving the Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA), and the Office of the Inspector General (OIG);
  • Advises on constructive changes, work delays, defective specifications, stop-work orders, government-furnished property, CPARS, warranty matters, data rights, and quality controls;
  • Counsels on disputes between primes and subcontractors, including teaming disputes; and
  • Conducts internal investigations and defends clients in federal investigations involving whistleblower allegations and retaliation claims.

Evan is a Vice Chair of the ABA Public Contract Law Section’s Contract Claims & Disputes Resolution Committee. He routinely writes and speaks about legal issues in federal contracting.