Understanding the provisions mentioned in the FY 2023 NDAA is essential for small and large government contractors to benefit from contracting opportunities and uphold compliant systems. President Biden signed the FY23 NDAA into law in December 2022, providing $816.7 billion in funding for the Department of Defense (DoD) and introducing significant changes to federal procurement policies. Part of the new legislation is Section 822, which provides inflation relief, a positive development for contractors operating under fixed-price contracts.
What does Section 822 of the NDAA include?
In Section 822 of NDAA FY23, titled ” Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts,” Public Law 85-804 is amended to empower the DoD to grant fair adjustments to contractors for expenses resulting exclusively from economic inflation. The provision for inflationary relief is subject to the discretion and applies solely to cost escalations resulting from inflation.
The legislative measure also entails augmentations in the monetary thresholds of ECR. Public Law 85-804 formerly mandated that contract adjustments necessitated approval from an Assistant Secretary or their Deputy for any amount above $50,000. However, with the proposed amendment to Section 822 of the NDAA, the threshold for approval is elevated to $500,000. Moreover, the Congressional threshold notification is raised from $25M to $150M. If approved, these new limits for approval and notification should enable greater utilization of the authority.
Within 90 days of the NDAA’s enactment, which is expected by the end of March 2023, the DoD must issue guidance under Section 822. The guidance will detail how the DoD will handle requests for relief from contractors. It will also include information on the expected format and content of contractor requests for relief, as well as any requirements for submitting cost or pricing data.
Who is eligible?
This relief is available for DoD prime contractors and subcontractors. The Department of Defense has the DISCRETION to provide contract amendments covering actual costs and may factor in indirect expenses in its aid (but not required). Modification approvals are conditioned upon acceptable contract performance, but contracting officers cannot make this relief contingent on changes to other contract terms. To be eligible for potential relief, covered contracts and subcontracts must exhibit a real loss, meaning costs that surpass the contract or subcontract price, rather than merely a reduction in profit or margin.
This provision extends relief to subcontractors who can now independently seek relief from the Department of Defense for costs incurred without having to depend on prime contractors to do so on their behalf. This means that even if prime contractors fail to pursue compensation for affected subcontractors, the latter is empowered to seek relief directly from the DoD.
Until when is the relief applicable?
Government contractors currently grappling with inflation risks in fixed-price contracts should be aware that the applicability of Section 822 commenced upon its enactment and will cease on December 31, 2023.
The legislation will provide a legitimate and formal channel for defense contractors, particularly small businesses, to petition for discretionary relief, which is crucially needed. It may bring a glimmer of hope to contractors and subcontractors in fixed-price contracts struggling with contractual obligations amid economic uncertainties and other challenges.
We recommend DoD contractors stay updated with the latest developments. Please do not hesitate to contact Peter Witts, CPA, with any questions or concerns, as we are always available to help.