What EPA is
An economic price adjustment (EPA) clause is what the Federal Acquisition Regulation calls a price escalation clause. It lets a fixed-price government contract adjust for changes in labor or material cost without being converted to a cost-reimbursement contract. The adjustment can be up or down.
FAR 16.203-2 says a fixed-price contract with EPA may be used when there is serious doubt about the stability of market or labor conditions over an extended contract period, and the contingencies can be identified and covered separately. FAR 16.203-3 adds that the contracting officer must find EPA necessary, either to protect both sides against significant swings in labor or material costs, or to allow for changes in the contractor's established prices.
FAR 16.203-1 names three kinds of adjustment: from established prices, from actual labor or material costs, and from cost indexes named in the contract.
The three standard clauses
- FAR 52.216-2, Economic Price Adjustment, Standard Supplies. For standard supplies with an established catalog or market price. When that price changes, the contract unit price moves by the same percentage. The aggregate of the increases on any one unit price is capped at 10 percent of the original unit price. The contractor must ask in writing for an increase, and the contracting officer verifies it first.
- FAR 52.216-3, Economic Price Adjustment, Semistandard Supplies. The same mechanism for supplies that are standard apart from changes the contract specification requires. It has the same 10 percent cap.
- FAR 52.216-4, Economic Price Adjustment, Labor and Material. For items whose cost is built from labor rates and material prices rather than a catalog price. The contractor must notify the contracting officer of an increase or decrease in a labor rate or material unit price within 60 days of the change, or by the date of final payment, whichever is earlier. A longer period is allowed if the contracting officer approves it in writing. Under this clause a change must also move the total contract price by at least 3 percent before an adjustment is made, unless a party asks after final delivery. Increases are capped at 10 percent of the original unit price. Decreases have no cap.
The FAR does not prescribe a standard clause for cost-index adjustment. FAR 16.203-4(d) says such a clause may fit when performance runs more than 1 year and the labor and material economics are too unstable, and it must be approved under agency procedures.
DFARS Subpart 216.2 adds Defense Department coverage.
When EPA is used
The contracting officer picks the clause that fits the supplies, under FAR 16.203-4:
- 52.216-2 for standard supplies with an established catalog or market price.
- 52.216-3 when the price can be reasonably related to the price of nearly equivalent standard supplies.
- 52.216-4 when no major design engineering or development work is involved and one or more labor or material cost factors are likely to change.
For short, stable jobs the contingency is small enough to price into a firm fixed price.
How federal EPA differs from a commercial clause
- The index is often the contractor's own established price, not a public government series, for 52.216-2 and 52.216-3.
- The cap is set by regulation. All three clauses start at 10 percent aggregate. The chief of the contracting office can approve a higher figure. A commercial cap is negotiated.
- Notice is mandatory and time-boxed under 52.216-4. A commercial clause may run adjustments automatically each period.
- De-escalation is built in. The clauses apply to decreases as well as increases. The contractor must report decreases promptly.
For a defence-specific walk-through of choosing the index and weighting the formula, see the defence contract price escalation guide.
Common mistakes
- Treating the 10 percent cap as per-adjustment when it is aggregate over the contract.
- Missing the 60-day notice window under 52.216-4 without written CO approval of a longer period.
- Forgetting the 3 percent threshold under 52.216-4, so small rate changes do not trigger an adjustment.
- Forgetting that a decrease must be reported too.