The Defense Department "does not intend to enact a policy to increase contract prices due to inflation,” according to a new letter sent by Pentagon acquisition chief Bill LaPlante to Sen. Elizabeth Warren (D-MA) and obtained by Inside Defense.
The letter, dated Oct. 19, is a response to concerns Warren raised following defense industry efforts to receive inflation relief on fixed-price contracts, sometimes called “economic price adjustments.” Warren, in an Oct. 5 letter, likened the proposed inflation relief to “corporate welfare.”
“DOD does not intend to enact a policy to increase contract prices due to inflation,” LaPlante states in his letter.
However, LaPlante notes DOD has issued a Sept. 9 guidance memo that has “called contracting officers’ attention” to existing policies. The memo states that contract officers should be open to considering inflation relief for companies working under firm, fixed-price contracts in "extraordinary circumstances.” LaPlante said in September that current levels of historic inflation could qualify as “extraordinary.”
LaPlante, in his letter to Warren, acknowledges that defense officials met with industry associations and “heard their concerns regarding harmful effects of inflation on defense contracts.”
Along with reinforcing prior guidance regarding contract types, LaPlante says the Sept. 9 memo also “addressed the possibility of accommodations that may be reached by mutual agreement of all parties while reinforcing the need for consideration.”
“The department stated it will consider requests, but noted there are stringent criteria for these requests and that funding must be available,” LaPlante said. “The department also included a reporting requirement for the components, to enable me and my office to track these requests and ensure consistency in handling them.”
Additionally, he said, DOD has provided an online course and webinar on inflation and economic price adjustment clauses.
LaPlante also tells Warren DOD has not received any data or analyses from the National Defense Industrial Association, Aerospace Industries Association, or Professional Services Council to support increasing price due to inflation, “other than what has been provided to the general public.”
Warren, in her letter, also sought information on how DOD might “ensure” that any increased payments would not be used for defense stock buybacks, dividends, bonuses or executive compensation. LaPlante says that DOD simply “does not have the authority to restrict how contract payments can be utilized after making a payment.”
Eric Fanning, the president and chief executive of AIA, said in a statement earlier this month that defense 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.”
Warren, in a statement to Inside Defense today, said industry contractors “should not be able to pressure DOD into increasing the price of existing contracts without certified cost or pricing data.”
“As major defense contractors brag to their shareholders about increasing dividends and buybacks, they can’t expect taxpayers to further underwrite their profits,” she said. “I will continue to take action to ensure that the department protects taxpayers from defense industry profiteering.”
Lawmakers, however, are poised to pass legislation that could give DOD cover to pursue modifying fixed-price contracts to account for inflation.
An amendment to the Senate’s proposed fiscal year 2023 defense authorization bill offered by Sen. Kevin Cramer (R-ND) would give DOD the authority to provide contractors with an economic price adjustment even in the case of firm, fixed-price contracts that have already been negotiated.
Progress payment information sought
Warren also sought information from LaPlante regarding what data DOD used when it increased the rate of progress payments to defense contractors at the onset of the COVID-19 pandemic in spring 2020.
Under the current progress payment system, large companies have been paid as much as 90% of incurred costs, up from the traditional 80% paid as progress goals are met, while the figure for small businesses is 95%, up from 90%.
LaPlante says the decision to increase progress payment rates was part of a “qualitative approach” to “quickly respond to the pandemic crisis and infuse cash into the defense industrial base.”
LaPlante notes that DOD has been conducting a “review of progress payment invoices,” which will “inform decision making relative to the standing deviation.”