Application
Use fixed-price contracts with economic price adjustment only when market or labor instability justifies it, and ensure contingencies are not double-counted in pricing.
Overview
FAR 16.203-2 outlines when and how to apply fixed-price contracts with economic price adjustment (EPA). This contract type is appropriate when there is significant uncertainty about future market or labor conditions over the contract period, and when specific contingencies can be separately addressed in the contract. The regulation emphasizes that price adjustments should be limited to industry-wide or uncontrollable contingencies, and not used to cover risks already included in the base price. Contracting officers must ensure that contingency allowances are not duplicated in both the base price and the EPA clause. For contracts not requiring certified cost or pricing data, adequate supporting data must be obtained and may be subject to verification. The section also references FAR 14.408-4 for EPA use in sealed bid contracts.
Key Rules
- Appropriate Use of EPA Contracts
- Use EPA contracts when market or labor conditions are unstable and specific contingencies can be separately addressed.
- Limitation on Price Adjustments
- Adjustments should be for industry-wide or uncontrollable contingencies only, not for risks already priced in the contract.
- Establishing Base Levels
- Contracting officers must prevent duplication of contingency allowances in both the base price and EPA clause.
- Data Requirements
- For contracts without certified cost or pricing data, adequate data must be obtained and may be verified to establish the base level for adjustments.
Responsibilities
- Contracting Officers: Ensure proper application of EPA, prevent duplication of contingencies, obtain and verify adequate data.
- Contractors: Provide accurate data for establishing base levels, avoid duplicating contingency allowances.
- Agencies: Oversee compliance with EPA application and data requirements.
Practical Implications
This section ensures that EPA clauses are used only when justified by market or labor instability, and that price adjustments are fair and not duplicative. It helps prevent overpricing and ensures transparency in contract pricing, especially for long-term contracts. Common pitfalls include duplicating contingency allowances and failing to provide or verify adequate supporting data.