It is well established that in a fixed-price contract, the contractor bears the risk that the actual costs of performance may exceed the contract price. The recent decision in Agility Defense & Government Services, Inc. v. United States highlights the importance of that principle, even in cases where it appears safe to assume that a price adjustment will be granted.
In this case, Agility Defense & Government Services, Inc. (“Agility”) entered into a firm fixed-price, indefinite-delivery-indefinite-quantity (“IDIQ”) contract to supply surplus Soviet-style weapons to U.S. forces in Afghanistan. The Army subsequently issued a Delivery Order for the purchase of 225 rifles, but Agility was unable to acquire the weapons before the delivery date.
Under the terms of the contract, the Army had the option to terminate the contract if Agility failed to deliver the weapons, but could not require Agility to make deliveries beyond the delivery date. Rather than terminate the contract, the parties entered into a bilateral modification acknowledging that Agility was unable to acquire surplus rifles, so it would instead provide new rifles. While the parties were aware that the price of the new rifles was significantly higher than the surplus rifles, no adjustment in price was included in the modification. The modification also stated that Agility waived its rights regarding the restriction on requiring performance after the delivery date had passed.
Agility eventually completed delivery of the new rifles and submitted a Request for Equitable Adjustment (“REA”) for the increased cost of providing those materials. The contracting officer rejected the REA, and later denied a certified claim for the same costs. Despite the fact that Agility performed work at more than twice the contract price, the U.S. Court of Federal Claims affirmed the rejection of its claim. See Agility Defense & Government Services, Inc. v. United States No. 13-380C (Fed. Cl. March 19, 2014). The Court noted that regardless of Agility’s assumption that an adjustment would be made to the contract price, the bilateral modification was silent in that regard, and the risk of increased costs fell on the contractor.
Contractors should be mindful that in a fixed-price contract, the contractor bears the risk of increased costs. Rather than assume that price increases will be granted through the REA process, price adjustments should be included in the modification when possible.