Economic Price Adjustment (EPA) Determination.pdf

Economic Price Adjustment (EPA) Determination (Effective after contract award)

H900 Note: The EPA determination will not be considered in the Total Evaluated Price calculations as described under “Evaluation Basis for Award.”

Portion of the Price Subject to Adjustment (PPSA): The PPSA proposed in response to the Request for Proposal shall be for a portion of the proposed unit prices related to material cost for CLINs 2001, 3001, and 4001. Specifically, the PPSA shall be 40% of the proposed unit price.

The intent of the EPA is to protect both the contractor and the Government against significant fluctuations in the price of metal products due to unforeseen economic factors. See FAR 16.203 for additional guidance.

No price adjustment (PA) will take effect until the beginning of Option II. 40% of each unit price established under Option I will be the baseline for adjustment for each subsequent option’s PPSA. If quantity discount ranges differ between Option I and the subsequent option periods, the contracting officer may use judgement to determine which quantity ranges and unit prices under Option I best correspond to those in the subsequent options and may use a weighted average unit price.

Pursuant to the terms of this clause, the PPSA as related to the Fixed Price with Economic Price Adjustment (FPEPA) CLINs for Option Years II – IV (CLINs 2001, 3001, and 4001) shall be subject to either upward or downward adjustments in accordance with FAR 16.203-1(a)(3).

FAR 16.203-1(a)(3) “Adjustments based on cost indexes of labor or material. These price adjustments are based on increases or decreases in labor or material cost standards or indexes that are specifically identified in the contract.”

Index for Adjustment:

The measurement index used for determining adjustment to the PPSA will be:

Series Id: WPU10 Series Title: PPI Commodity data for Metals and metal products, not seasonally adjusted Industry: Metals and metal products Product: Metals and metal products

The source for the index values used for PPSA adjustments will be obtained from the U.S. Bureau of Labor Statistics (BLS) website. The link/URL below provides the location of this data, current at the time of the drafting of this clause.

The link/URL may differ in the future based on changes to the BLS website.

https://data.bls.gov/timeseries/WPU10?amp%253bdata_tool=XGtable&output_view=data&include_graphs=true

BLS provides the most recent 4-months of index values as preliminary. The preliminary value will be used as the latest month’s index value for purposes of calculating the percentage change in the index value.

Timing of Adjustment:

Following the Government’s preliminary written notice of its intent to extend the contract by exercising an option, for the option periods and CLINs referenced above, the Index for Adjustment will be referenced to determine if a price adjustment applies.

Adjustment Factor:

The adjustment factor will be calculated by dividing the latest month’s index value by the index value associated with the exercise of Option I. This adjustment factor will be applied to the material cost estimate(s) in Option I to https://data.bls.gov/timeseries/WPU10?amp%253bdata_tool=XGtable&output_view=data&include_graphs=true determine the impact that material inflation has on the next option’s PPSA and established unit price. The adjustment factor will be expressed as a decimal which is rounded to four (4) digits past the decimal.

Adjustment Factor = (Latest Index Value / Index Value associated with Option I)

The following is an example of calculating the adjustment factor where the latest month’s index value, prior to the exercise of Option II, is from March 2021 and the index value associated with Option I is from March 2020:

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2020 190.4 183.0 181.4 170.3 164.4 162.4 164.2 168.1 174.8 173.6 174.4 181.1 2021 185.2 188.3 191.4

(Mar 2021 / Mar 2020) = (191.4 / 181.4) = 1.0551

The index value increased by 5.51% over the last 12-months. The adjustment factor of 1.0551 will be multiplied by the estimated material cost associated with Option I to determine the impact that inflation has on Option II’s PPSA and established unit price.

Price Adjustment Examples without Unit Price Limitations:

As shown below the established unit prices are adjusted to determine an adjusted unit price. The example below illustrates the application of adjustment factors to determine adjusted unit prices if no upper or lower limits are placed on the magnitude of the price adjustment. However, see the next section for upper and lower adjustment limits to the unit price.

The table below shows hypothetical established unit prices for each option year.

Proposed Escalation Factor: 1.02 1.02 1.02 Proposed & Established % of Price OY 1 OY 2 OY 3 OY 4 Material Cost Per Unit (PPSA) 40% $8,000 $8,160 $8,323 $8,489 Other Cost & Profit 60% $12,000 $12,240 $12,485 $12,735 Established Unit Price 100% $20,000 $20,400 $20,808 $21,224

*Option Year (OY)

Next, the 1.0551 adjustment factor (Mar 2021 / Mar 2020) is applied to the OY 1 estimated material cost per unit (PPSA) as shown in the table below. Areas of change are highlighted in yellow.

Adjustment Factor (on OY 1) 1.0551 Price Adjustment % of Price OY 1 OY 2 OY 3 OY 4 Material Cost Per Unit (PPSA) 40% $8,000 $8,441 $8,323 $8,489 Other Cost & Profit 60% $12,000 $12,240 $12,485 $12,735 Adjusted Unit Price 100% $20,000 $20,681 $20,808 $21,224

% Change in the Unit Price 0.00% 1.38% 0.00% 0.00%

This results in OY 2’s PPSA increasing from an established estimate of $8,160 to $8,441 ($8,000 x 1.0551) and the corresponding unit price increasing by 1.38% (($20,681 / $20,400) – 1) from what was previously established on the contract.

One year later, prior to the exercise of Option III, the index is referenced again. Which results in the following index values and adjustment factor.

Index Values Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2020 190.4 183.0 181.4 170.3 164.4 162.4 164.2 168.1 174.8 173.6 174.4 181.1 2021 185.2 188.3 191.4 202.7 207.8 216.7 217.045 225.198 232.194 242.255 247.459 229.373 2022 237.207 257.310 256.517

Adjustment Factor = 1.4141 = (256.517 / 181.4) (Mar 2022 / Mar 2020)

The index value increased by 41.41% over the last 24-months since Option I. The adjustment factor of 1.4141 will be multiplied by the estimated material cost associated with Option I to determine the impact that inflation has on Option III’s PPSA and established unit price, assuming no limits as shown below.

From:

Established % of Price OY 1 OY 2 OY 3 OY 4 Material Cost Per Unit (PPSA) 40% $8,000 $8,441 $8,323 $8,489 Other Cost & Profit 60% $12,000 $12,240 $12,485 $12,735 Established Unit Price 100% $20,000 $20,681 $20,808 $21,224

To:

Adjustment Factor (on OY 1) 1.0551 1.4141 Price Adjustment % of Price OY 1 OY 2 OY 3 OY 4 Material Cost Per Unit (PPSA) 40% $8,000 $8,441 $11,313 $8,489 Other Cost & Profit 60% $12,000 $12,240 $12,485 $12,735 Adjusted Unit Price 100% $20,000 $20,681 $23,798 $21,224

% Change in the Unit Price 0.00% 0.00% 14.37% 0.00%

This results in OY 3’s PPSA increasing from an established estimate of $8,323 to $11,313 ($10,000 x 1.4141) and the corresponding unit price increasing by 14.37% (($23,798 / $20,808) – 1) from what was previously established on the contract.

Unit Price Adjustment Trigger and Limitations:

Trigger: For a unit price adjustment to be triggered under this EPA clause the percentage change in the established unit price must exceed an absolute value of 5.00%.

Limitations: Unit price adjustments under this clause will be limited to a percentage change of plus or minus 10.00%.

In accordance with FAR 52.216-4(c)(4), “the aggregate of the increases in any contract unit price made under this clause shall not exceed 10 percent of the original unit price.”

Calculating the Percentage Change in the Unit Price:

The percentage change in the unit price will be calculated by dividing the adjusted unit price by the previously established unit price for the same option period and subtracting one (1). The percentage change can result in either an increase or decrease, unless unchanged. The resulting percentage change in the unit price will be expressed as a percentage which is rounded to the nearest basis point (i.e., one hundredth of one percent).

Percentage Change in the Unit Price = (Adjusted Unit Price / Established Unit Price) – 1

Price Adjustment Examples with Unit Price Triggers and Limitations:

Using the prior examples showing price adjustment without limitations, we will apply the triggers and limitations as applicable to the execution of this clause. These triggers and limitations will result in the following adjusted unit prices:

Adjustment Factor (on OY 1) 1.3005 Price Adjustment % of Price OY 1 OY 2 OY 3 OY 4 Material Cost Per Unit (PPSA) 40% $8,000 $8,160 $10,404 $8,489 Other Cost & Profit 60% $12,000 $12,240 $12,485 $12,735 Adjusted Unit Price 100% $20,000 $20,400 $22,889 $21,224

% Change in the Unit Price 0.00% 0.00% 10.00% 0.00%

The OY 2 unit price adjustment of 1.38% was not triggered since it did not exceed an absolute value of 5.00%. The OY 3 unit price adjustment of 14.37% exceeded the 10.00% upper limitation. Therefore OY 3’s adjusted unit price of $22,889 is limited to 10.00% higher than the previously established OY 3 unit price of $20,808.

Final computations of the EPA shall be rounded to whole dollars to maintain whole dollar unit prices as required in the contract, i.e., the proposed revised/adjusted unit price to be incorporated into the contract must be in whole dollars.