These days, we can no longer overlook the effects of inflation in fixed-price government contracts. These are contracts where you take the risks of inflation and increase in cost.
There are very few contracts that allow for compensation for contractors when inflation occurs, especially in FFP or Firm Fixed Price Contract. You can use an REA, Request For Equitable Adjustment but there are no guarantees that the Federal Government will approve it. You may end up asking to terminate the contract, which damages you in the long run, you don’t earn anything and your reputation becomes tarnished.
When you as a company bid on FFPs, it’s a bit of fortune telling about the current economics of the contract. You may end up overestimating and offering a significantly higher amount than other companies, or underestimate and get you operating at a loss.
There is an EPA (Economic Price Adjustment) clause in FAR that can help. Last May 25, 2022, the DoD issued a memo on considerations when deciding how to incorporate the EPA clause in new contracts:
- The EPA will allow upward and downward revisions.
- Revisions are based on pre-negotiated formulas.
- The EPA clause will not modify existing contracts.
- The inclusion of the clause would also consider the length of the contract.
- The clause will be limited to costs that are more impacted by economic fluctuations.
- Indexes like the Producer Price Index, BLS, Bureau of Labor Statistics, Employment Cost Index, and the North American Industry Classification System Product Codes, should be used for adjustments on indexes of materials and labor.
The complexities of a Firm Fixed-Price government contract do not only happen at the beginning, there are more while you are working on the contract. These tend to take away effort from the real tasks that the government contract brings. Your best resource would be to get help from our highly experienced people from Peter Witts CPA PC, we take away all the hardships of accounting and prep for your contract leaving you to focus on your craft.