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Recently, the U.S. House of Representatives and Senate overwhelmingly approved the National Defense Authorization Act for Fiscal Year 2023 ("FY23 NDAA"). The legislation is welcome news for both the Department of Defense ("DoD") and defense contractors – the bill now heads to the President's desk for signature.

While the legislation is over 4,400 pages, covering a host of issues, one provision may have a profound impact on the defense industrial base ("DIB"): inflation relief under Section 822, Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts. This is welcome news for contractors and subcontractors in fixed price contracts that are struggling to navigate contractual requirements under significantly increased inflationary and supply-chain pressures.

If enacted, Section 822 will amend Title 50 to provide "extraordinary contractual relief" in several ways, including by increasing the approval and Congressional notification thresholds to $500,000 and $150,000,000, respectively. Notably, the new language makes clear that relief will be available to contractors and subcontractors and without additional consideration. Section 822 also provides that authority under the section begins when the law is enacted and ends on December 31, 2023.

As part of the legislative process, Congress provided a Joint Explanatory Statement which acknowledged that, "[w]hile it is important for the Department to uphold and enforce contractual terms and conditions, we believe the Department should be provided tailored authority to engage extraordinary measures to address extraordinary economic impacts." The Joint Statement also noted that "[w]hen unanticipated extraordinary economic events disrupt those plans and decisions, the result can be catastrophic for the DIB, including economic hardship, bankruptcy, and consolidation."

As mentioned above, the amendments to Title 50 – specifically to 50 U.S.C. § 1431 – will provide relief for both DoD contractors and subcontractors in the following ways:

• DoD may amend or modify to an eligible contract when, due solely to economic inflation, the cost to a prime contractor of performing such eligible contract is greater than the price of such eligible contract.
• A prime contractor may request for an amendment or modification to an eligible contract when, due solely to economic inflation, the cost to a covered subcontractor of performing an eligible subcontract is greater than the price of such eligible subcontract.
• The legislation permits covered subcontractors to submit a request for inflationary relief, due solely to economic inflation, directly to a contracting officer even where the prime contractor does not do so.

In providing inflationary relief, the legislation prohibits DoD from requesting additional consideration (i.e., more work) from the prime contractor. Where the prime contractor requests relief for covered subcontractor, the bill also requires primes to certify both that they will "remit to such covered subcontractor the difference" of any requested relief and that they "will not require such covered subcontractor to pay additional consideration or fees related to such amendment or modification."

The bill also provides definitions for "eligible contract" and "eligible subcontract." The former means a contract awarded to a prime contractor by the DoD, while the latter means a subcontract under an eligible contract to a covered subcontractor. Because the amendments define "covered subcontractor" as a "subcontractor who has entered into an eligible subcontract with a prime contractor," it appears that subcontractor requests under the bill will be limited to first-tier subcontractors.

In terms of DoD guidance, the FY23 NDAA states that DoD has 90 days from the enactment of the legislation to provide guidance implementing Section 822.

Takeaway

Section 822 is welcome news for defense contractors and subcontractors in this uncertain economic environment, particularly fueled by overtaxed supply chains and sharply rising costs. While any inflation relief is discretionary, as shown by the use of the word "may,” the legislation will provide defense contractors, and particularly small businesses, with a much-needed formal avenue for seeking such relief.

Moreover, Section 822 is a further signal that DoD considers inflation to be of paramount import to the DIB and may thus assist in any pending FAR Part 50 requests for inflationary relief. As many important questions remain for DoD to address in its forthcoming guidance, such as the meaning of “due solely to economic inflation,” DoD contractors should closely monitor developments to ensure that they timely act to seek relief given the relatively short window within which to do so.

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Please reach out to a member of Maynard Nexsen Cooper’s Government Solutions Group if you have any questions or need assistance.