FAR Part 16.2 Economic Price Adjustment Clause

Under the Federal Acquisition Regulations (FAR) “fixed-price government contracts with an economic price adjustment clause provides for upward and downward revisions of the stated contract price upon the occurrence of specified contingencies.”

This is covered in FAR Part 16.203-1(a).  To establish a case or bid protest challenging the agency’s improper use of the contract price adjustment in the RFP sections, one has first to articulate the underlying contingency.

Dealing with the Economic Price Adjustment Clause -FAR Part 16 Sections

When reviewing a federal government RFP, the language can be very vague. If you find that the RFP language is unreasonably vague then bid protest regulations require you to raise the dispute in a pre-award protest.

A common problem arises when both the government and the protestor have different interpretations about the economic price adjustment clause language.

The Federal Circuit Court has explained that “[t]o show an ambiguity [with an economic price adjustment] it is not enough that the parties differ in their respective interpretations of a contract term.

Rather, both interpretations must fall within a ‘zone of reasonableness.’” NVT Techs., Inc. v. United States, 370 F.3d 1153, 1159 (Fed. Cir. 2004) (citations omitted).

The lesson here is that government contractors should price their proposals by the solicitation terms.

• Take advantage of questions and answer sessions to resolve economic cost adjustment issues.
• However, if you have to file a pre-award protest, make sure that your interpretation of the cost economic cost adjustment clause / section in the RFP is reasonable.

Different Types of Contract Economic Price Adjustment Vehicles FAR Part 16

For fixed-price government contracts, the FAR identifies three types of contract Economic Price Adjustment Clauses.

FAR Part 16.203-1(a). Economic Price Adjustment Clause can be based upon either established prices, actual costs of labor or material, or cost indexes of labor or material. 

Economic price adjustment clause for labor and material: The FAR explains that an actual cost price adjustment is “based on increases or decreases in specified costs of labor or material that the contractor experiences during contract performance.” FAR Part 16.203-1(a)(2). These are all factual investigations that lead to any decision in a bid protest.

Fixed cost government contract and upwards adjustment in labor rates: When contracting agencies evaluate Government RFP responses under FAR part 16 for the award of a cost-reimbursement contract, the bidder’s proposed costs under the Economic Price Adjustment Clause are not considered controlling because, regardless of the costs proposed, the government is bound to pay all actual, allowable costs. See Federal Acquisition Regulation (FAR) sections 15.305(a)(1);  FAR 15.404-1(d). 

As a result, an agency must perform a cost realism analysis to determine the extent to which proposed costs represent what the contract should cost, assuming reasonable economy and efficiency. 

• An agency’s cost realism analysis and method employed must offer some measure of confidence that the agency’s conclusions about the most probable costs under an offeror’s proposal are reasonable and realistic. 
• Note that application of the rules can be different in other types of procurement contracts

FAR Part 16.203 — Fixed Cost Contracts with Economic Price Adjustment Clause.

(a) A fixed-price contract with economic price adjustment provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies. Economic price adjustments are of three general types:

(1) Adjustments based on established prices. These price adjustments are based on increases or decreases from an agreed-upon level in published or otherwise established prices of specific items or the contract end items.

(2) Adjustments based on actual costs of labor or material. These price adjustments are based on increases or decreases in specified costs of labor or material that the contractor actually experiences during contract performance.

(3) 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.

(b) The contracting officer may use a fixed-price contract with economic price adjustment in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains fixed-price with economic price adjustment when used with these incentives.

FAR Part 16.203-2 — Application.

A fixed cost contract with economic price adjustment may be used when

(i) there is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance, and

(ii) contingencies that would otherwise be included in the contract price can be identified and covered separately in the contract. Price adjustments based on established prices should normally be restricted to industry-wide contingencies. Price adjustments based on labor and material costs should be limited to contingencies beyond the contractor’s control. For use of economic price adjustment in sealed bid contracts, see 14.408-4.

(a) In establishing the base level from which adjustment will be made, the contracting officer shall ensure that contingency allowances are not duplicated by inclusion in both the base price and the adjustment requested by the contractor under economic price adjustment clause.

(b) In contracts that do not require submission of certified cost or pricing data, the contracting officer shall obtain adequate data to establish the base level from which adjustment will be made and may require verification of data submitted.

FAR Part 16.203-3 — Limitations.

A fixed-price contract with economic price adjustment shall not be used unless the contracting officer determines that it is necessary either to protect the contractor and the Government against significant fluctuations in labor or material costs or to provide for contract price adjustment in the event of changes in the contractor’s established prices.

Retroactive Price Adjustment to the Government?

Appeal courts have ruled that where a payment is erroneously made and the demand for its return timely, “the government can claim a retroactive price adjustment, even after contract completion.” Olympiareinigung, GmbH, ASBCA No. 53643, 04-1 BCA ¶ 32,458 at 160,562 citing Maxima Corp. v. United States, 847 F.2d 1549, 1555 (Fed. Cir. 1988).

• It is not only lawful but the duty of the government to sue for a refund thereof, and no statute is necessary to authorize the recovery, Fansteel Metallurgical Corp. v. United States, 172 F. Supp. 268, 270 (Ct. Cl. 1959), citing United States v. Wurts, 303 U.S. 414 (1938).

DOL Wage Price Adjustments

Although federal government contractors must bid the base year in accordance with attached contract wage rates for that period,  federal contract modifications adjusting the price for subsequent option years are made, as necessary, to comport with DOL minimum wage rates. United States v. Service Ventures, Inc., 899 F.2d 1, 3 (Fed. Cir. 1990); accord, Guardian Moving and Storage Co., Inc. v. Hayden, 421 F.3d 1268, 1273 (Fed. Cir. 2005).

Speak With a Lawyer. Get a Free Initial Consultation.

For help with types of fixed price contracts and Economic Price Adjustment Clause concerns, and help with FAR 15.404 and FAR Part 16, call our bid protest law firm at 1-866-601-5518. FREE INITIAL CONSULTATION.