52.216-4 Economic Price Adjustment-Labor and Material
Source: FAR 52.216-4 on acquisition.gov
FAR 52.216-4 allows for equitable contract price adjustments when labor or material costs change significantly, but requires prompt notification, negotiation, and strict adherence to specified limits and procedures.
Overview
FAR 52.216-4, Economic Price Adjustment-Labor and Material, provides a mechanism for adjusting contract unit prices when there are significant changes in labor rates (including fringe benefits) or material unit prices specified in the contract Schedule. This clause is designed to protect both the contractor and the government from unforeseen fluctuations in labor and material costs during contract performance, ensuring fair compensation and cost control.
Key Rules
- Notification Requirement
- Contractors must notify the Contracting Officer within 60 days of any increase or decrease in labor rates or material unit prices, or within an approved extended period, but no later than final payment.
- Negotiation of Adjustments
- Upon notification, the Contracting Officer and contractor will negotiate a price adjustment and its effective date. The contract will be modified to reflect these changes, but the contractor must continue performance during negotiations.
- Adjustment Limitations
- Adjustments are limited to the impact on unit prices for labor and material listed in the Schedule. No adjustment is allowed for unrelated supplies/services, rates not listed, or changes in quantities used. Upward adjustments do not apply to items delivered before the adjustment date unless delays are excusable. No adjustment is made for changes less than 3% of the total contract price, except after final delivery. Increases are capped at 10% of the original unit price; decreases have no cap.
- Audit Rights
- The Contracting Officer may audit the contractor’s records related to labor and material costs for up to three years after final payment or as specified in FAR 4.7.
Responsibilities
- Contracting Officers: Review notifications, negotiate and approve adjustments, modify contracts, and may audit contractor records.
- Contractors: Monitor labor/material cost changes, provide timely notification and supporting data, and continue performance during negotiations.
- Agencies: Ensure compliance with adjustment procedures and maintain oversight of contract modifications.
Practical Implications
This clause ensures that contractors are neither unfairly penalized nor unduly enriched by market fluctuations in labor and material costs. It requires diligent cost tracking, timely communication, and thorough documentation. Common pitfalls include late notifications, insufficient supporting data, and misunderstanding the thresholds and caps for adjustments.
As prescribed in 16.203-4(c), insert the following clause:
Economic Price Adjustment-Labor and Material (Jan 2017)
(a) The Contractor shall notify the Contracting Officer if, at any time during contract performance, the rate of pay for labor (including fringe benefits) or the unit prices for material shown in the Schedule either increase or decrease. The Contractor shall furnish this notice within 60 days after the increase or decrease, or within any additional period that the Contracting Officer may approve in writing, but not later than the date of final payment under this contract. The notice shall include the Contractor’s proposal for an adjustment in the contract unit prices to be negotiated under paragraph (b) of this clause, and shall include, in the form required by the Contracting Officer, supporting data explaining the cause, effective date, and amount of the increase or decrease and the amount of the Contractor’s adjustment proposal.
(b) Promptly after the Contracting Officer receives the notice and data under paragraph (a) of this clause, the Contracting Officer and the Contractor shall negotiate a price adjustment in the contract unit prices and its effective date. However, the Contracting Officer may postpone the negotiations until an accumulation of increases and decreases in the labor rates (including fringe benefits) and unit prices of material shown in the Schedule results in an adjustment allowable under paragraph (c)(3) of this clause. The Contracting Officer shall modify this contract (1)to include the price adjustment and its effective date and (2)to revise the labor rates (including fringe benefits) or unit prices of material as shown in the Schedule to reflect the increases or decreases resulting from the adjustment. The Contractor shall continue performance pending agreement on, or determination of, any adjustment and its effective date.
(c) Any price adjustment under this clause is subject to the following limitations:
(1) Any adjustment shall be limited to the effect on unit prices of the increases or decreases in the rates of pay for labor (including fringe benefits) or unit prices for material shown in the Schedule. There shall be no adjustment for-
(i) Supplies or services for which the production cost is not affected by such changes;
(ii) Changes in rates or unit prices other than those shown in the Schedule; or
(iii) Changes in the quantities of labor or material used from those shown in the Schedule for each item.
(2) No upward adjustment shall apply to supplies or services that are required to be delivered or performed before the effective date of the adjustment, unless the Contractor’s failure to deliver or perform according to the delivery schedule results from causes beyond the Contractor’s control and without its fault or negligence, within the meaning of the Default clause.
(3) There shall be no adjustment for any change in rates of pay for labor (including fringe benefits) or unit prices for material which would not result in a net change of at least 3 percent of the then-current total contract price. This limitation shall not apply, however, if, after final delivery of all line items, either party requests an adjustment under paragraph (b) of this clause.
(4) The aggregate of the increases in any contract unit price made under this clause shall not exceed 10 percent of the original unit price. There is no percentage limitation on the amount of decreases that may be made under this clause.
(d) The Contracting Officer may examine the Contractor’s books, records, and other supporting data relevant to the cost of labor (including fringe benefits) and material during all reasonable times until the end of 3 years after the date of final payment under this contract or the time periods specified in subpart 4.7 of the Federal Acquisition Regulation (FAR), whichever is earlier.
(End of clause)