Mitigating Delay

Tips for reducing, recovering inflation-related cost increases on federal contracts

By Jake Scott

overnment sluggishness in evaluating proposals, processing change orders, and responding to requests for information is not new. But contractors’ struggles to accurately price bids and hold those prices while waiting for the government to act has taken on new urgency in the face of the economic volatility of the past few years.

There are no silver bullets for this challenge, but contractors can mitigate and recover their increased costs for this type of delay in some circumstances.

The cost increases can start even before contract award. Delays in the evaluation process of proposals for federal contracts may drive the award date past the date through which offers remain valid. In that instance, the government will usually request an extension of offers rather than resolicit proposals. Before agreeing to an extension, contractors should request the chance to reprice their offers based on the passage of time and the ever-increasing costs of materials and labor.

The government is not obligated to grant the request—the government knows that it can delay the procurement without suffering cost increases experienced by private parties, and it takes great advantage of that benefit. Still, in some cases the contracting officer will agree to repricing. Contractors cannot be shy about protecting their interests. The worst thing that the contracting officer can do is deny the request.

Cost-type contracts with the federal government are but a vague memory for most contractors. These days, with few exceptions, the federal government has shifted to firm-fixed-price contracts. While fixed-price contracts have the benefit of giving the government certainty of its costs, they place a significant burden on contractors, who are usually obligated to absorb any cost increases not caused by a government change to the contract. Federal Acquisition Regulation, or FAR, 52.216-4 Economic Price Adjustment-Labor and Material can provide construction contractors relief if the agency agrees to insert the clause into the contract.

An economic price adjustment, or EPA, clause generally allows a contractor to seek a price adjustment in the event that the cost of labor or materials exceeds the contractor’s schedule of values. The increases are often determined by referring to economic indices identified by the contracting officer, but actual costs can also form the basis for the adjustment. EPA clauses also require the contractor to reduce its prices when labor and materials costs go down.

Federal agencies are inconsistent in their use of EPA clauses. The US Army Corps of Engineers has taken the position that EPA clauses are not appropriate for construction contracts. Other agencies with significant construction work have been known to agree to the insertion of EPA clauses in construction contracts. The lesson to take from this is that contractors should always request an EPA clause when negotiating a contract with the federal government.

In construction contracts, FAR 52.249-10 Default (Fixed-Price Construction) explains that a contractor is entitled to noncompensable time for government-caused delays, such as lags in issuing change orders. The government reasons that, even if a contractor’s costs increase during that time, the cost increase itself is not a result of the government’s delay. The Armed Services Board of Contract Appeals, the Civilian Board of Contract Appeals, and the US Court of Federal Claims, where these issues are litigated, generally uphold the government’s position. However, there are instances in which a government-caused delay that drives a contractor into a time of increased prices can constitute a compensable change.

A recent decision by the Armed Services Board of Contract Appeal, or ASBCA, allowed a contractor to pursue its claim that its subcontractors experienced inflation-related cost increases as a result of a constructive suspension of work by the government. The contractor asserted that the government’s actions and inactions in response to COVID-19 hindered subcontractors’ ability to perform, leading to delay and inflation-related cost increases. The contractor also asserted that, by denying the impact of COVID-19-related factors on the project schedule, the government constructively suspended the contract. While the ASBCA decision denied the government’s motion to dismiss the contractor’s appeal, the ASBCA has not yet decided the merits of the case. Nonetheless, the decision illustrates the importance of tying otherwise unrecoverable inflation-related cost increases directly to government action or inaction that would, by itself, entitle a contractor to relief.

A final and less technical approach to dealing with increased costs resulting from the government’s unhurried contract administration is to establish strong working relationships with contracting personnel. Despite the ominously thick rulebooks that govern federal contracts, contract administration relies on people to carry out those rules. Contracting officers enjoy broad discretion in their decision-making. With cooperation from a friendly contracting officer, a contractor can find room to maneuver in situations where an overly stiff reading of the rules might otherwise preclude relief.

As a matter of course, contractors should thoroughly document any delays, cost increases, changes, and communication with the government as they happen. That documentation will prove important when trying to convince the government that the contractor is entitled to a contract price increase, or when trying to convince a judge of the same thing years after the fact. Every case is different, so there is no single approach to recovering increased costs. If you have questions about how to proceed, contact qualified government contracts counsel for advice.