WASHINGTON ― The Defense Department is opening the door to inflation relief for defense contractors working under fixed-price contracts in an effort to potentially “address acute impacts on small business and other suppliers,” according to a new high-level memo.

The new guidance from the Pentagon’s pricing chief, John Tenaglia, comes as the defense industry has pressed for more latitude to deal with inflation, supply chain snags and labor shortages. Contracting officers may apply “schedule relief” or otherwise amend contractual requirements if the government obtains “adequate consideration,” the Sept. 9 memo reads.

In the memo, Tenaglia said he is advising contracting officers about the range of available approaches after he heard from the Defense Department’s acquisition chiefs about how inflation is affecting the ability of contractors to perform under existing fixed-price contracts.

“Contractors performing under firm-fixed-price contracts that were priced and negotiated before the onset of the current economic conditions generally bear the risk of cost increases,” the memo reads.

“However, there may be circumstances where an accommodation can be reached by mutual agreement of the contracting parties, perhaps to address acute impacts on small business and other suppliers. For example, provided adequate consideration is obtained for the Government, such an accommodation may take the form of schedule relief or otherwise amending contractual requirements,” the memo continues.

The secretaries of the armed services have authority under the federal law and regulations to afford “extraordinary contractual relief” in “extraordinary circumstances where contractors have sought or may seek an upward adjustment to the price of an existing firm-fixed-price contract to account for current economic conditions,” the memo reads. Those requests are to be forwarded to Tenaglia’s office within 10 days.

“While the law and regulation have established stringent criteria, the Department will consider contractor requests to employ this authority, subject, of course, to available funding,” the memo reads.

After defense trade associations launched a lobbying push for relief through Congress and the administration, the undersecretary of defense for acquisition and sustainment, Bill LaPlante, said last week his team was working on a revision to Tenaglia’s May 25 guidance on the topic. Inside Defense was first to report on the new guidance.

“I’m worried about the small supplier who signed the firm-fixed price contract. It’s got 50 employees, and all of a sudden it was dealing with 11% inflation. How do we deal with that company? We don’t want those companies to go out of business,” LaPlante said. “That’s what we’re working on right now.”

Joe Gould is the senior Pentagon reporter for Defense News, covering the intersection of national security policy, politics and the defense industry. He served previously as Congress reporter.

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