Overview
This section details the Fixed-Price Contract with Economic Price Adjustment (FP-EPA), a contract type that allows for the upward or downward revision of a stated contract price based on specific economic contingencies. It is designed to mitigate financial risk for both the Government and the contractor when market or labor conditions are expected to be unstable over an extended period.
Key Rules
- Three Adjustment Methods:
- Established Prices: Based on increases or decreases in published catalog or market prices of specific items.
- Actual Costs: Based on the specific labor or material costs the contractor actually experiences during performance.
- Cost Indexes: Based on identified labor or material cost standards or indexes (e.g., Bureau of Labor Statistics indexes).
- Application Criteria: May only be used when there is "serious doubt" regarding the stability of market or labor conditions and when specific contingencies can be identified and isolated from the base price.
- Prohibition on Duplication: The contracting officer must ensure that contingency allowances are not included in both the base price and the adjustment clause.
- Limitations on Actual Cost Adjustments:
- Adjustments are limited to contingencies beyond the contractor’s control.
- Adjustments must exclude indirect costs (except certain fringe benefits) and profit.
- Cannot be used if there is a major element of design engineering or development work involved.
- Aggregate Increase Limit: Standard clauses typically limit aggregate increases to 10% of the original unit price, though this can be increased with approval from the chief of the contracting office.
- Incentives: FP-EPA contracts can be used with award-fee or performance incentives, provided those incentives are based on factors other than cost.
Practical Implications
- Bid Accuracy: This contract type prevents contractors from over-pricing bids with large "padding" or contingency funds to protect against inflation, potentially resulting in lower initial costs for the Government.
- Administrative Oversight: FP-EPA contracts require higher levels of administrative effort than Firm-Fixed-Price contracts, as the Government must verify market price changes, audit actual cost expenditures, or monitor economic indexes to validate price shifts.