Craig Stetson, Partner, Capital Edge Consulting
President Biden signed December 23, 2022 into law the National Defense Authorization Act (NDAA) for fiscal year (FY) 2023. The NDAA, prepared annually by Congress and signed by the President, authorizes funding for various Department of Defense (DoD) programs and initiatives, establishes procurement policy and sets forth new or revised contract management and administration rules and procedures.
Title VIII, Section 822, of the FY 2023 NDAA “Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts” provides the Secretary of Defense authority to modify existing fixed-price contracts when contractors experience increased costs “solely due to inflation”. This temporary authority, to be administered under Federal Acquisition Regulation (FAR) Part 50 procedures, expires December 31, 2023. Further, Congress must first appropriate funds designated for Section 822 relief prior to the DoD granting contractor requests.
Section 822 requires the DoD to issue guidance within 90 days of enactment of the NDAA, i.e., by the end of March 2023, on how DoD will implement contractor requests for relief. Expectingly, this forthcoming guidance will describe the DoD’s expectations regarding the format and content of contractor requests for relief, including any cost or pricing data submission requirements, and whether applicable cost impacts are to be calculated on an actual cost basis, i.e., at contract completion, or on an estimate-to-complete / estimate-at-completion basis, i.e., during contract performance.
Specifically, Section 822 prescribes that for the DoD to grant inflationary relief “the cost to a prime contractor of performing such eligible contract is greater than the price of such eligible contract”. This prescription appears to mean that a request for relief cannot be granted until the contract is complete as that is the point in time under a fixed-price contract when a comparison of “cost” and “price” can be performed to determine if a loss was actually incurred. Section 822 further prescribes “Any adjustment or modification made pursuant to subsection (c) to an eligible contract or an eligible subcontract shall— ‘‘(1) be contingent upon the continued performance, as applicable, of such eligible contract or such eligible subcontract; and ‘‘(2) account only for the actual cost of performing such eligible contract or such eligible subcontract…..”. This prescription may be contradictive to the provision initially highlighted above as it indicates that a request for relief may be granted during contract performance, which, is at a point in time when a final comparison of “cost” and “price” under a fixed-price contract cannot be made on an actual cost basis. The prescriptive language in Section 822 is not clear when contractors may submit, and the DoD grant, requests for relief nor if requests for relief must be calculated on an actual cost basis, an estimated cost at completion basis or either basis.
Other key provisions of Section 822 include:
- Only prime contracts awarded by the DoD (“covered contract”) and subcontracts awarded under these prime contracts (“covered subcontract”) are eligible for relief.
- Subcontractors may seek relief through the prime contractor (and the prime contractor is required to certify the subcontractor’s request) or directly to the DoD contracting officer.
- The DoD’s authority to grant relief is not a mandate, rather a contracting officer’s discretion.
- Covered contracts and subcontracts eligible for potential relief must demonstrate an actual loss, i.e., costs in excess of contract or subcontract price, and not simply an erosion of profit or margin.
- The underlying foundation of the legislation, i.e., “solely due to inflation”, is undefined – this could present entitlement challenges as other factors contributing to contractor actual losses may exist and may not be covered under Section 822.
- The DoD is prohibited from seeking additional compensation from contractors as an element of any contract price modifications granted “solely due to inflation”.
The Section 822 legislation is an encouraging sign for contractors that are facing increased contract performance costs due to the current inflationary environment. Although any granted relief is subject to a contracting officer’s discretion, this legislation provides a rather significant departure and change in direction from the DoD’s initial guidance and position on this matter pursuant to its May 25, 2022 memorandum Guidance on Inflation and Economic Price Adjustments.
Consistent with the objectives of Section 3610 of the CARES Act, Section 822 seeks to protect the DoD’s timely and reliable access to the Defense Industrial Base through creation of statutory authorities providing a means for contractors to seek reimbursement from the government while performing federal government contracts during extraordinary times. The DoD throughout 2020 issued extensive written guidance, expectations and requirements regarding contractors seeking relief for employee paid time off caused by a variety of factors during the early phases of the pandemic. Hopefully, DoD issues practical guidance in the coming few months regarding its procedures to implement contractor requests for increased costs “solely due to inflation”. Also, contractors should keep in mind the contrast between Section 3610 (CARES Act) and Section 822 (NDAA) regarding specific funding authorization – the CARES Act does not require specific funding authorization while the 2023 NDAA does.
In the meantime, and as the DoD’s reaction to the current inflationary environment is an undefined and evolving matter, contractors facing economic challenges and contract losses under their DoD contracts due to inflationary pressures are encouraged to i) timely and periodically communicate with their customer, ii) maintain thorough and adequate records and supporting documentation related to anticipated versus actual costs, and iii) proactively seek and document attempts to mitigate adverse inflationary impacts to the maximum extent practical.