By Michael C. Zisa and Abby Bello Salinas of Peckar & Abramson, P.C.
Originally Published February 16, 2023

The 2023 National Defense Authorization Act (NDAA FY23), signed into law by President Biden on December 23, 2022, includes a provision authorizing the Secretary of Defense to issue modifications for fixed-price contracts impacted by increased costs due to inflation. Up until now, Department of Defense (DoD) contractors have attempted to mitigate inflation-related costs with existing tools such as Economic Price Adjustment clauses and Requests for Equitable Adjustment, but Contracting Officers found themselves without the authority to grant relief in fixed-price contracts in which contractors assumed the risk of cost increases.

Section 822 of the NDAA FY23, entitled “Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts,” amends Public Law 85-804, authorizing the DoD to provide equitable adjustments to contractors for costs due solely to economic inflation. The DoD may grant modifications to cover the actual cost of performing the contract and has the discretion to include indirect costs in its relief. While modification approvals are contingent on acceptable contract performance, contracting officers may not condition this relief on changes to other contract terms.

Additionally, Section 822 raises the threshold for secretarial-level approvals from $50,000 modifications to $500,000 modifications and from $35M to $150M for Congressional committee notification. These changes should simplify the modification process for contractors.

The authority granted in NDAA FY23 expires on December 31, 2023.

Who can apply for relief under Section 822?

The amendment covers both prime contractors and their subcontractors. Prime contractors can seek adjustments for costs incurred by their subcontractors. If a prime contractor fails to do so, subcontractors may apply for relief directly.

Next Steps for Contractors Seeking Relief

Section 822 is an important step for DoD contractors seeking relief but does not provide details regarding the procedure for contractors to seek relief. However, the DoD must issue DoD guidance implementing this new authority within 90 days of the NDAA’s passage, which will hopefully clarify the eligibility criteria and claims process. The DoD is currently accepting public input on the implementation of NDAA FY23 via the DARS website.

In the meantime, to the extent that DoD contractors are being impacted by inflation, they should take a few steps. First, contractors should establish a system to track and document the cost impacts due solely to inflation. Second, contractors should provide notice of the impact to the contracting officer and explain that they intend to seek relief under the Section 822.

Peckar & Abramson plans to provide an update when the final implementing guidelines are issued.

Michael C. Zisa focuses his practice on construction, surety, and government contracts law and is the Co-Managing Partner of Peckar & Abramson’s Washington, DC office, and the Chair of the firm’s Surety Practice Group. For over 20 years, he has successfully represented general contractors, subcontractors, and sureties in all stages of the construction and claims process – from contract formation and administration to claims management and dispute resolution. Zisa is recognized by Chambers USA, Best Lawyers and Super Lawyers in the areas of construction, construction litigation, government contracts, and surety law; is a Fellow of the Construction Lawyers Society of America; and proudly serves on NASBP’s Attorney Advisory Council. He can be reached at mzisa@pecklaw.com or 202.293.8815.