An all-but-forgotten remedy in government contracting, Extraordinary Contractual Relief (ECR), is in the midst of a potential resurgence due to the Department of Defense’s (DOD) most recent memorandum on inflation entitled Managing the Effects of Inflation with Existing Contracts. As PilieroMazza previously discussed, the current inflation crisis prompted DOD to suggest that, subject to the availability of funds, contractors should seek ECR when seeking an upward adjustment to the price of an existing firm-fixed-price contract. If you are a government contractor impacted by inflation while performing a contract, see below for the ins‑and‑outs of ECR, including how to properly request it. Also, visit this link to register for an upcoming webinar on this important topic.
Extraordinary Contractual Relief in General
Pub. L. No. 85-804 (50 U.S.C. §§ 1431‑35) (PL 85-804) provides certain federal agencies the authority to grant ECR when there is otherwise no remedy available to them, in law or equity. Three types of relief are available: (1) contractual adjustments, (2) advance payments, and (3) the exercise of residual powers. The heads of the following agencies can grant ECR:[1]
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Contractual Adjustments
Three types of contractual adjustments exist: (1) amendments without consideration, (2) correction of mistakes, and (3) formalization of informal commitments.
Amendments without consideration can be made in two instances. First, amendments can be made when an actual or threatened loss (not merely lost profits) under a defense contract will impair the productive ability of a contractor who is deemed essential to national defense.[4] In recent years, the DOD and Congress placed a renewed emphasis on national security by way of a strong and robust Defense Industrial Base (DIB). DOD is therefore more likely to grant this form of relief since keeping companies in the DIB and preventing impairment of their productive ability will result in increased national security. The second form of amendment can be granted when a contractor suffers a loss under a contract due to government action.[5] In one instance, a small business was given a $5.7 Million amendment without consideration to its firm-fixed-price contract ($68 Million in total value) because an erroneous specification package provided by the government dramatically increased the scope of work, as well as created a host of other inefficiencies that ultimately led to the small business filing for bankruptcy.[6]
Other potential mistakes allowing for correction include, but are not limited to, mutual mistakes and obvious contractor mistakes that should have been apparent to the Contracting Officer (CO).[7] Even though the contract’s “Disputes” clause will generally provide an avenue for relief in the case of mistakes, if serious impacts to the contractor will ensue while the CO and then the Boards of Contract Appeals adjudicate a claim, contractual adjustments may be warranted.[8] Finally, the government may formalize its informal commitments if a contractor acts upon a government official’s instructions, relying on their apparent authority in good faith, to furnish supplies or services to the agency outside the scope of the contract.[9]
To request a contractual adjustment under PL 85-804, a contractor must submit a letter, in duplicate, to the CO stating at a minimum:
- the precise adjustment requested;
- the essential facts summarized chronologically;
- the arguments entitling the contractor to an adjustment; and
- whether or not:
a. all obligations under the involved contracts have been discharged,
b. final payment under them has been made,
c. proceeds from the request will be subject to an assignment or transfer, and
d. whether the contractor already sought the same or similar adjustment from another part of the government.[10]
In addition, if the adjustment being sought exceeds the SAT, the contractor must certify that the request is made in good faith and supporting data are accurate and complete.[11] The required supporting documentation varies widely depending on the type of contractual adjustment a contractor is seeking.
Advance Payments
Generally, an advance payment can be made for any amount under $35 Million (unless prior written notice is provided to Congress) and cannot exceed the unpaid contract price or a contractor’s estimated interim cash needs.[12] Such relief has been granted previously on firm-fixed-price contracts[13] as well as cost-reimbursable contracts.[14] To be eligible, a contractor must give adequate security—payment must not exceed the unpaid contract price—and the agency head (or delegate, including an agency’s Contract Adjustment Board) must determine the payment either is in the public interest or facilitates national defense.[15] Significantly, advance payments can be considered useful and appropriate for contracts with small business concerns.[16]
Contractors seeking advance payments can apply pre- or post-award and must submit written requests to the CO including:
- a reference to the contract or solicitation;
- a cash flow forecast with estimated disbursements and receipts for the period of contract performance;
- the proposed total amount of payment;
- bank account payment information;
- a description of the contractor’s efforts to obtain unguaranteed private financing; and
- any other information appropriate to understand the contractor’s financial condition, ability to perform the contract without loss to the government, and financial safeguards needed to protect the government’s interest.[17]
Beyond that, the government also may require additional securities, such as personal/corporate guarantees, pledges of collateral, or subordination of other debts.[18]
Residual Powers
An agency can use the residual powers under the PL 85-804, when necessary and appropriate, to take almost any governmental action not expressly prohibited by the statute, except contractual adjustments or advance payments.[19] Even though used sparingly, DOD has used this power to ensure the continued production of a unique DOD space and missile program’s component where the sole supplier faced the following circumstances: it was going out of business due to competitive pressures, had significant increased costs in raw materials, lacked operating capital, and was unable to borrow from private sources.[20] Other examples of this power include the use of indemnification provisions to protect contractors against liabilities resulting from claims of death, injury, or property damage resulting from nuclear radiation, high-energy propellants, or other risks not covered by the contractor’s insurance.[21]
Key Takeaways
In sum, contractors should look to take advantage of ECR and DOD’s renewed focus in it as a way to combat inflation. Although ECR has been rarely used over the past generation, DOD leadership specifically identified it as an option in their latest memorandum on inflation. It is unlikely DOD would highlight this remedy if it had no intention of using it under applicable circumstances.
For that reason, contractors should understand how to leverage the various angles of ECR to request contractual adjustments or advance payments, as well as how to exercise an agency’s residual powers. As the name implies, this relief is extraordinary and will not be granted simply for lost profits, a risk explicitly assumed by the contractor on a firm-fixed-price contract, or for an issue that can be resolved adequately through another remedy. But it can be granted to ensure that a company does not go out of business or lose money on a previously profitable contract. That said, this type of relief is highly discretionary and failure to appropriately request such relief can result in a denial by the requisite agency official. Thus, it is imperative to include the necessary details within each request.
PilieroMazza attorneys are here to help ensure that you can effectively use all available tools to mitigate the negative impacts of inflation on your current and future government contracts. If you have questions, please contact Kevin Barnett or Lauren Brier, the authors of this client alert, or another member of the Firm’s Government Contracts or Government Contract Claims & Appeals practice groups. Please visit this link to register for Kevin and Lauren’s webinar on this important topic.
Special thanks to Daniel Figuenick for his assistance with this client alert.
[1] Executive Order No. 10789 (Nov. 14, 1958).
[2] Authorizing the Exercise of Authority Under Public Law 85‑804, 79 Fed. Reg. 68,757 (Nov. 13, 2014).
[3] Authorizing the Exercise of Authority Under Public Law 85-804, 85 Fed. Reg. 21,735 (April 10, 2020).
[4] FAR 50.103-2(a)(1).
[5] FAR 50.103-2(a)(2).
[6] See Colonna’s Shipbuilding, Inc., N.C.A.B. 4 E.C.R. ¶ 62 (Jan. 29, 1991).
[7] FAR 50.103-2(b).
[8] See Pac. Architects & Engineers, A.F.C.A.B. 4 E.C.R. ¶ 69 (Aug. 29, 1992).
[9] FAR 50.103-2(c).
[10] FAR 50.103-3(a).
[11] FAR 50.103-3(b).
[12] FAR 50.102-3(b)(4); FAR 32.410(a)(2).
[13] See Application of Bioport Corp., A.C.A.B. 1246, 1999 WL 33233099 (July 27, 1999).
[14] See Holston Def. Corp., A.C.A.B. 1250, 2006 WL 4591482 (Sept. 27, 2006).
[15] FAR 32.402(c)(1).
[16] FAR 32.403(g).
[17] FAR 32.408(b).
[18] FAR 32.409-3(d).
[19] FAR 50.104.
[20] See Avtex Fibers Front Royal, Inc., A.F.C.A.B. 4 E.C.R. ¶ 47 (Dec. 18, 1988).
[21] FAR 50.104.
