DoD Issues Guidance On Inflation Adjustments For Contractors

The Department of Defense ("DoD") recently issued a memorandum to contracting officers ("COs") providing guidance on the use of economic price adjustment ("EPA") clauses to address inflation-related cost increases. The memorandum, entitled Guidance on Inflation and Economic Price Adjustments, comes as the year over year inflation rate rose to 8.6% for the month of May and contractors with fixed-price contracts seek ways to recover their rising costs. EPA clauses allow the parties to mitigate cost risks that present themselves as a result of circumstances beyond the contractor's control, e.g., inflation and supply chain price fluctuations. Generally, an EPA clause will dictate that the Government bear the cost risk up to a mutually-agreed-upon ceiling. EPA clauses apply to the cost portion of a contract, but do not normally apply to the profit. DFARS PGI 216.203-4.