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Pentagon Releases Guidance on Inflation, Economic Price Adjustment in Defense Contracts

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The Department of Defense has issued a memorandum meant to guide companies and contracting officers on how to manage cost increases due to inflation under existing contracts and provide considerations with regard to the use of economic price adjustments when entering into new contracts.

The memo states that the treatment of cost differences depends on contract type and that vendors should inform DOD that the costs incurred are closing in on the limits specified in the contract.

Upon notification, the department may raise contract funding and the company is not obligated to continue contract performance beyond what can be carried out within the contract’s funded amount.

For fixed-price incentive contracts, the government may adjust the target profit in the event that the vendor’s actual cost differs from the target costs.

The memo signed by John Tenaglia, principal director of defense pricing and contracting at DOD, states that under fixed-price contracts with EPA, the government will shoulder the cost risk up to the limit specified in the clause.

For firm-fixed-price contracts, contractors should bear the risk of cost increases and those associated with inflation. The department said it is addressing queries about the possibility of user requests for equitable adjustment to address inflation under FFP contracts.

For contracts being developed or negotiated during this period of unusually high inflation, an EPA clause may be an appropriate tool to equitably balance the risk of inflation between the Government and contractor,” the document reads.