Help on the Way? Proposed National Defense Authorization Act for 2023 Grants DoD Discretion to Allow Inflation Relief for DoD Contractors

The annual National Defense Authorization Act (NDAA), in essence Congress’ annual budget for the Department of Defense (DoD), commonly includes various riders and attachments that amend or create other federal laws. For example, the 2022 NDAA (finally) gave SBA’s Office of Hearings and Appeals the authority to hear appeals of HUBZone protests (something SBA just recently proposed a rule regarding), and the 2021 NDAA is why SDVOSB self-certification is ending and SBA is taking over the job of carrying out certifications from the VA (SDVOSB contractors, SBA will start accepting applications on January 9, 2023, as we discuss here.) The 2023 NDAA is no exception, and as it is currently proposed, the DoD would get a lot more discretion to help out its contractors in light of inflation.

We’re guessing we don’t need to remind you that inflation has been a real concern for contractors in 2022, as well as the general public. In fairness to the DoD, the department has tried to address the concern as far as federal law allowed as well. Back in May, it released guidance outlining its plan to include economic price adjustment clauses with upcoming firm-fixed price contracts, which would more easily allow for adjustments for inflation. Then, in September, it released another memorandum that, while still providing for no general policy of adjusting firm-fixed price contracts for inflation, noted that through FAR Part 50, Extraordinary Contract Actions, established under 50 U.S.C. § 1431, some contracts could be adjusted for inflation as an “extraordinary contract action.”

The problem is that DoD can’t really go any further considering the laws in place. As of the time of this post, FAR Part 50 is quite stringent in its application. FAR 50.102-3 explains that “no contract, amendment, or modification shall be made under 50 U.S.C. § 1431’s authority…(u)nless the approving authority finds that the action will facilitate the national defense,” among other limitations. This is not a low bar. FAR 50.103-2 further provides that “the fact that losses occur under a contract is not sufficient basis for exercising the authority conferred by 50 U.S.C. § 1431. Whether appropriate action will facilitate the national defense is a judgment to be made on the basis of all of the facts of the case.” FAR Part 50 isn’t titled “Extraordinary Contract Actions” without reason.

To get around this, Congress needs to act. And so far, it has. The 2023 NDAA, which has now passed the House, contains language that will amend 50 U.S.C. § 1431 so as to give the DoD more discretion in allowing adjustments to contracts to account for inflation, although this allowance will only be temporary, lasting from when the NDAA is signed by the President until December 31, 2023.

First, it is important to clarify this language will not mandate DoD to grant adjustments to contracts for inflation. It simply gives them the broad authority to do so even if it is not crucial to the national defense. So, if you’re currently facing a loss on your DoD contract due to inflation, do not assume that this language, if and when it becomes law, gives you a clear legal right to an adjustment. It is still up to the agency. They do not have to grant you the adjustment. The new law would simply mean that now they have free rein to do so if you’re facing losses due to inflation.

On that point, note that the language states the DoD may “make an amendment or modification to an eligible contract when, due solely to economic inflation, the cost to a prime contractor of performing such eligible contract is greater than the price of such eligible contract.” Notice the caveat: the language here specifies this authority is only given if the prime contractor would otherwise face a loss on the contract due to the increase in cost, and only if the increase in cost is due to inflation. If you aren’t facing a loss on the contract, or the reason for the loss isn’t cost increases due to inflation, the language does not grant DoD general discretion to adjust. How it will be determined what can and cannot be attributed to inflation isn’t addressed, which will certainly be an issue of contention for some contracting officers.

Second, the language doesn’t just benefit prime contractors. It covers subcontractors facing a loss due to inflation too, and subcontractors may even take their claim straight to the government if their prime does not take their claim to the government. This latter change is a notable departure from the usual state of affairs.

Third, while the language in FAR Part 50 normally requires some sort of recompense or consideration from the contractor in order to get the adjustment, adjustments under this expanded temporary authorization will not require such consideration. Certainly, this is good news.

Fourth, it is worth noting that, normally, a contract adjustment under FAR Part 50 that exceeds $50,000 needs approval “by an official at or above the level of an Assistant Secretary or his Deputy, or an assistant head or his deputy, of such department or agency, or by a Contract Adjustment Board established therein.” 50 U.S.C. § 1431. The language in the 2023 NDAA would change that $50,000 to $500,000, which certainly will make it much easier to get larger adjustments than before. Furthermore, that change to $500,000 applies to all extraordinary contract actions involving DoD contracts, and it is not part of the temporary adjustment. (For those with potentially very large losses, it also changes the monetary threshold at which Congress must be notified before any potential adjustment is made from $25 million to $125 million.) Those monetary threshold changes, then, can be expected to be permanent changes, assuming the law is passed as it is written.

Finally, it must be clarified that all these changes only apply to DoD contracts. So, if your contract is with a civilian agency, unfortunately, the language in the 2023 NDAA will not be of assistance to you.

This is a welcome and needed break for contractors, many of which we know have been suffering significantly due to inflation. Hopefully, Congress goes a step further, and extends this discretion to the civilian agencies. In the meantime, if this language is passed (and we suspect it will be), this will be a great relief to DoD contractors.

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