The Armed Services Board of Contract Appeals (ASBCA) recently issued a decision regarding a contractor’s claim for increased performance costs due to the economic impact of the COVID-19 pandemic. Notable about this case is the contractor’s invocation of a July 2, 2020 Department of Defense (DoD) memorandum concerning the financial consequences on contractors with firm fixed-price contracts lacking an economic price adjustment clause during “historic and unprecedented challenges” in the wake of the pandemic’s onset.
In Ace Electronics Defense Systems, LLC (Ace), the Navy issued a delivery order to the contractor under an indefinite delivery, indefinite quantity contract for various assemblies and parts associated with cruise missiles. The delivery order contained numerous fixed-price line items, some of which the contractor needed to procure from an outside vendor.
Since the onset of the pandemic in 2020, the vendor’s prices for two of these line items had risen dramatically, and the contractor could not procure those items from another vendor. As a result, the contractor submitted several requests for contract adjustments based on the increased price quotes of the vendor. The Navy denied these requests. Subsequently, the contractor filed a claim that the government breached the contract for failing to adjust the contract price and requested that the provisions of FAR 16.203—Fixed price contracts with economic price adjustments— be applied to its contract. The Navy denied the claim, and the contractor appealed that decision to the ASBCA. There, the Navy asserted that the contractor failed to submit a claim upon which relief could be granted. The ASBCA agreed and dismissed the appeal.
In dismissing the appeal, the ASBCA first noted that the contract was a fixed-price agreement with no economic price adjustment clause. As such, the contractor assumed maximum risk and full responsibility for all costs and resulting profit or loss without any mechanism for an adjustment based on the contractor’s actual cost experience.
The ASBCA also addressed the contractor’s reliance on the July 2, 2020 DoD memo. This memo, issued by the Undersecretary of Defense for Acquisition and Sustainment (the Undersecretary), urged contracting officers to use, through the skill and experience of the DoD workforce, innovative solutions to protect the government’s interests as well as the health of the Defense Industrial Base. And while the memo noted that contractors under fixed-price contracts must generally bear the risk of cost increases, including those due to COVID-19, the Undersecretary reinforced that contracting officers have the discretion to modify contracts to reflect the changes in the government’s needs due to the pandemic. Nevertheless, the ASBCA observed that the contractor failed to demonstrate in any manner how the DoD memo provides entitlement to recover the contractor’s increased costs. Specifically, the ASBCA agreed with the Navy that the memo was not made a part of the contract and, thus, had no bearing on the parties’ respective rights. The ASBCA held that the contractor’s argument that the memo somehow imposed a contractual obligation on the part of the government to grant a price increase due to higher costs resulting from the pandemic was plainly not correct. In a footnote, the ASBCA also pointed out that the Undersecretary later clarified in his memo dated May 5, 2022 that price increases due to unanticipated inflation are not the result of any contracting officer directed change; therefore, contracting officers should not agree to contract adjustments in response to changed economic conditions.
The ASBCA then readily disposed of the contractor’s argument that the Navy’s failure to recognize the changed economic environment in which the contract was performed amounted to a breach of the implied duty of good faith and fair dealing. In short, the ASBCA observed that the contractor failed to allege that the government’s refusal to relieve the contractor from its fixed-price agreement undermined any specific contractual promise or destroyed the contractor’s reasonable expectation of the fruit of its contract—essential elements for this type of breach claim.
Finally, the ASBCA held it would not rewrite the contract because of increased costs resulting from the pandemic. To do so, in the words of the ASBCA, would be “to turn on its head Ace’s assumption of the maximum risk and full responsibility for all costs and resulting profit or loss.”
Although the Undersecretary, in a September 9, 2022 updated memo, signaled an increased willingness to consider alleviating inflation impact, particularly on small businesses, and provided specific avenues of relief for contracting officers and contractors to consider, the decision in Ace reinforces that DoD guidance does not compel the government to modify fixed-price contracts to adjust for COVID-19 (or inflation-related) costs. In other words, the four corners of the contract will continue to define the parties’ rights, leaving contractors, in the absence of a price adjustment clause, to appeal to the creativity (and goodwill) of sympathetic contracting officers for relief to ongoing and unprecedented economic changes.
Because filing claims on the same basis as the contractor did in Ace is unlikely to be a fruitful endeavor, the more productive approach is to write to your contracting officer explaining the changed economic circumstances you are facing and requesting a meeting to discuss a possible accommodations to ease the impact. An alternative approach is to seek an upward adjustment from DoD under Public Law 85-804, implemented at FAR Part 50 – Extraordinary Contractual Relief. FAR Part 50 is a lesser-known provision that provides contractors an opportunity for relief when no other contractual clauses are available to do so. Though meeting the criteria relief under FAR Part 50 may be somewhat stringent, using this provision may be a worthwhile venture depending on the amount of increased costs you are experiencing.
If you have questions about seeking relief for increased contract costs from the pandemic or ongoing inflation, our Government Contracting Group is available to assist you on this or any other government contracting matters.