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 says a fixed-price contract with EPA may be used when there is serious doubt about the stability of market or labor conditions over the contract term, and the contingency would otherwise be priced into the bid.
The three standard clauses
- FAR 52.216-2, Economic Price Adjustment, Standard Supplies. For commercial items with an established catalog or market price. Adjustment is tied to that established price. The aggregate of the increases on any one unit price is capped at 10 percent of the original unit price.
- FAR 52.216-3, Economic Price Adjustment, Semistandard Supplies. Same mechanism for items that are substantially standard but built to a government specification.
- 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.
DFARS Subpart 216.2 adds Defense Department coverage, and DoD issued specific guidance in 2022 on using EPA and processing requests for equitable adjustment during the inflation spike.
When EPA is used
EPA clauses are generally used only when:
- the contract price is expected to exceed the simplified acquisition threshold, and
- delivery or performance will not be completed within six months of award.
Below those thresholds 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 largely fixed by regulation (10 percent aggregate on 52.216-2), where 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.
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 52.216-2 cap as per-adjustment when it is aggregate over the contract.
- Missing the 60-day notice window under 52.216-4 and losing the adjustment.
- Using EPA on a contract under six months, where the CO will usually reject it.
- Forgetting that a decrease must be reported too.