As part of the FY23 National Defense Authorization Act (“NDAA”), Congress has given the Department of Defense authority to pay defense contractors for increased costs due to inflation.  Section 822 of the NDAA amends Public Law 85-804 (50 U.S.C. 1431) to allow contractors to apply for adjustments, while also giving the DoD wide discretion to grant or deny requests.  President Biden is expected to sign the FY23 NDAA soon, and Section 822 has the potential to be welcome news for contractors who have been battling inflation under multi-year, fixed-price contracts. 

As readers of this blog know from prior posts, DoD has issued position papers over the last year that attempt to address inflation with existing legal tools, but as a practical matter, the Department has provided few options for contractors impacted by rising costs.  The new NDAA provision could finally provide DoD with the legal support it needs to aid contractors struggling with inflation.  However, many questions remain about how this law will work and whether it will actually meet the growing needs of the defense industrial base.  In particular, Congress has not yet appropriated money to fund applications for relief, and DoD must prepare guidance for implementing the statute.  Both of these things will need to happen before contractors can apply for and potentially receive inflation-based price adjustments under this amended Public Law 85-804 authority.

This post discusses the amendment and analyzes the hurdles that remain between defense contractors and inflationary relief.

The Amendment of Public Law 85-804

Public Law 85-804, as implemented by Subpart 50.1 of the Federal Acquisition Regulation (“FAR”), allows the President to authorize U.S. Government agencies to enter or modify contracts to “facilitate the national defense” in cases where “other legal authority . . . is deemed to be lacking or inadequate[.]”  Agencies using Public Law 85-804 are not bound by many of the traditional procurement restrictions and have wide discretion to provide financial relief to contractors.  As mentioned in our September 13, 2022 post — available here — Public Law 85-804 has historically been used to as a backstop for contractors that might otherwise be put out of business by unexpected events, thus protecting the defense industrial base.

Public Law 85-804 requires approval by senior agency officials for actions above certain monetary thresholds.  For example, it cannot be used to obligate more than $75,000 without approval by an official and the secretarial level (e.g., a deputy assistant agency head).  FAR 50.102-1; FAR 50.100.  It also cannot be used to obligate more than $35 million unless certain Congressional committees are notified, and “60 days of continuous session of Congress” have passed.  FAR 50.102-3(b)(4).

Section 882 of the FY23 NDAA, titled Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts, amends Public Law 85-804 to permit adjustments based on inflation in two key ways.

First, Section 882 grants DoD specific authority to pay an equitable adjustment to a contractor that experiences increased costs due to inflation.  Specifically, DoD may grant Public Law 85-804 requests when the cost of performing an eligible contract or subcontract is greater than its price “due solely to economic inflation.”  Section 882 further provides that relief is contingent upon continued performance, and may only account for the actual cost of performance, including indirect costs “as the Secretary of Defense determines appropriate.”

Second, Section 882 increases the above-referenced monetary thresholds to $500,000 (for secretarial level approvals) and $150 million (for Congressional notice).  This change accounts for the impact of recent inflation, and suggests that the Government is attempting to increase the availability of funds obligated under Public Law 85-804 — likely in anticipation of funds sought under the increased authority described above.

What Should Interested Contractors Do to Request Relief Under Section 822?

The next question for contractors is — how do they request payment?  As readers might expect, this question does not yet have a single, clear answer.  Covington will be closely watching three key issues, which will help to inform the practical benefit of this new statutory authority and the steps that contractors should take to seek an adjustment from DoD.

• Dependency Upon Appropriations.  While Section 882 creates a legal authority for DoD to pay increased costs from inflation, it does not actually appropriate any funding for this purpose.  Indeed, Section 882 expressly states that “[o]nly amounts specifically provided by an appropriations Act for the purposes detailed” in the amendment may be used to grant relief.  In sum, Congress will need to appropriate funding for Section 822 payments, which it has not yet done.

• Timing Concerns.  The final paragraph of Section 882 instructs the Under Secretary of Defense for Acquisition and Sustainment to issue implementing guidance “[n]ot later than 90 days” after Congress appropriates funds for this purpose.  We expect this guidance to contain instructions for seeking adjustments under Section 822.

Even if funds were appropriated for this purpose next month — and the Under Secretary was able to prepare guidance three months thereafter — contractors would not have instructions for how to apply for such funding until, at best, April of 2023. 

Complicating this timeline, the inflationary relief authority contemplated by Section 882 is set to expire on December 31, 2023.  Unless the authority is extended, contractors will need to seek relief before that deadline.

• Qualifying for Relief.  Given the dependency on a yet-to-be-appropriated amount of specific-use funding, and the limited time for which these funds will be available, we expect DoD will only be able to grant relief to a subset of applicants.  While it is difficult to speculate what criteria DoD will ultimately use, we would not be surprised if appeals to national defense concerns — the original purpose of Public Law 85-804 — increase an applicant’s chance of receiving funding.

Conclusion

While Section 882 gives defense contractors options for seeking receiving inflationary relief through Public Law 85-804, the new statutory authority depends on further Congressional action before such funds are actually made available to contractors.  The Covington team will continue to monitor developments in this space, and will be available to assist contractors with the application process if and when the time comes.  In the meantime, impacted contractors should review their DoD contracts for economic price adjustment provisions and explore other potential bases for contractual adjustment.