In 2020, I read many articles addressing how contractors can mitigate the effects of COVID-19 on construction projects. I also wrote similar articles, including tracking COVID-19 impacts and whether a contractor can get more time and money due to COVID-19 impacts.
Fast forward to 2022 and the new hot topic is inflation. The cost of many things used to build a project have gone up significantly the last year and a half, including lumber and plywood (+101%), copper and brass mill shapes (+52%), plastic construction products (+45%), and gypsum or drywall (+29%).
As a result, many contractors are feeling the pinch of these increased costs and find themselves in a position where they may lose money on a project if construction costs do not go back down.
Public owners are addressing the impacts of inflation on existing and new contracts in different ways. For example, the United States Department of Defense (DOD) recently issued a memorandum providing guidance to contracting officers (COs) how to deal with the impact of inflation.
Here are some of the key takeaways from the memorandum:
Economic price adjustment (EPA) clauses are the key: Certain DOD contracts have EPA clauses that mitigate specifically covered cost risks to both the government and the contractor as a result of contingencies beyond either party’s control. Typically, the EPA clause will provide that the government will bear the risk of a cost increase up to the limit specified in the clause. If your contract has an EPA clause, that may provide a basis for a change in the contract price.
Contractors with firm-fixed-price contracts are out of luck: The DOD has instructed its COs to deny requests for equitable adjustment seeking additional compensation due to inflation under fixed-price contracts. The DOD reasoned that “[s]ince cost impacts due to unanticipated inflation are not a result of a contracting officer-directed change, COs should not agree to contractor REAs submitted in response to changed economic conditions.”
For new contracts, COs should consider adding an EPA clause: The DOD has also instructed its COs to include an EPA clause where there is going to be an extended contract length. The memorandum suggests that EPA clauses should be used “when delivery or performance will not be completed within six months after contract award.” This would seem to make EPA clauses appropriate for many significant construction projects.
EPA clauses must be equitable: The DOD noted that an equitable EPA clause will allow for both upward and downward revision of the stated contract price when a specified contingency occurs (e.g., the price of lumber goes up or down significantly). If there is a ceiling and floor for price adjustments, the ceiling and floor should be the same.
The DOD also directed its COs to “work with contractors to ensure EPA clauses provide appropriate risk mitigation while being fair to all parties to the contract.”
Bottom Line: If you are a construction contractor working on an existing DOD or other public owner contract, review the contract to determine whether there is any clause addressing potential cost or price changes due to economic conditions, including an EPA clause. For new contracts, determine whether there is an EPA clause. If not, you need to include the potential for inflation-related price increases in your bid.
If you have any questions about getting additional compensation due to inflation-related costs increases, please feel free to reach out.