Rising inflation continues to affect the cost of products and services. When faced with these price hikes, government contractors are wise to review the terms of their agreements. Price adjustments are a common component of business, impacting nearly all industries.
However, negotiating price adjustments can be complicated. There are many factors that government contractors must consider to prevent losing valuable contracts or selling themselves short. An experienced certified public accountant (CPA) can assist government contractors in negotiating these price adjustments.
Importance of Negotiating
The notion of a price adjustment can bring forth feelings of uncertainty. While government contractors must know their worth, they must also be willing to negotiate to come to a mutually beneficial agreement that satisfies all parties involved. Working with an effective negotiator is critical to help build a successful business and maintain a good reputation as a valuable contractor.
What to Consider as an Independent Contractor
There are many elements that a government contractor should consider when approaching the concept of price adjustments. Negotiations should be based on key factors, such as the contractor’s minimum acceptable rate, the industry, location, and other factors unique to the client or circumstance.
Here are some important points to consider as a government contractor when negotiating price adjustments:
1. Understand Economic Price Adjustments
Having a fixed-price contract with an economic price adjustment (EPA) allows for the upward or downward revision of the contract price based on certain contingencies. There are three primary types of economic price adjustments based on:
- Established prices
- Actual costs of material or labor
- Cost indexes of material or labor
The Department of Defense issued a memorandum on May 25, 2022, that recognizes that contractors too are facing a period of unusually high inflation. This memorandum, titled “Guidance on Inflation and Economic Price Adjustments,” gives contractors more detailed guidelines on when it is appropriate to seek relief from cost increases caused by inflation. The memorandum also offers guidance on the proper use of EPA clauses when entering new contracts.
Contractors may be eligible for relief for existing DoD contracts due to inflation based on the type of contract. This includes contractors with cost reimbursement contracts, fixed-price incentive contracts and fixed-price contracts with an economic price adjustment clause included. However, contractors performing under firm-fixed-price (FFP) contracts will generally need to bear the risk of cost increases, including increases due to inflation.
2. Know the Industry
Contract rates can differ significantly from one industry to the next. For example, businesses in information technology (IT) often demand higher rates than those in other industries as IT is a more specialized industry that requires advanced training. It is important to do ample research to determine industry contract standards when negotiating price adjustments.
3. Consider the Location
Along with industry, location can make a big difference when negotiating price adjustments. Salaries in larger cities are generally higher than those in more remote areas. This is due to many factors, such as a higher cost of living and the level of demand for certain services and taxes in some locations. Perform research to determine the average rates in both the industry and location before negotiating.
4. Factor in Unique Circumstances
Client specific circumstances will also impact the negotiation of price adjustments for government contractors. Rates are often based on the uniqueness of the project and customer, whether the client requires fast turnarounds, if traveling or relocation is involved, and similar factors. When negotiating price adjustments, keep client constraints in mind.
5. Start with a High Rate
When negotiating price adjustments, government contractors should always start with a higher rate than they would normally accept but with an understanding that after negotiations, the agreed-upon rates will be lower. Starting with a higher rate and a willingness to negotiate to accept a lower rate can help ensure that the contract rate does not fall below the established minimum acceptable rate. It is important to remember that while the initial rate should be higher, the rate should stay within the client’s limitations and industry standards to avoid being passed over.
How a CPA Can Help with Price Adjustment Negotiations
The reliable CPAs at Diener & Associates understand the importance of negotiating price adjustments and can help government contractors with contract related services including:
With the help of a knowledgeable CPA, a government contractor can avoid being subject to an unsatisfactory price adjustment or poorly altered agreement terms.
Schedule a Consultation Today
Negotiating price adjustments as a government contractor is an essential but complex skill. For more information about how CPAs can help you negotiate price adjustments or to schedule a consultation with a CPA, contact Diener & Associates today at (703) 386-7825.