EPA (Economic Price Adjustment)

What is EPA (Economic Price Adjustment)?

An Economic Price Adjustment (EPA) clause in a government contract is a mechanism that allows for changes to the contract price based on fluctuations in specific economic conditions. This helps to protect both the government and the contractor from unforeseen economic risks, ensuring fair pricing throughout the contract's lifecycle. EPAs are commonly used in long-term contracts or when dealing with commodities or services subject to significant price volatility.

Definition

An Economic Price Adjustment (EPA) clause is a provision within a government contract (typically found in FAR Subpart 16.2) that permits upward or downward revisions to the stated contract price due to changed economic circumstances affecting the contractor's costs. This clause aims to allocate economic risk more equitably between the government and the contractor. Instead of building large contingencies into the initial price to cover potential cost increases, the EPA allows for adjustments based on objective criteria. The use of an EPA is appropriate when market conditions are unstable or when a significant portion of the contract cost is tied to volatile commodities. The specific indices or cost drivers used for adjustment are clearly defined in the contract.

Key Points

• Risk Mitigation: EPAs help contractors manage the risk of cost increases, particularly for materials, labor, or other inputs that are subject to market volatility.
• Price Stability: By allowing for price adjustments, EPAs can help to prevent contractors from inflating their initial bids to cover potential future cost increases, potentially leading to lower overall costs for the government.
• Transparency and Objectivity: EPA clauses typically rely on established, publicly available indices or benchmarks to ensure price adjustments are based on objective criteria and are transparent to both parties.
• Mutual Benefit: EPAs can benefit both the government and the contractor by fostering a more collaborative and equitable relationship, reducing the potential for disputes over pricing.

Practical Examples

1. Fuel Price Fluctuations: A long-term transportation contract includes an EPA clause tied to the national average price of diesel fuel. As fuel prices rise, the contract price is adjusted upward to compensate the contractor for the increased fuel costs.
2. Commodity Price Changes: A contract for supplying raw materials, such as steel or aluminum, includes an EPA linked to the relevant commodity price index. If the price of steel rises significantly, the contract price is adjusted upward to reflect the increased cost of materials.
3. Labor Rate Adjustments: A long-term service contract includes an EPA based on a published labor rate index for the specific type of work being performed. As labor rates increase, the contract price is adjusted to reflect the increased labor costs.