Be Careful to Review Price Adjustment Clauses in Solicitations
Published Date: April 30, 2018
By now, many government contracts are feeling the impact of the recent 25% tariff on imported steel through increased prices of steel and steel-based products. The price impact has not been limited to imported steel. Rather, there has been a marked increase in the cost of domestic steel and steel-based products.
In most circumstances, as contractors know, on fixed-price contracts the contractor bears the risk of any increase in material costs unless there is a contract clause shifting the risk to the Government. One type of risk shifting clause is an economic price adjustment clause. One example of such a clause used in government contracts is FAR 52.216-4, Economic Price Adjustment – Labor and Material. Recently, P&A has seen the Government including this clause in some of its solicitations for fixed-price construction contracts.
FAR 52.216-4 provides for an equitable adjustment in the contract price if the rate of pay for labor or the unit prices for materials shown in the contract Schedule either increases or decreases. The contractor has to notify the Contracting Officer of such an increase or decrease within 60 days after the increase or decrease. FAR 52.216-4(a). The contractor also has to submit a proposal for a contract adjustment with the notice and provide supporting data including the cause of the increase or decrease, the effective date, the amount of the increase or decrease, and the amount of the contractor’s proposal.
To get an adjustment, the net change in the rate of pay for labor or the unit prices for material has to be at least 3% of the then-current total contract price. FAR 52.216-4(c)(3). The contractor may request multiple increases over time; however, there is a limit in the aggregate of adjustments that may be granted under the clause. The aggregate limit is 10% of the original unit price unless the standard clause has been modified to increase this limitation. FAR 52.216-4(c)(4).
There is one key aspect of the clause, however, that may limit the effectiveness of the clause for construction contractors seeking to recover for increased steel costs. FAR 52.216-4 states that there shall be no adjustment for changes in rates or unit prices other than those shown in the Schedule. FAR 52.216-4(c)(1). In other words, the contractor may not be entitled under the clause to an increase if there is no unit price for steel in the Schedule. For construction contracts, the Schedule generally does not include unit prices for any construction materials; rather there usually is just a lump sum unit price for the entire construction effort. Without a unit price for steel, it is unclear how effective FAR 52.216-4 will be for construction contractors seeking to recover an equitable adjustment for steel increases.