YES, YOU CAN RECOVER COSTS RELATING TO INFLATION
If Your Claim is Presented with the Right Strategy!
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For a printable PDF of this blog post and its attachments, click here.
INTRODUCTION
As discussed in a previous Excell Report blog, on May 25, 2022, John M. Tenaglia, the Principal Director for Defense Pricing and Contracting at the United States Department of Defense (DoD) issued a memorandum entitled “Guidance on Inflation and Economic Price Adjustments”. This memorandum spurred quite a commotion throughout the Government Contracting world, and for good reason.
The May 25, 2022 Memo set forth the DoD’s position that, facing the unprecedented rate of inflation and its economic impacts on contracts in the U.S. and around the world, contractors under existing fixed price contracts would need to bear the impacts of inflation as an unfortunate part of the risk a contractor assumes when entering into such a contract.
Excell took exception to that guidance and issued a blog post strongly questioning the position the DoD was taking in its memorandum. Evidently, Excell appears to have been on to something, as the DoD has now issued “updated” guidance on the matter.
Indeed, on September 9, 2022, Mr. Tenaglia issued a second memorandum to Contracting Officers on “Managing the Effects of Inflation with Existing Contracts.”
The following is a summation of the DoD’s memo, which represents an almost complete reversal of prior positions and is therefore worth a very serious read and understanding by industries and companies dealing with the Department of Defense on Federal Government contracting efforts.
OVERCOMING RECENT DoD GUIDANCE ON INFLATION AND ECONOMIC PRICE ADJUSTMENT
The Department of Defense’s first memorandum of May 25, 2022 provided official guidance to Contracting Officers regarding how to treat Requests for Equitable Adjustment (REAs) that were based on inflation and the resulting increase in the cost of materials and labor, among other factors (i.e., supply chain impacts, inflation, unanticipated effects stemming from COVID-19, etc.).
Indeed, the DoD instruction and guidance was that Contracting Officers should reject such claims submitted under existing contracts, while simultaneously instructing the Contracting Officers to incorporate the Economic Price Adjustment clause in future contracts (to include the exercise of option years on existing contracts, as discussed in the previous Excell blog), to allow for contractual adjustments to address spikes in inflation.
As discussed, this DoD guidance was short sighted and failed to recognize other alternative routes to recovery. Excell understands this full well, and knows that the key to recovery lies within the text of the clauses in the contract and how they interact and support one another.
Far too often the argument heard from contractors boils down to: “I spent it, therefore I am entitled to it.” This approach is far too simplistic to be successful in the vast majority of situations in which the Government is inclined to provide pushback of any real magnitude, and ultimately leads to a monetary recovery of zero nearly every time.
In practice, a Request for Equitable Adjustment (and its eventual success or failure) cares not about the money being spent, but rather about the money being spent in a manner that is justifiably recoverable via the language of the clauses found in the subject contract. If the contractor actually understands what the contract’s language says and its applicability to the situation at hand, the contractor can then make the money a secondary issue and recover its costs 100% of the time.
Thus, with Contracting Officers aggressively looking for ways to reject REAs related to inflation, an “outside the box” strategy may be required to have your REA accepted, understood, and approved. Contrary to popular belief, such a strategy is not actually all that far-fetched, but rather can be based on existing FAR clauses, existing contracting principles, and significant legal precedent, so long as it is prepared by a mind that truly understands these components.
Industry experts in this realm like Excell, Baker Tilly, Arcadis, and others (all firms who really understand and are able to traverse the pitfalls in the contract) know this, and that is why they exist and are successful. Simply put: A contractor’s entitlement has to be established first, and then the money can follow with far less resistance.
NEW DoD MEMO WALKS BACK PRIOR DIRECTION AND OPENS DOOR TO PATH TO RECOVERY
In Excell’s view, the DoD has acknowledged that its prior guidance was flawed when it recently issued its follow-on memorandum on September 9, 2022 titled, “Managing the Effects of Inflation with Existing Contracts.”
In conjunction with Excell’s stance as described above, the updated Memo seeks to “advise Contracting Officers about the range of approaches available to them” in resolving REAs to adjust for inflation costs.
For contractor’s having their projects impacted by inflation, the importance of the DoD’ shifting of opinion really cannot be understated. The DoD has now acknowledged that “there may be circumstances where an accommodation can be reached by mutual agreement of the contracting parties” to address acute inflation-related impacts, especially where a small business is involved.
Notably, while the DoD does not spell out the exact contractual access points they are referencing, Excell knows that there are several available clauses within the FAR and the Contract itself that can be utilized by contractors to request a recovery. These include the Changes Clause (which encapsulates Excusable Issues, Non-Excusable Issues, Compensable Issues, Concurrent and Nonconcurrent, Payment Provisions, Site Availability Provisions, Impossibility of Performance, Defective Plans and Specifications, Seasonal Weather Changes, Strikes/Lack of Manpower, Failure of Owner to Furnish Items, Superior Knowledge Arguments, Notice Arguments, Non-Responsiveness Issues, Lack of Response Issues, etc.), as well as the Differing Site Condition Clause, the Suspension of Work Clause, the Spearin Doctrine, the Bromley decision(s), and more.
In its updated guidance memo, the DoD also raises the issue of Public Law 85-804, a lesser-known and (in Excell’s opinion) severely underutilized remedy that has been available to contractors for decades. This law allows for Extraordinary Contractual Relief where fairness and equity demand – but the contractual provisions do not readily provide – the relief requested by a contractor.
It now appears that, given the DoD’s guidance to its Contracting Officers concerning this law, Pub. L. 85-804 may finally be receiving the attention it deserves. especially with the DoD’s declared intent to assimilate, study, and advise on behalf of the contracting parties when a clause does not fit the exact situation being encountered.
THUS, where an REA for inflation-related costs under a Firm Fixed-Price (FFP) contract would have been denied under the DoD’s first Guidance Memo, the updated Guidance Memo is now cracking open the door to recovery.
The DoD has acknowledged that the issue needs to be looked at again, and the new guidance has effectively reversed the prior guidance. The issue is now wide open, and the key to entry is knowledge of how to persuasively package your REA.
In addition to the literal language of the updated Guidance Memo, the DoD’s choice of words in the updated memo’s second paragraph is also telling to Excell specifically with regard to the use of words such as “Generally”, “However”, and “Perhaps.”
For example, the DoD states in its memo that contractors on a Firm-Fixed Price contract “generally” bear the risk of cost increases. The use of the word “generally” reflects a substantial softening of its prior (May 25, 2022) hardline guidance to contracting officers to flatly deny REAs for inflation-related cost impacts on these types of contracts.
“However,” the DoD goes on to write, “there may be circumstances” where exceptions to the general rule should apply, as in the case of the ongoing, once-in-a-generation inflation impacts. This shift from its previous position comes after an upswell of input from industry; asserting that continued performance on FFP contracts with no reasonable cost adjustment is simply untenable and unfair, and that the inevitable failure of performance on said contracts would most certainly undermine the DoD’s larger and critical mission.
Finally, the DoD’s use of the word “perhaps” indicates that the matter is now open for discussion, and that reasonable heads should prevail in order to keep DoD contracts moving toward successful completion, all while keeping both contractors and the Government equitably whole.
INSIGHTS FROM THE DoD’S NEW ‘CORRECTION’ MEMORANDUM
The DoD’s issuance of the second guidance Memorandum is as close to a reversal of a formal position as you may ever see in the world of Government Contracting. Contractors need to understand that the situation over the last few years (to include “Acts of God” such as the pandemic, and its unexpected associated inflation, supply chain impacts, and inconsistent direction from those in charge in the contracting arena) are now finally coming to the surface, and now is the time in which they need to be addressed and accounted for in the interest of fairness and equity.
In summation, industry needs to understand, in the simplest of terms, that the rules and regulations as they relate to delays, disruptions, and ripple effects, caused or not caused by Government action or inaction, can all present areas of recoverability. Importantly, just a few months ago, the Government’s official position was essentially, “Sorry you made the mistake of entering into our contract that is fixed-price in nature. You took the risk, and you lose.” Not only has that position softened, but in many ways it has been reversed, and U.S. Government contracting personnel across the world have been formally instructed to act accordingly moving forward.
If you believe that your contract environment is now open for discussion, you merely need to understand how to parlay that belief into a monetary recovery. Large organizations specializing in cost accounting, as well as consulting and law firms that have their ears to the ground in the world of government contracting are all waking up to this fact and stand ready to assist contractors that wish to seek said recoveries. In fact, some have already started the process, and Excell clients have already begun to see victories in this area.
RECENT VICTORIES FOR EXCELL CLIENTS
Excell not only believes all of the above to be true, but has proven it to be true with recent victories on behalf of its clients.
Recent victories for two of Excell’s clients demonstrate that contractors CAN recover their cost impacts associated with the COVID-19 pandemic and related shutdowns, as well as impacts to profitability due to inflation. The key to both types of claims lies in how the claim is argued and presented.
Recently, two separate contractors, both of whom found themselves in similar contractual situations, submitted formal REAs to Government in an attempt to recover COVID-19 and inflation-related cost impacts to their projects. In both cases, the Government initially denied the contractors’ REAs, nearly in their entirety.
However, after engaging Excell and repackaging their REAs and supporting arguments in conjunction with the knowledge and principles discussed herein, both clients were successful in convincing the Government to reconsider their initial denials. Both clients were able to convince the Government to enter into further discussions and negotiations on their respective projects, and both eventually were granted their requested recovery. In essence, the key to recovery for both clients was in convincing the Government’s contracting personnel that recovery was indeed allowable via a combination of Federal Acquisition Regulation clauses, an approach that the DoD has now formally directed its Contracting Personnel to follow moving forward.
The key for both clients, and for contractors in similar situations, is to determine (contractually) how the Government’s direction(s) ultimately caused a Change in the terms and conditions of their contracts that was different from the performance planned, bid upon, and awarded. Excell has long known precisely how to go about this, and was able to prove this fact in both of these cases, much to the satisfaction of its clients.
CONCLUSION
Contractors absolutely should not give up on REAs and claims for cost impacts resulting from COVID-19 and/or inflation, even in situations where initial requests related to compensation for these items have been denied. The Government has now formally issued direction that contradicts a denial of such requests, and would naturally love nothing more than for contractors to believe that previous denials remain valid when the complete opposite is now really the case.
Excell has long held that a well strategized and well-crafted submission can set the foundation for a successful REA/claim under most sets of facts and circumstances. Before throwing in the towel, Excell highly recommends that contractors consult a professional for an analysis of their situation; preferably one who has had very recent success dealing with exactly these types of issues.
Aside from the obvious potential cost/time recovery, contactors who do so will also stand to gain a valuable education on how to assemble and argue successful REAs/claims under circumstances where many contractors before them may have given up before they even began.
Ultimately, the door to recovery of COVID-19 and inflation-related costs has now been opened, and fiscal recoveries to contractor’s bottom-lines (both on current AND future contracts) is sure to be substantial. Let Excell Consulting International share with you the knowledge it has gained over 30+ years of experience, and place your company on the path to a successful recovery of these costs today!
If you have any questions about these recent developments, or would like to discuss your specific situation, Excell Consulting is ready and able to assist. And remember…
Initial consultation calls to Excell are always FREE!
Call (719) 599-8336 today!
Attachments:
Excell Blog Post: “DoD ISSUES QUESTIONABLE GUIDANCE ON INFLATION”, published June 14, 2022
Department of Defense Memorandum, May 25, 2022, “Guidance on Inflation and Economic Price Adjustments”
Department of Defense Memorandum, September 9, 2022, “Managing the Effects of Inflation with Existing Contracts“
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For a printable PDF of this blog post and its attachments, click here.
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EXCELL CONSULTING – “HERE TODAY FOR YOUR TOMORROW “
Author’s note: The information contained in this article is for general informational purposes only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation. – John G. Balch, CEO, MA, CPCM