Select Provisions Dealing with Inflation in the FY 2023 National Defense Authorization Act

Passed in December 2022, the National Defense Authorization Act (NDAA) for Fiscal Year 2023 contains provisions that address the challenges that rapidly rising costs present to both industry and the Department of Defense (DOD). Today’s post examines a couple of the provisions in the FY 2023 NDAA addressing inflation and discusses the potential implications of these for industry.

Modification of Contracts

Section 822 allows the modification of contracts to provide extraordinary relief due to inflation. This section enables prime contractors to submit to the Secretary of Defense a request to amend/modify an eligible contract when inflation raises the cost to a subcontractor of providing a good or service at a previously negotiated price. The request submitted by the prime must certify that it will remit the modified difference in price to the named subcontractor. Subcontractors may also submit a request for a price amendment or modification independently of a prime contractor. Requests must be submitted to the contracting officer responsible for administering the contract. Modification approvals are contingent on the contract performance being acceptable to that point.

Implications – Inflation in the cost of goods and services hit small businesses particularly hard in the last year. Section 822 will help mitigate the hardship being experienced by enabling small subcontractors to pass on heightened costs to the government customer. This provision provides flexibility at a time when the government has been trying to award a higher percentage of contracts on a firm fixed price basis. Having price flexibility may convince hesitant small industry partners to stay in government contracting.

Inflation Report

Section 1003 orders the Secretary of Defense to append its annual budget request with a report on the budgetary effects of inflation. This report must include the following information for each DOD appropriation account:

• The amount appropriated for the fiscal year preceding the fiscal year for which the report is submitted and the amount requested for the fiscal year for which the budget request is submitted.
• The relevant inflation index applied to each account at the time of the budget request’s submission.
• The actual inflationary budgetary effects on each such account for each fiscal year.
• A summary of all requests for equitable adjustment, including the exercise of economic price adjustment (EPA) clauses and bilateral contract modifications. Additional information should include the contract type and fiscal year and the type and amount of appropriated funds used for the contract.
• A summary of any methodological changes in DOD’s cost estimation the fiscal years in question.

Implication – The information required by Sec. 1003 will help clarify for industry the anticipated budgets for programs that partners may be working. Providing additional information about the observed and/or anticipated impact of inflation will help industry partners better align support costs with program budgets. Adding inflation data will also help congressional appropriators understand which key or critical programs might require additional resources to proceed without disruptions.

These provisions will provide the DOD with additional methods for dealing with inflation, which is likely to be with us for the foreseeable future.