Within the next week, DoD hopes to update its policies to allow more vendors hit by inflation to request price increases on their fixed-price contracts.
The Defense Department is preparing new guidance that would give its contracting officers more flexibility to reimburse vendors whose costs have ballooned because of inflation, updating an earlier policy document that industry groups complained did too little to prevent contractors from bearing the full brunt of higher prices.
The update is in the final review stages and should be published within the next week, said Dr. Bill LaPlante, the undersecretary of Defense for acquisition and sustainment. A key focus would be to offer relief to companies who signed firm fixed-price contracts with the government before inflation took hold.
“If you’re in an FFP contract that was signed in 2020, it’s gotta suck when it’s 2022 with an inflation rate of 10%. That’s what I’m worried about,” he said during a conference hosted by Defense News on Thursday. “We want to keep our industrial base whole, we want to keep them solvent. We need them. That’s what we’re after.”
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The department published an initial set of inflation guidance on May 25, and vendor associations have critiqued the policy for not going far enough. The guidance, from DoD’s office of Defense Pricing and Contracting, told contracting officers not to accept what are known as requests for equitable price adjustments (EPAs) for contracts that have already been signed, and didn’t enthusiastically endorse their use in new contracts.
Since then, defense industry associations have been making the case to Congress and DoD leaders that the sudden onset of high inflation is an unusual case that calls for a departure from usual contracting practices. LaPlante said he and other senior Defense officials have found many of their arguments persuasive.
“We’ve been looking at several things,” he said. “One, can we loosen or broaden the definition of what an EPA clause can be used for, including for firm fixed-price? And can we use what’s called extraordinary circumstances in some cases to make people whole? What I’ve been asking of industry, though, is data. I need data about companies that are either potentially going under or not bidding that are affected by inflation. Because we need to inform the Congress, we need to inform the Pentagon. I’m convinced there’s real-world examples of people being hurt — how can you not read the news and not see that? But we need to show the data.”
And there is at least anecdotal evidence that the defense industrial base had already been shrinking before inflation became a concern, said Gabe Camarillo, the undersecretary of the Army. He said the possibility of a shrinking supply base is especially worrisome amongst small businesses.
“I asked our team to look at doing some more in depth analysis to say, ‘What are these trends? Do we see it on the services side on R&D, or facilities and maintenance? I also want to focus the causes for some of that decline,” Camarillo said at the same conference. “Are these small businesses simply not doing business with the department? Are they going to commercial customers? Or are they hidden to us because they’re doing more teaming or being bought out by other larger companies? I think some forensics are in order, and we’re doing some analysis right now with some FFRDCs. And I hope to get the results of that later this year.”
David Berteau, the president of the Professional Services Council, a trade association, said an update to DoD’s EPA policies would be more than welcome, but noted that the money would need to come from somewhere. That’s one reason his association and others have been making their case to Congress as well.
Since the government is almost certain to start off the fiscal year under a continuing resolution — quite possibly the first of several — Berteau argued lawmakers should build additional funding into that short-term measure to account for increasing inflation.
“We acknowledge that in the recent past, CRs have tended to be flat, and just extend the funding of the previous fiscal year’s appropriations. But that was when the federal funds rate was a quarter of a percent and inflation was not that much higher. We’re in different circumstances today,” he said in an interview with Federal News Network. “So we’re going to urge Congress not only to address it in the CR, but if there’s a subsequent CR to include it there and in an omnibus appropriation for the full fiscal year. Obviously, we would be also be happy if Congress were to encourage not only the Defense Department, but the rest of the federal government to open the aperture for consideration of requests for equitable adjustment.”
Julia Gledhill, an analyst at the Project on Government Oversight’s Center for Defense Information, said there could be a reasonable case for allowing economic price adjustments for smaller firms, but that her group was wary of any potential policy changes that could become a “bailout” for the broader defense industry.
“These prime contractors have been financially stable for a very long time. And so while it certainly does matter to ensure that they are able to continue meeting their subcontracting goals, I think that there’s more accountability measures to be enforced on the part of the Pentagon and Congress, and making sure that they’re meeting those goals,” she said. “I think the Pentagon will ask industry for details to make decisions regarding whether to make those adjustments. But the director for Defense Pricing and Contracting has said that that should be done on a very limited scale.”
But Berteau argued expanding the circumstances when DoD can grant requests for equitable adjustments is far from a blank check for the government contracting industry. In each case, he said, vendors would need to show evidence that inflation has forced them to absorb costs that weren’t foreseeable when they agreed to fixed-price contracts.
“This is the beauty of administrative action through a request for equitable adjustment, because it’s not an invoice that gets paid. It’s a submission of justification for a change in the amount of money being paid,” he said. “That submission is subject to documentation requirements. It’s reviewed by the federal government. You wouldn’t grant additional funding unless there was substantial justification and actual costs that have been incurred, or that you can demonstrate would be incurred if you continue doing work under the contract.”
LaPlante said more data will be vital, not just for adjudicating individual contract adjustments, but for broader policymaking in an economy where inflation has suddenly become a major factor.
“We need real examples to show back to us and to the Congress, that this is real, and it’s really hurting companies. It’s my personal belief that it’s happening, but I want data to show it,” And I’ve challenged industry on this. I’ve also said, ‘How do you respond to the fact you’re buying back your stock?’ And they have answers for that, but that’s the perception. I’ve also pointed out that during COVID, one of the best places to be was to be have a contract with the U.S. government. It’s better than being a hotel or being a restaurant or being an airline. Particularly in national security, because of the imperative of what we do, we made sure we tried our best to make [companies] whole. But having said all that, industry did incredible work to sacrifice themselves to keep the production lines going. So I think this is a holistic discussion, but the reality is we can’t have our suppliers with FFPs go under or get away from us. That’s what I’m trying to prevent.”
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