Shutterstock_2474143053.jpg

Claims for Increased Cost of Performance in Fixed Price Contracts

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.

Related Insights

TLF-Federal-Procurement-Insight-64.jpg

The Federal Acquisition Regulation (FAR) prescribes the use of Limitation of Costs or Funds clauses in cost-reimbursable contracts that are either fully or incrementally funded. These clauses require contractors to follow specific procedures to notify the contracting officer (CO) when anticipated costs on a cost-reimbursable contract exceed a pre-determined threshold (typically 75 percent of the estimated costs), provide a revised estimate of costs for the remainder of the contract, and seek the CO’s approval to obtain additional funding. While FAR § 32.706-2 instructs the CO to insert the limitation of cost clause (LOCC) at FAR 52.232-20 in fully funded cost-reimbursable contracts, it instructs the CO to utilize the limitation of funds clause (LOFC) at FAR 52.232-22 in cost-reimbursable contracts that are incrementally funded.

These otherwise nearly identical clauses serve the dual purpose of protecting the contractor and the government from unfunded cost overruns. Firstly, the contractor is protected from the risk of the government’s unexpected refusal to pay additional costs due to the prior approval requirements imposed by the LOCC and the LOFC. Secondly, the LOCC and the LOFC protect the contractor by relieving any performance obligations on the contract beyond the stated cost limitation in the absence of the CO’s approval of a raised ceiling. Meanwhile, the clauses also protect the government by limiting the inherent risks of overpayments in cost-reimbursable contracts. That is, the LOCC and LOFC help prevent unnecessary cost overruns by requiring the contractor to go through an approval process to obtain additional funding before continuing performance on the contract beyond the contract’s stated cost ceiling. By setting a cost limitation ceiling, the government effectively protects itself from unexpectedly having to pay the contractor more than the anticipated costs set aside for the contract. The use of the LOCC or the LOFC also discourages contractors from utilizing unrealistically low pricing to obtain a competitive advantage during the solicitation stage of a cost-reimbursable contract.

more
Shutterstock_763113187.jpg

The apportionment of risk of increased performance costs in a government contract depends primarily on the type of contract and its included clauses. If a specifically included contract clause assigns the financial risk of an event on either the government or the contractor, that clause usually dictates which party bears the increased costs of performance due to the occurrence of that event. However, even if the contract does not specifically contemplate the occurrence of a particular event, dispute adjudicative forums may look to relevant clauses included in the contract to determine which party must bear the increased costs. A good indicator of whether an included clause apportions the risk of increased performance costs on the government is if the clause points to the contract’s changes clause. In ASBCA No. 62712, a decision issued on October 2, 2024, the Armed Services Board of Contract Appeals (ASBCA) held the government liable for increased costs associated with COVID-19-related quarantine of contractor employees due to a specifically included contract clause dictating the health and safety requirements under the contract. Notably, the relevant clause also pointed to the clause at Federal Acquisition Regulation (FAR) 52.243-4 “Changes,” which was incorporated in the contract by reference.

more
TLF-Contract-Claims-Insight-96.jpg

When acquiring commercial products, the federal government must give preference to customary commercial practices. To implement this preference, the Federal Acquisition Regulation (FAR) instructs the government to only use contract clauses that are consistent with customary commercial practices. One such clause is the clause at FAR 52.212-4, Contract Terms and Conditions – Commercial Products and Commercial Services, which includes a list of many terms and conditions incorporated in the contract by reference. This clause allocates the risk of loss and cost of shipping commercial items between the government and the contractor depending on whether the contractor must deliver the commercial items free on board (FOB) at the origin or destination. The standard clause at FAR 52.212-4(j) states:

Unless the contract specifically provides otherwise, risk of loss or damage to the supplies provided under this contract shall remain with the Contractor until, and shall pass to the Government upon:

(1) Delivery of the supplies to a carrier, if transportation is f.o.b. origin; or

(2) Delivery of the supplies to the Government at the destination specified in the contract, if transportation is f.o.b. destination.

more
Protesting Price Reasonableness Evaluations.jpg

The Federal Acquisition Regulation (FAR) requires contracting officers (COs) to purchase supplies and services from responsible sources at fair and reasonable prices. In determining price reasonableness, the procuring agency’s primary concern is typically whether the offeror’s quoted prices are too high. Generally, adequate competition between proposals received in response to the solicitation establishes the reasonableness of pricing. However, depending on the procurement, the government may employ various other price analysis techniques to establish price reasonableness. Such techniques may include comparing proposed prices to historical prices paid, competitive published price lists, an independent government cost estimate (IGCE), or prices obtained through market research for the same or similar items or services. Unsuccessful offerors may challenge the procuring agency’s price reasonableness evaluation techniques in a post-award protest. In such protests, the manner and depth of the government’s price reasonableness evaluation is typically within the sound exercise of the agency’s discretion. However, while it is the agency’s prerogative to select an appropriate method for evaluating price reasonableness, the chosen method must provide a reasonable basis for assessing the different proposed pricing under the competing proposals.

more

Claims for Increased Cost of Performance in Fixed Price Contracts

TILLIT LAW Federal Contract Claims Insights