Section 822 of the 2023 National Defense Authorization Act, Public Law No. 117-7776 (Dec. 23, 2022) provides new authority for some defense contractors and subcontractors to obtain price increases that address the impacts of inflation. The new authority is welcome relief for contractors and subcontractors holding fixed-price defense contracts, which typically do not allow a price increase due solely to inflation.

Here are the highlights of the new law:

1. Effective Dates. The Secretary of Defense’s authority to make inflation adjustments under section 822 begins on December 23, 2022, and ends on December 31, 2023. Guidance implementing the authority granted by section 822 is due by March 23, 2023.

• Eligible contracts. Inflation adjustments under section 822 are limited to fixed-price contracts and subcontracts with Defense Department agencies. On cost-reimbursement contracts, the Government bears the risk of inflation because they provide that the Government will pay the actual allowable and reasonable costs that the contractor incurs in performance. 

• Eligible parties. Inflation adjustments under section 822 are available to prime contractors and subcontractors. Prime contractors may seek adjustments on behalf of subcontractors. If a prime contractor declines to request an adjustment on behalf of a subcontractor, the subcontractor may seek the adjustment directly from the government.

• Proof of entitlement. A party seeking an inflation adjustment under section 822 must be able to show that the cost of performing an eligible contract or subcontract is greater than the price of the eligible contract or subcontract “due solely to economic inflation.”

• Amount of adjustment. The amount of inflation adjustment under section 822 must “account only for the actual cost of performing . . . but may account for indirect costs of performance, as the Secretary of Defense determines appropriate.” Apart from the ambiguity arising from the language itself, meeting this requirement may be a challenge for contractors and subcontractors not accustomed to accounting for incurred costs. Hopefully the guidance documents provide clarification on this question.

• Prohibition on consideration. Section 822 specifically prohibits requests for consideration in exchange for an inflation adjustment. The Government may not request “consideration” from prime contractors and prime contractors may not request “additional consideration or fees” from subcontractors. Presumably, this language is intended to ensure that contractors and subcontractors receive the benefit of the inflation adjustment and are not held up in negotiations on collateral terms and conditions or presented with offsetting demands, such as scope changes or accelerated completion deadlines.

• Requirement for continued performance. Section 822 authorizes inflation adjustments only for those contractors and subcontractors who continue performance. A contractor that stops performance to avoid sustaining economic losses caused by inflation will not be eligible for an adjustment under section 822.

Contractors and subcontractors currently performing fixed-price defense contractors should look carefully at whether they may seek relief from the impact of inflation under section 822. If they have not already done so, contractors and subcontractors that may be eligible for an adjustment under section 822 should begin documenting the impact of inflation on their performance costs. While it may make sense to delay the submission of a formal request until after the Defense Department’s guidance is published, the timeline for action is short. 

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