Due to a recent memorandum on inflation released by the Department of Defense (DoD), a type of relief known as Extraordinary Contractual Relief (ECR) is receiving more attention. Since the current inflation crisis, government contractors are urged to seek ECR, subject to the availability of funds, when pursuing an upward price adjustment of an existing firm-fixed-price contract.
Government contractors who have been negatively affected by inflation while performing a contract may request relief. However, it is important to work with a certified public accountant (CPA) to ensure that the process is completed properly.
What Is Extraordinary Contractual Relief?
Under Public Law 85-804, contractors can receive additional compensation or other forms of relief in certain instances where relief would otherwise be prohibited by law and where the government has no legal obligation. Contractors are not guaranteed relief but rather are granted equitable relief on a discretionary basis.
The contractor’s request for relief is considered by a Contract Adjustment Board (CAB) which is a board appointed by the head of an agency. The heads of the following agencies have the authority to grant extraordinary contractual relief to contractors:
- Department of Defense
- Department of Agriculture
- Department of the Treasury
- Department of Transportation
- Department of the Interior
- Department of Health & Human Services
- Department of Commerce
- Department of Veterans Affairs
- Department of Homeland Security
- General Services Administration
- Atomic Energy Commission
- Government Printing Office
What are the Main Types of Contractual Adjustments?
Public Law 85-804 provides certain federal agencies with the authority to grant contractors ECR in cases where there are no other remedies available to them. The three types of relief available include:
1. Amendments Without Consideration
When a threatened or actual loss under a defense contract, regardless of the cause, will affect the contractor’s productivity whose performance on a defense contract or whose operations are deemed essential to the national defense. The contract may be amended only to the extent necessary to avoid further impairment to the productive ability of the contractor.
2. Correction of Mistakes
Contracts may be modified or amended to mitigate or correct the effect of a mistake. Examples include a mutual mistake relating to a material fact, a mistake that is so obvious that it should have been or it was apparent to the contracting officer, or a mistake that includes the failure to express in a written contract, an agreement as understood by all parties.
3. Formalization of Informal Commitments
In certain situations, informal commitments may be formalized to allow payment to a person who has taken action without a formal contract. An example includes a person who has furnished supplies or services to an agency as a response to an agency’s oral or written instructions and relies in good faith upon the official’s authority to issue them.
Who Qualifies for Extraordinary Contractual Relief?
Contractors may apply for relief or otherwise amend their contractual requirements if the government first obtains “adequate consideration.” Contractors that perform under firm-fixed-price contracts that were negotiated and priced prior to the onset of the current economic conditions are typically at a higher risk of cost increases.
In some instances, accommodation can be reached when the contracting parties come to a mutual agreement. A contractor may qualify for extraordinary contractual relief by certain agencies that have the authority under federal law and regulations to afford relief.
This relief may be granted to contractors who have sought or plan to seek an adjustment to the cost of their current firm-fixed-price contract in response to current economic conditions. Although contractors must meet stringent criteria for relief, each agency will consider contractor requests subject to the availability of funds.
Recovery under 85-804 is intended for unique situations in which there is no other legal basis for relief, meaning a contractor must first exhaust all other administrative remedies which may be available to them.
If there is a situation in which the relief requested is related to a constructive change, a contractor can pursue relief under the contract’s disputes clause which involves appealing to the agency’s Board of Contract Appeals. A contractor must also submit an 85-804 request before the government discharges any obligations under the contract.
Schedule a Consultation with Diener & Associates Today
Inflation has begun to reach levels that have not been seen in decades, and these changes have had a dire effect on government contracts. Extraordinary contractual relief, a law originally passed in 1958, allows the government to adjust contracts to facilitate the national defense when experiencing exceptional circumstances.
When faced with the prospect of ECR, it is important for contractors to have the experience and knowledge of a certified public accountant on their side. The CPA team at Diener & Associates can assist independent contractors through reliable government contract consulting services.