New Senate amendment would allow DOD to modify contracts for inflation relief

By Tony Bertuca / October 5, 2022

(Editor's note: This story has been updated to include comments from Scott Amey, general counsel for the Project on Government Oversight.)

The defense industry has thrown its support behind a new amendment to the Senate's version of the annual defense authorization bill that would allow the Pentagon to modify existing contracts to grant inflation relief to contractors.

The amendment offered by Sen. Kevin Cramer (R-ND) would give the Defense Department the authority to provide contractors with an “economic price adjustment” even in the case of firm, fixed-price contracts that have already been negotiated.

The amendment has the backing of the Aerospace Industries Association, which represents some of the largest defense contractors in the world.

Eric Fanning, the president and chief executive of AIA, said in a statement that companies require contract flexibility to mitigate soaring costs stemming from record-high inflation.

“Inflation is running at more than double the rate anticipated when most contracts were negotiated,” he said. “With limited tools at their disposal to manage increasing costs and maintain their workforce, many companies, especially small businesses, may choose to leave the defense industrial base entirely. The result would be significant harm to our national security and our ability to surge to meet demand.”

Defense businesses, he said, “need relief now.”

Congressional staffers said there is a good chance Cramer’s amendment makes it into the final version of the Senate’s bill, which must still be reconciled with the House.

Still, there are critics who say defense contractors do not need to be paid more by the federal government. Scott Amey, general counsel for the Project on Government Oversight, said he believes the push for inflation relief is surging because of “large federal contractors, many of which are doing well for themselves,” and their various “influence peddlers.”

Amey also asked why the federal government would want to pay more for goods and services if it has already made deals that save taxpayers money.

“[L]et's not forget, fixed-priced contracts always come with risk, sometimes that means the government gets a good deal and other times it means contracts came out ahead,” he said. “Any effort to protect contractors comes at the expense of taxpayers, and that is a recipe for more projects that are over budget and behind schedule.”

As first reported in Bloomberg News, the eight largest defense contractors have reported such healthy bottom lines that they are expected to return around $23 billion to investors in 2022, with about $11 billion coming from dividends and $12 billion in share repurchases.

But industry advocates argue the U.S. defense industrial base is composed of countless small suppliers who might be forced out of business if they (and the large companies they supply) cannot cover inflation-related costs, thus threatening national security.

AIA’s Fanning, in a Sept. 28 letter to the Senate Armed Services Committee, warned of “a significant exodus of workforce talent.”

“While these economic pressures affect the entire ecosystem of defense companies, the situation is uniquely challenging for the thousands of small businesses comprising the shared [aerospace and defense] supply chain,” he wrote.

Senior defense officials in recent weeks have also voiced support for giving contractors inflation relief.

Pentagon acquisition chief Bill LaPlante has already said DOD wants to help defense contractors -- especially small ones -- with inflation-related costs as he considers it to meet the definition of an “extraordinary circumstance.”

“This is not typical inflation,” he said last month. “This is something different.”

At LaPlante’s direction, John Tenaglia, principal director of defense pricing and contracting, issued a Sept. 9 memo saying DOD is open to considering inflation relief for defense contractors working under firm, fixed-price contracts in "extraordinary circumstances.”