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Economic Price Adjustment ("EPA") Clauses

FAR 16.203-3 provides that an EPA clause shall not be used unless 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."

FAR 16.203-4(d)(1) provides that such a clause may be appropriate when:

"(i) The contract involves an extended period of performance with significant costs to be incurred beyond 1 year after performance begins;

(ii) The contract amount subject to adjustment is substantial; and

(iii) The economic variables for labor and materials are too unstable to permit a reasonable division of risk between the Government and the contractor, without this type of clause."

The index used in the EPA clause must take account of economic factors having a direct and specific relationship to performance of the contract. Beta Systems, Inc. v. United States, 838 F.2d 1179, 1184-86 (Fed.Cir. 1988); Firestone Tire & Rubber Co. v. United States, 444 F.2d 547 (Ct.Cl. 1971). It is for this reason that the DFARS instructs the contracting agency to "[c]onstruct the index to encompass a large sample of relevant items while still bearing a logical relationship to the type of contract costs being measured. The basis of the index should not be so large and diverse that it is significantly affected by fluctuations not relevant to contract performance . . . ." DFARS 216.203-4(d)(v).

With respect to construction of an appropriate index, the DFARS identifies three general index series published by the Bureau of Labor Statistics ("BLS") of the Department of Labor, and notes that because there is no published series currently available that relates directly to total prices of delivered items, "it will be necessary to construct composite indexes from major portions of the three series identified." DFARS 216.203-4(d)(vi).

Failure of a chosen index to approximate the change in a contractor's costs in the course of performance is a per se violation of regulation which must be remedied. Beta Systems, Inc. v. United States, 838 F.2d 1179, 1184-86 (Fed.Cir. 1988).

Moreover, DFARS 216.203-4(d)(xi) limits that portion of the contract price subject to adjustment. Accordingly, the clause should be applied neither to the profit portion of the contract price, nor to those portions representing labor and material costs which do not require adjustment. Specifically identified in this latter group are subcontract costs, overhead costs, and any other cost not likely to be affected by fluctuation in the economy. DFARS 216.203-4(d)(xi)(B).

In G.L. Christian & Associates v. United States, 312 F.2d 418 (Ct.Cl. 1963), cert. denied, 375 U.S. 954 (1963), the court determined that procurement regulations have the force and effect of law, and are effectively incorporated in each contract awarded by the government. See also Chris Berg, Inc. v. United States, 426 F.2d 314 (Ct.Cl. 1970). Accordingly, the express terms of a contract may be modified to comport with such regulations at any point in a procurement. When a clause has been placed in a contract in violation of procurement regulations, the Christian doctrine has been applied to delete the clause and render it unenforceable. Guard-All of America, ASBCA No. 22167, 80-2 BCA 14,462 (1980); Charles Beseler Company, ASBCA No. 22669, 78-2 BCA 13,483 (1978).

It is therefore well-established that an EPA clause cannot be enforced for the benefit of the Government if it violates controlling procurement regulations. Beta Systems, Inc. v. United States, 838 F.2d 1179, 1184-86 (Fed.Cir. 1988); Craft Machine Works, Inc., ASBCA No. 35167, 90-3 BCA 23,095 (1990).

The courts have recognized that the purpose of an EPA clause based on an economic indicator is to accommodate changes in the contractor's actual costs of performance. Beta Systems, Inc. v. United States, 838 F.2d 1179, 1184-86 (Fed.Cir. 1988); Firestone Tire & Rubber Co. v. United States, 444 F.2d 547 (Ct.Cl. 1979). Therefore, through its provision for a downward price adjustment, the clause is designed to prevent the contractor from making a windfall profit as a result of a decrease in its cost of performance, while at the same time ensuring through its provision for an upward price adjustment that the contractor is not forced to absorb large losses resulting from an increase in its costs.

Indeed, it is well-established that when a contract clause drafted by the government is inconsistent with legal requirements, neither a contractor's failure to challenge the clause in the procurement process nor its acquiescence in accepting the clause as part of the contract will prevent it from obtaining relief. Beta Systems, supra; Applied Devices Corp. v. United States, 591 F.2d 635 (Ct.Cl. 1979). As the Armed Services Board of Contract Appeals recently noted in a similar situation, the government will not be permitted to enforce an EPA clause suffering from such defects, regardless of the contractor's actions. Craft Machine Works, supra.

The courts have recognized that the purpose of the EPA clause is to accommodate changes in the contractor's actual production costs. Beta Systems, Inc. v. United States, 838 F.2d 1179, 1184-86 (Fed.Cir. 1988); Firestone Tire & Rubber Co. v. United States, 444 F.2d 547 (Ct.Cl. 1979).