Addressing the impact of inflation on government contracts

This column was originally published on Roger Waldron’s blog at The Coalition for Government Procurement and was republished here with permission from the author.

Supply chain challenges and inflation are having a negative impact on businesses across the economy.  The federal procurement system, a subset of that economy, is not immune to these impacts. Indeed, the same cost increases affecting the performance of businesses, especially small businesses, in the private sector have materialized for businesses seeking to meet their contractual obligations under government contracts.

Fundamentally, successful contract performance is rooted in a strong, stable industrial base at the ready to meet the government customer’s performance requirements in an economically sound manner. Recognizing that the devaluation of purchasing power associated with inflation prompts cost increases for businesses, including those performing government contracts, it should be self-evident that the ability of government contractors to continue performance at a loss arising from those inflationary pressures ultimately will undermine the business viability of those contractors. These deleterious effects of inflation also impact government customers. In the short term, they can give rise to less than optimum performance in meeting contract requirements. In the long term, they threaten the health of the federal government’s industrial base and associated supply chain.

GSA’s Multiple Award Schedule (MAS) program, the government’s largest commercial item contracting program, also is vulnerable to the impact of inflation. MAS contractors are seeing inflationary cost and pricing pressures across the supply chain, from transportation, to materials, to wages, to energy, and all are prompting the need for price and rate increases. Yet, GSA’s current framework leaves contracting officers relying on a standard Economic Price Adjustment clause with little or no effective guidance supporting the streamlined administration of contractor requests for price increases. Time is money, especially for small business that see costs increasing while MAS prices remain stagnant. From our members’ perspective, there appears to be no sense of urgency in addressing the impact of inflation across the MAS program. Moreover, as noted in our recent blog, “The Tyranny of Low Price and Other Challenges,” GSA’s overall approach to commercial pricing under the MAS program institutionally ignores economic realities, creating distortions in the federal procurement market.

MAS contractors are being put in an untenable position: continue performance at losses of 15-25 percent or more on individual products, seek other, more flexible channels to support the customer, or simply exit the government space altogether in favor of the private sector that responds more readily to the forces of the market. This reality is stark, especially for small business whose margins are slim, resources are scarce, and channels to the federal buyer are limited.

The larger and ever-growing effect of inflation should prompt GSA to develop a framework for the streamlined administration, assessment, and execution of price modifications both increases and decreases under the MAS program. By so doing, it can ensure that the government’s suppliers remain stable and ready to support the business of government and, at the same time, advance the administration’s goals to build the economy and support small business opportunities in the Federal market.

Now is the time for the MAS to rise to the challenge that faces all of us in these difficult economic times. By responding to market dynamics and addressing the effects of inflation, GSA can support the industrial base, enhance competition, and ensure customer agencies have access to the latest commercial services and products. Coalition members, at the forefront of service to the agencies, look forward to partnering with GSA in this important enterprise.

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