On May 5, 2023, the World Health Organization ended the Global Health Emergency status for COVID-19. The lingering impacts to the construction industry continue with market volatility for construction materials being impacted by inflation. While price indices for the past two months have shown some stabilization, the uncertain economic climate casts doubt on whether that trend will continue. At least one sector of the construction industry – federal defense contracting – has offered some relief from inflation on fixed-priced contracts for the immediate future.
On December 23, 2022, President Biden signed into law the 2023 National Defense Authorization Act (“NDAA”) which contains new authority permitting the Department of Defense to modify fixed-price contracts impacted by inflation. This new authority provides much needed assistance for government contractors facing historic inflation that has wreaked havoc on fixed price contracts negotiated prior to the current inflationary cycle.
Public Law 85-804
Section 822 of the NDAA entitled “Modification of Contracts to Provide Extraordinary Relief due to Inflation Impacts” amends Public Law 85-804 to permit the Secretary of Defense to modify Department of Defense (“DoD”) contracts impacted by inflation. Under this law, prime contractors can submit a written request for amendment when, solely due to inflation, the cost to perform a contract is greater than the price of the contract. If granted, the modification adjusts the price of the contract up to the actual cost of performance. The Secretary of Defense also has discretion to grant an adjustment for so-called “indirect costs”. However, at this time, it is not clear what costs will be considered “indirect”.
Subcontractors are also eligible for contract modification under the amended law. As with prime contractors, subcontractors may request contract modification when, solely due to inflation, the cost of performance exceeds the price of the subcontract. However, a subcontractor seeking contract modification must first do so through a written request submitted by the prime contractor to the DoD. If the prime contractor does not make the request on behalf of its subcontractor, the subcontractor may then make its request directly to the DoD. It is worth noting that if the prime contractor requests the modification on behalf of its subcontractor, it must provide the subcontractor with the entire amount of adjustment to the subcontract. Additionally, the prime contractor cannot require the subcontractor to pay any additional consideration or fees for submitting the request for modification.
Key Considerations
Contractors seeking inflation-related adjustments under this new law have a few considerations to keep in mind. First, modifications under the law are contingent on continued performance of the contract. Second, the law imposes additional requirements depending on the amount of the modification. For modifications over $500,000, approval must be received from a secretarial-level official within the DoD. Modifications over $150 million require written notice to the House and Senate Armed Services committees and a 60-day waiting period during which the either the House or Senate Armed Services committees may disapprove of the modification. Finally, there is a limited window of availability for inflation-related modification under Public Law 85-804. At the time, the DoD is only authorized to grant inflation-related modifications until December 31, 2023.
Final Thoughts
The amendments to Public Law 85-804 will soon bring much needed relief to defense sector public contractors facing historic inflation. Guidance outlining the procedure for submitting claims was initially due within 90days of the passage of the NDAA. At this time, the DoD has yet to release this guidance. Nevertheless, contractors wishing to provide their input on this forthcoming guidance may do so through the DoD’s Defense Pricing and Contracting site. Given the narrow window of time to submit claims, defense contractors should begin preparing their claims and support documents as soon as possible so that they may be submitted as soon as the DoD releases its guidance on claims submission.
