16.203-4 Contract clauses
Source: FAR 16.203-4 on acquisition.gov
FAR 16.203-4 mandates the use of specific economic price adjustment clauses in fixed-price contracts to address price fluctuations, with strict documentation and approval requirements for deviations.
Overview
FAR 16.203-4 outlines the required and optional contract clauses for fixed-price contracts with economic price adjustment (EPA) provisions. It specifies when to use standard EPA clauses for standard supplies, semistandard supplies, and contracts based on actual labor or material costs, as well as when agency-specific clauses may be substituted. The section also details documentation requirements, approval processes for modifying standard clause limits, and the use of cost index-based EPA clauses for contracts with extended performance periods and unstable economic variables.
Key Rules
- Standard Supplies (52.216-2)
- Use the EPA-Standard Supplies clause when contracting for standard supplies with established catalog or market prices, unless an agency-prescribed clause is justified.
- Semistandard Supplies (52.216-3)
- Use the EPA-Semistandard Supplies clause for semistandard supplies with prices reasonably related to standard supplies, with similar substitution and documentation rules.
- Actual Labor or Material Costs (52.216-4)
- Use the EPA-Labor and Material clause when identifiable labor or material costs are subject to change, with detailed contract schedule requirements and negotiation guidance.
- Cost Index-Based Adjustments
- Consider custom EPA clauses based on cost indexes for contracts with long performance periods and unstable economic variables, subject to agency approval.
Responsibilities
- Contracting Officers: Must select and insert the appropriate EPA clause, document discounts, obtain approvals for clause modifications, and ensure detailed contract schedules where required.
- Contractors: Must agree in writing to standard supply identifications (for semistandard supplies) and comply with EPA clause terms.
- Agencies: Approve modifications to standard clause limits and custom EPA clauses based on cost indexes.
Practical Implications
- This section ensures price fairness and risk sharing in fixed-price contracts subject to market fluctuations. Contractors and contracting officers must carefully select and document the correct EPA clause, maintain proper records, and obtain necessary approvals to remain compliant. Common pitfalls include failing to document discounts, using the wrong clause, or exceeding adjustment limits without approval.
(a) Adjustment based on established prices-standard supplies.
(1) The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-2, Economic Price Adjustment-Standard Supplies, or an agency-prescribed clause as authorized in paragraph (a)(2) of this subsection, in solicitations and contracts when all of the following conditions apply:
(i) A fixed-price contract is contemplated.
(ii) The requirement is for standard supplies that have an established catalog or market price.
(iii) The contracting officer has made the determination specified in 16.203-3.
(2) If all the conditions in paragraph (a)(1) of this subsection apply and the contracting officer determines that the use of the clause at 52.216-2 is inappropriate, the contracting officer may use an agency-prescribed clause instead of the clause at 52.216-2.
(3) If the negotiated unit price reflects a net price after applying a trade discount from a catalog or list price, the contracting officer shall document in the contract file both the catalog or list price and the discount. (This does not apply to prompt payment or cash discounts.)
(4) The contracting officer may modify the clause by increasing the 10 percent limit on aggregate increases specified in 52.216-2(c)(1), upon approval by the chief of the contracting office.
(b) Adjustment based on established prices-semistandard supplies.
(1) The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-3, Economic Price Adjustment-Semistandard Supplies, or an agency-prescribed clause as authorized in paragraph (b)(2) of this section, in solicitations and contracts when all of the following conditions apply:
(i) A fixed-price contract is contemplated.
(ii) The requirement is for semistandard supplies for which the prices can be reasonably related to the prices of nearly equivalent standard supplies that have an established catalog or market price.
(iii) The contracting officer has made the determination specified in 16.203-3.
(2) If all conditions in paragraph (b)(1) of this subsection apply and the contracting officer determines that the use of the clause at 52.216-3 is inappropriate, the contracting officer may use an agency-prescribed clause instead of the clause at 52.216-3.
(3) If the negotiated unit price reflects a net price after applying a trade discount from a catalog or list price, the contracting officer shall document in the contract file both the catalog or list price and the discount. (This does not apply to prompt payment or cash discounts.)
(4) Before entering into the contract, the contracting officer and contractor must agree in writing on the identity of the standard supplies and the corresponding line items to which the clause applies.
(5) If the supplies are standard, except for preservation, packaging, and packing requirements, the clause prescribed in 16.203-4(a) shall be used rather than this clause.
(6) The contracting officer may modify the clause by increasing the 10 percent limit on aggregate increases specified in 52.216-3(c)(1), upon approval by the chief of the contracting office.
(c) Adjustments based on actual cost of labor or material.
(1) The contracting officer shall, when contracting by negotiation, insert a clause that is substantially the same as the clause at 52.216-4, Economic Price Adjustment -Labor and Material, or an agency-prescribed clause as authorized in subparagraph (c)(2) of this section, in solicitations and contracts when all of the following conditions apply:
(i) A fixed-price contract is contemplated.
(ii) There is no major element of design engineering or development work involved.
(iii) One or more identifiable labor or material cost factors are subject to change.
(iv) The contracting officer has made the determination specified in 16.203-3.
(2) If all conditions in paragraph (c)(1) of this section apply and the contracting officer determines that the use of the clause at 52.216-4 is inappropriate, the contracting officer may use an agency-prescribed clause instead of the clause at 52.216-4.
(3) The contracting officer shall describe in detail in the contract Schedule-
(i) The types of labor and materials subject to adjustment under the clause;
(ii) The labor rates, including fringe benefits (if any) and unit prices of materials that may be increased or decreased; and
(iii) The quantities of the specified labor and materials allocable to each unit to be delivered under the contract.
(4) In negotiating adjustments under the clause, the contracting officer shall-
(i) Consider work in process and materials on hand at the time of changes in labor rates, including fringe benefits (if any) or material prices;
(ii) Not include in adjustments any indirect cost (except fringe benefits as defined in 31.205-6(m)) or profit; and
(iii) Consider only those fringe benefits specified in the contract Schedule.
(5) The contracting officer may modify the clause by increasing the 10 percent limit on aggregate increases specified in 52.216-4(c)(4), upon approval by the chief of the contracting office.
(d) Adjustments based on cost indexes of labor or material. The contracting officer should consider using an economic price adjustment clause based on cost indexes of labor or material under the circumstances and subject to approval as described in paragraphs (d)(1) and (d)(2) of this section.
(1) A clause providing adjustment based on cost indexes of labor or materials may be appropriate when-
(i) The contract involves an extended period of performance with significant costs to be incurred beyond 1 year after performance begins;
(ii) The contract amount subject to adjustment is substantial; and
(iii) The economic variables for labor and materials are too unstable to permit a reasonable division of risk between the Government and the contractor, without this type of clause.
(2) Any clause using this method shall be prepared and approved under agency procedures. Because of the variations in circumstances and clause wording that may arise, no standard clause is prescribed.