WASHINGTON — The General Services Administration, which provides purchasing options for tens of billions of dollars of goods and services for federal agencies, is urging its procurement officials to use their discretion in adjusting prices in government contracts to address inflation, and is making it one step easier for them to do so.
GSA temporarily lifted restrictions on economic price adjustments in its contracts in March to fight inflation. With prices still rising, the agency this month extended the flexibilities through March 2023 and said officers can now make adjustment decisions without the need for approval from a more senior official.
Agency officials said they recognize how supply chain shortages and price volatility impact the global economy and U.S. suppliers, creating a need for immediate relief for contractors who are getting squeezed by rising costs and fixed revenue.
“Inflation and uncertain economic market conditions erode scarce contracting dollars, cause severe hardship on federal partners, and discourage new entrants from pursuing federal acquisition,” said GSA in the memo announcing the extension. “The acquisition workforce has both the authority and the tools to take action to mitigate the impact of inflation in federal contracts.”
How is the Pentagon responding to inflation?
The Department of Defense took a similar step on Sept. 9, saying contracting officers may apply “schedule relief” or otherwise amend contractual requirements in certain circumstances to address inflation, according to a memo from the Pentagon’s pricing chief, John Tenaglia.
That could include some wiggle room on firm, fixed-priced contracts, which as the name suggests are notoriously rigid and hard to alter, worth tens of billions of dollars.
GSA, however, directly encouraged procurement officials to make use of flexibilities.
Unlike GSA, the Pentagon “wasn’t exactly encouraging contracting officers to be flexible or understanding when it comes to economic price adjustment or requests for equitable adjustments,” said Stephanie Kostro, executive vice president for policy at the Professional Services Council, a trade organization for the government technology and professional services industry.
The memos can help keep funding appropriated by Congress moving into the hands of workers on government contracts, Kostro said, by relieving economic pressures and fortifying the procurement pipeline against bureaucratic impasses.
Defense trade groups, seeking to sway Congress to add more for defense in a continuing resolution, say record-high inflation is costing the Pentagon $6 billion per month, endangering military readiness and throwing tech development plans off course.
The Aerospace Industries Association, National Defense Industrial Association and Professional Services Council ― which represent thousands of defense contractors ― asked congressional appropriators in a letter earlier this month to factor inflation into the CR and add money to allow new programs to start.
How does inflation impact federal procurement contracts?
Inflation is being felt widely across the government procurement sector. As costs rose, contractors began removing items from Federal Supply Schedule contracts to avoid selling at a loss. Also known as the GSA schedule, the purchasing vehicle is a long-term governmentwide contract with commercial companies that provide access to nearly 11 million products and services at at pre-negotiated prices. Government buyers spend over $30 billion annually through these contracts.
Assets on contracts overall are simply more costly, and that includes labor. On service contracts, which are especially human-capital centric, companies end up offering reduced capability for the same labor costs because dollars don’t go as far as they used to and workers have been lost to the private sector or other government offices.
The latest memo takes power that was tied up in the request and approval process and puts it into the hands of contractors and procurement officers to evaluate, make decisions and keep business flowing.
“Acquisition Letter MV-22-02 initially lowered the approval level from the contracting director to one level above the contracting officer. This Supplement, in recognition of ongoing price volatility and impacts to the global economy, removes the requirement to obtain additional approvals,” the memo says.
However, the temporary moratorium does not diminish a contracting officer’s responsibility for reviewing EPA requests and asking for additional information, if applicable, “within the confines of what is normally necessary for processing EPA requests.”
Can procurement officials negotiate prices on their own?
This gives contracting officers in the federal government on these contracts more latitude to negotiate adjustments themselves. The guidance will help shorten delivery timelines, Kostro said, and get rid of bureaucratic levels of approval.
Still, it probably won’t diminish workloads for contract officers, she said.
Additionally, contractors don’t have to hold their contract for a minimum of year before submitting a price increase. The guidance also temporarily did away with the limit of three increases per year and the 30-day waiting period between requests.
For fixed-price contracts, GSA acknowledges the possibility of reimbursement if the inflated costs are the direct result of government action. For example, an agency delays the work into a period where higher costs are unavoidable.
As a general rule, inflation is not a government-directed change and thus cannot form the basis for an equitable adjustment.
Time is another destroyer of value during periods of high inflation. An agency can lose the purchasing power of its initial budget if a deal takes weeks or months to solidify. Thus, the updated guidance encourages the use of contract vehicles that streamline procedures and simplify acquisitions, such as multiple-award schedules or Indefinite Delivery Indefinite Quantity contracts.
Awarding contracts for shorter periods of time are also a way to reduce unforeseen losses and risk, GSA said.
Industry experts and GSA officials acknowledged that the inflation-era guidance has been working and should, at least until next spring, be extended.
“The temporary moratorium is achieving some of its key objectives, including ensuring GSA continues offering customers a full range of products, services, and solutions through the Federal Supply Schedule program and GSA Global Supply,” the memo said.
With reporting by Joe Gould of Defense News
Molly Weisner is a staff reporter for Federal Times where she covers labor, policy and contracting pertaining to the government workforce. She made previous stops at USA Today and McClatchy as a digital producer, and worked at The New York Times as a copy editor. Molly majored in journalism at the University of North Carolina at Chapel Hill.