Friday, February 22, 2013

Economic Price Adjustments in Contracts

Most readers of this blog will be familiar with the different types of contracts the Government uses to procure goods and services; fixed price, cost-reimbursable, and time-and-materials, to name three. Within each major contract type, there are variations available, depending upon circumstances. One of the variations available under fixed priced contracts is the economic price adjustment (EPA) provision.

The use of EPA clauses is somewhat rare but they are available and useful under the right set of circumstances. A fixed-price contract with EPA will provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies. EPA typically fall under one of three general types.

  • Adjustment based on established prices. These price adjustments are based on increases or decreases from an agree-upon level in published or otherwise established prices of specific items or the contract end items.
  • Adjustments based on actual costs of labor or material. These price adjustments are based on increases or decreases in specified of labor or material that the contractor actually experiences during contract performance.
  • Adjustments based on cost indexes of labor or material. These price adjustments are based on increases or decreases in labor or material cost standards or indexes that are specifically identified in the contract.

An EPA clause is typically used where there is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance and contingencies that would otherwise be included in the contract price can be identified and covered separately in the contract. EPA clauses are normally used to cover events that are beyond a contractor's control.

Before an EPA provision can be included in a contract, the contracting officer must determine that it is necessary either to protect the contractor and the Government against significant fluctuations in labor or material costs. Usually contracting officers do not initiate such a process so contractors must be proactive in helping contracting officer understand the desirability of such a clause.

Typically, EPA clauses are used in contracts where the period of performance is several years and there is a significant component of raw materials where the price is subject to market forces, well beyond the control of the contractor. For example, if a construction contract requires steel to be purchased three years from the date of the award, an EPA could be fashioned to adjust the steel prices from the amount negotiated to the price on the date purchased. Or, if the contract is subject to the Service Contracting Act or Davis-Bacon Act, the contractor has no control over prevailing wage determinations.

The EPA provision specifically prohibits EPA be used for overhead or G&A but it does make allowances for fringe benefits. For example, a fringe benefit rate that includes a defined benefit pension plan may be impacted by stock market performance.

If this sounds like something that would be useful for your company, bring it up during contract negotiations.

No comments:

Post a Comment