Many awards made in the fourth quarter run for years, through a base period and several options. Prices set in September may need to hold through changes in labor markets, material costs and inflation that no one can predict precisely. Economic price adjustment clauses are one of the ways federal contracts deal with that uncertainty. Understanding them helps you price multi-year offers sensibly and recognize when a contract leaves you carrying risk you did not intend.
What an economic price adjustment does
A fixed-price contract with economic price adjustment provides for upward and downward revision of the stated contract price when specified contingencies occur. It is still a fixed-price contract; the adjustment is limited to defined circumstances. FAR Part 16 describes when the approach is appropriate: generally when there is serious doubt about the stability of market or labor conditions over an extended period of performance, and when contingencies that would otherwise be built into the price can be identified and covered separately in the contract.
The three general types
- Adjustments based on established prices. Price changes are tied to increases or decreases in published or otherwise established prices of specific items or of the contract’s end items, such as catalog or market prices.
- Adjustments based on actual costs. Price changes are tied to increases or decreases in the costs of labor or material that the contractor actually experiences during performance.
- Adjustments based on cost indexes. Price changes are tied to increases or decreases in labor or material cost standards or indexes specifically identified in the contract.
The FAR includes standard clauses for adjustments based on established prices and on actual costs, while index-based adjustments are generally written to fit the specific contract and may require approval under agency procedures.
Limits and mechanics
Economic price adjustment clauses usually include limits. Upward adjustments may be capped at a percentage of the original price, and clauses may specify how often adjustments may be requested, what notice is required and what documentation must accompany a request. Some clauses apply only to certain line items, and downward adjustments may be required when prices or costs fall. Read each clause closely: a provision that covers materials but not labor, or that carries a low cap, may protect you less than you expect.
EPA and other ways prices change
Economic price adjustment is distinct from other mechanisms that can change prices. On service contracts covered by labor standards, adjustments to reflect new wage determinations are handled through specific labor standards clauses. On GSA Schedules, economic price adjustments follow the terms of the schedule contract. And many contracts have no adjustment provision at all, which means the escalation you build into option-year prices when you make your offer is the only protection you get.
Pricing with these clauses in mind
- Check every multi-year solicitation for an adjustment clause and note exactly what it covers.
- Where no clause exists, escalate option-year prices realistically and document your assumptions.
- Where a clause exists, understand the index or method and how it compares with your actual cost trends.
- Calendar notice periods and request windows, since late requests may not be honored.
Pricing involves judgment about the future, and an accountant experienced in government contracting can help you model it. The FAR’s provisions are in Subpart 16.2 at acquisition.gov.