Firm-fixed-price contracts place maximum risk and full responsibility upon the contractor for all costs and resulting profit or loss incurred in performing a government contract. Fixed price contracts provide for a price that is not subject to any adjustment based on the contractor’s cost experience. Meanwhile, fixed-price contracts with economic price adjustments provide for upward or downward revisions of the stated contract price upon the occurrence of specified contingencies. There are three general types of price adjustments. First, price adjustments based on established prices provide for increases or decreases from an agreed-upon level in published prices of specific items. Second, adjustments based on actual costs of labor or materials contemplate increases or decreases in the specified costs of labor or materials actually experienced by the contractor during contract performance. Finally, adjustments based on labor or material cost indexes provide for increases or decreases in labor or material cost standards or indexes identified explicitly in the contract. In fixed-price contracts that do not provide for economic price adjustments, the contractor assumes the risk of unexpected costs not attributable to the government.
In Civilian Board of Contract Appeals (CBCA) 8030, a decision issued on June 25, 2024, the Board dismissed the appeal for failure to state a claim when the contractor allegedly suffered material price increases during contract performance, but the fixed-price contract did not provide for economic price adjustments. The Department of Veterans Affairs (VA) had issued the underlying contract for construction services for the Renovate Building #22 Construction Project at the Lebanon Medical Center in Pennsylvania. Notably, while the fixed price contract incorporated the Changes clause at Federal Acquisition Regulation (FAR) 52.243-4, it did not include an inflation or economic price adjustment clause. During the performance, the contractor encountered circumstances that required it to perform additional work not included in the original contract. Due to unexpected circumstances, the parties negotiated and executed a contract modification that added approximately $176,000 to the total contract price of $4,456,447. However, the modification denied roughly $85,000 of costs associated with increased prices for certain materials that resulted from various shortages and inflation caused by COVID-19.
When the contractor subsequently filed claims for the increased prices for materials, the contracting officer (CO) denied them in their entirety, citing the fixed-price nature of the underlying construction contract. Consequently, the contractor filed an appeal at the CBCA, arguing that the government’s declaration of a public health crisis in response to the COVID-19 pandemic countermanded the fixed price nature of the contract. Furthermore, the contractor cited the changes clause in the contract and alleged that the extreme and unforeseeable price increases altered the scope of the contract’s performance. The contractor argued that, under the circumstances, the Board could, at a minimum, find that a constructive change had occurred. The VA filed a motion to dismiss the contractor’s complaint for failure to state a claim upon which relief may be granted. The VA maintained that, because the contractor entered a firm-fixed-price contract, it assumed the risk of price increases for materials. In granting the motion to dismiss, the CBCA agreed with the agency.
The Board pointed to the description of a firm-fixed-price contract in FAR 16.202-1, noting that the price in the VA construction contract was not subject to adjustments based on the contractor’s cost experience in performing the contract. The CBCA also noted that the contract award timeline indicated that the contractor should have been aware at the time of contract formation that the COVID-19 pandemic could increase the cost of materials during its performance. Furthermore, the contract did not contain any economic price adjustment clauses or other terms that would shift the risk of cost increases due to the pandemic onto the government. As to the contractor’s argument requesting equitable adjustment under the contract’s changes clause, the CBCA noted that generally, change orders executed under FAR 52.243-4 must be in writing, and the contractor had failed to produce any evidence of a written change order. Finally, the contractor’s constructive change argument also failed because it could not demonstrate that the increased cost of materials was due to work performed beyond the requirements of the original contract. Therefore, the Board dismissed the contractor’s appeal, holding that even in the case of unforeseen events such as a pandemic, in the absence of an economic price adjustment clause, the risk of unexpected cost increases under a firm-fixed-price contract remains with the contractor.
A firm-fixed-price contract is typically utilized for the procurement of commercial products or services or in acquisitions where the government possesses reasonably definite functional or detailed specifications and fair and reasonable prices can be established at the outset. Consequently, the risk of increased costs due to market changes in a fixed-price contract is placed upon the contractor unless the contract contains an economic price adjustment clause. Economic price adjustments can be based on established prices, actual costs of labor or materials, or on cost indexes of labor or materials. In the absence of an economic price adjustment clause, contractors should look to other clauses or terms in the fixed-price contract that may shift the risk of cost increases to the government. Ultimately, when entering firm-fixed-price contracts, contractors should remember that they assume maximum risk for any cost increases during performance, and depending on other terms of their contract, their options for recovering increased costs may be limited absent a relevant economic price adjustment clause.
This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.