“The inflation crunch is especially severe for government contractors, however, because they have traditionally faced a buyer dominated market in which contract terms and conditions are offered on a take it or leave it basis. Once into the period of performance, government contractors consequently confront a formidable bureaucracy characterized by limited flexibility in responding to the radically changed circumstances presented by such developments as double digit inflation. Unlike his civilian counterpart, the government contracting officer has little or no power to adjust contract prices when equity or practical considerations require and his authority in general is limited by a bewildering array of regulatory and decisional law.”
This excerpt is from a research paper by the Washington and Lee Law Review, capturing the impact of inflation on government contractors in 1975. Yes, written 47 years ago and the point made by Richard Johnson and John Pachter, who now are with Smith, Pachter and McWhorter, rings more true today than ever.
In 1975, the inflation rate was 9.13%. In January 2022, it stood at 7.3%.
And just like in 1975, where a gallon of gas was 44 cents on average and milk cost on average $1.57 per gallon, contractors are feeling the brunt of the rising costs of goods and services, and so too are agencies and their ability to meet their missions.
“[The General Services Administration’s] multiple award schedule contractors are being put in an untenable position: continue performance at losses of 15%-to-25% 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,” wrote Roger Waldron, the president of the Coalition for Government Procurement, in a Jan. 28 blog post. “This reality is stark, especially for small business whose margins are slim, resources are scarce and channels to the federal buyer are limited.”
And sources say some contractors are actually leaving the federal market altogether, in part, because they are losing so much money.
Heavy burden on contractors
Larry Allen, the president of Allen Federal Business Partners, said the impact on inflation on small businesses is especially hard given tight margins in federal acquisition already.
The issue isn’t just around GSA’s multiple award schedule contracts. Inflation is impacting everything from the Defense Department’s buying of fuel to the Department of Veterans Affairs’ purchasing of healthcare equipment to the Millennium Challenge Corporation’s acquisition of copy paper and toilet paper.
“Price increases have hit every link in the supply chain, including labor, materials, shipping, and energy. Associated with this rise in the rate of inflation (the highest rate in over a generation) is the increase in interest rates as a means to moderate inflation,” Waldron wrote to in a Feb.9 letter to GSA’s Mark Lee, the assistant commission in the Office of Policy and Compliance. “Altogether, these challenging economic circumstances place a heavy burden on contractors and their supply chains, especially small businesses contractors. The damaging effects of inflation on those providing goods and services in the economy cannot be overstated. The current increase in the rate of inflation devalues the currency businesses hold, reducing their spending power, and adding to the cost of doing business. The federal marketplace is a part of the broader economy, and thus, federal contractors are not immune to the impact of these challenges. Indeed, the same cost increases affecting the performance of businesses, especially small businesses, in the private sector exist for businesses performing under government contracts.”
The other related issue that contractors saw in 1975 and are once again feeling the pinch today is the government’s protracted process for vendors to increase prices.
The good news is that GSA is recognizing the inflation challenge and trying to do something about it.
Stephanie Shutt, the director of the MAS program management office, said the Economic Price Adjustment clause isn’t working because the rules are too restrictive. For example, the regulation only lets vendors increase prices no more than three times a year per item and the total annual increase is capped either 5% or 10% depending on the item or service.
“We are working with the Office of Governmentwide Policy and the Office of Policy and Compliance to see what we can do to provide workarounds for industry so you can increase more often throughout the year and increase more often after you have added something to your contract so your pricing can stay current and your pricing can stay fair and reasonable, and so we can make sure you are in a pocket for success,” Shutt said at the Centre Law and Consulting Annual 2022 Review on March 3. “If you are having issues with your pricing, so we can track it better, we do recommend that you email the GSA ombudsman. Please don’t email the ombudsman until you actually have an issue though. We are working really hard to make sure that we provide a lot more flexibility so the supplier journey is easier across the board. It does take time and money for us to process a rejection as much as it is time, money and frustration on your side. We are working very hard to see what we can do to make sure we are doing it well across the board.”
Allen said it’s a good sign that GSA recognizes the need to address prices changes, but need to move more quickly.
“They’re collecting contractor input right now, which suggests that it will be a couple of months before we have something. That’s too long when there is abundant market evidence that inflation is a problem,” he said. “Why not adopt an interim approach now and work toward something more permanent over time? This really impacts small businesses the most, so if GSA is following the administration’s lead on helping such companies, it would make sense to do something quickly.”
Shutt recommended that when vendors come to their contracting officer to ask for a price adjustment, they need to make sure they have all necessary and proper documentation.
“If you come to the table and the contracting officer asks for documentation on how the pricing is effecting your commercial market and you provide something like a firm fixed price invoice that has no detail in it, that’s not going to give your contracting officer enough to go off of. It’s not going to be properly documented in a way the contracting officer can do any type of negotiation from that,” she said. “Some great documentation could include freight charges of raw materials and how it effects your supply chain. Another thing could be for labor categories, with COVID and people coming back to work, there is a need to pay people more so there may be an increase in what you need to pay your employees. That may funnel down as well. So telling and documenting that whole story is really important with pricing.”
Another idea to whip inflation
Shutt didn’t say when GSA would come up with a new workaround or even an interim process change to address the challenges posed by the Economic Price Adjustment clause.
One solution mentioned in 1975 was to invoke the powers under 50 U.S.C. § 1431-35, which dates back to 1958. Johnson and Pachter write that the law lets the President and agency leaders modify contracts and “remove the prohibition against making amendments to contracts without consideration, and vests in the executive branch a wide-ranging discretion to remedy inequities in its contractual dealings, such as those created by the current surge of inflation.”
Given the fact that agencies are still dealing similar regulatory challenges as was the case 47 years ago, turning to a potential short term solution like this may make the most sense.
As Johnson wrote in 1975, “Moreover, a limited broadening of relief under Public Law 85-804 may be less inflationary in the long run than a wholesale exodus of commercial enterprise from the government contracting field. This latter result, which is a distinct threat today, would inevitably reduce competition for government business and increase the prices the government must pay for years to come.”