Economic Price Adjustment-Labor and Material
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.