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4.70.20.5. Economic Price Adjustments in Firm Price Contracts

  1. It may not be possible to obtain a realistic estimate of the material prices and/or labour and overhead rates required for the use of a firm price basis of payment, and it may be necessary to negotiate provisions for price adjustments. These provisions provide for revisions to the firm base price upon the occurrence of certain contingencies.
  2. Under changing market conditions, one or more elements of the cost of a good or service may be subject to significant fluctuations in price, so that neither the buyer nor the supplier would have confidence in accepting a fixed or firm price over an extended period of time. The purpose of including an economic price adjustment (EPA) and/or a foreign currency adjustment (FCA) in the contract is to eliminate these risks for the contractor, as they are outside of the contractor's control. Contracting officers must identify in their approval documents (including any approval documents subject to Treasury Board approval) any provisions for EPA and/or FCA.
  3. Economic price adjustments should not normally be included in contracts with delivery schedules of less than 12 months, or contracts valued under $100,000.
  4. There are a number of possible actions:
    1. postpone the procurement;
    2. use available substitute products;
    3. provide advance information on requirements to potential contractors, to benefit from their improved ability to control costs by forward planning, and to make full use of the commodity futures markets in appropriate circumstances;
    4. reduce the period of term contracts or the quantities ordered on production contracts;
    5. increase production rates to compress the duration of contracts;
    6. reduce administrative time allowances in the procurement process (solicitation, award decision, award of contract and authority to commence work), but taking into account required time frames under the North American Free Trade Agreement, Canada-European Union Comprehensive Economic and Trade Agreement and the World Trade Organization Agreement on Government Procurement;
    7. procure the unstable element separately in the construction industry. This technique is known as pre-bidding;
    8. isolate the unstable element in pricing the work and providing for price adjustment, both upward and downward, on it alone, in accordance with a reliable predetermined formula such as an established economic index.
  5. When a competitive bidding process is used, the proposed economic price adjustment provisions must be considered in the evaluation of the bid. In all other situations, economic price adjustment provisions must be agreed upon during negotiation of the initial or base year contract price.
  6. When a provision for future wage or price adjustments on one or more elements of the cost of a good or service, is necessary to protect the contractor and the government against significant economic fluctuations, economic price adjustment provisions may be used in firm price type contracts and in contracts that contain firm price elements within the basis of payment.
  7. Adjustments to firm prices in a contract will be allowed only if provided for in the contract.