FAR 16.203-2—Application.
Plain-English Summary
FAR 16.203-2 explains when a fixed-price contract with economic price adjustment (EPA) is appropriate and how the contracting officer should set up the adjustment basis. It covers the core conditions for using EPA clauses: serious doubt about the stability of market or labor conditions over an extended performance period, and the ability to identify contingencies separately instead of burying them in the contract price. It also distinguishes between price adjustments tied to established prices and those tied to labor and material costs, limiting each to the types of contingencies they are meant to address. The section points readers to the sealed bidding rule at FAR 14.408-4 when EPA is used in sealed bid acquisitions. It further addresses how the contracting officer must establish the base level for adjustment without duplicating contingency allowances, and it requires adequate data—and possibly verification—when certified cost or pricing data are not required. In practice, this section is about preventing unfair risk shifting, avoiding double counting in pricing, and making sure EPA clauses are supported by a defensible baseline and reliable data.
Key Rules
Use only when stability is doubtful
A fixed-price contract with economic price adjustment may be used only when there is serious doubt about the stability of market or labor conditions during an extended performance period. The clause is meant for situations where price volatility is a real risk, not as a routine pricing feature.
Contingencies must be separable
EPA is appropriate only when the contingencies that would otherwise be built into the price can be identified and addressed separately in the contract. This keeps the contract price from including hidden or speculative risk premiums.
Limit established-price adjustments
Price adjustments based on established prices should normally be limited to industry-wide contingencies. The rule is intended to keep this type of adjustment tied to broad market movements rather than contractor-specific issues.
Limit labor/material adjustments
Price adjustments based on labor and material costs should be limited to contingencies beyond the contractor’s control. This prevents the clause from being used to cover ordinary business risks or poor contractor performance.
Follow sealed-bid guidance
If EPA is used in a sealed bid acquisition, the contracting officer must follow FAR 14.408-4. That cross-reference signals that special bidding procedures apply when price adjustment clauses are included in sealed bidding.
Avoid double counting
When establishing the base level for adjustment, the contracting officer must ensure contingency allowances are not included both in the base price and again in the contractor’s requested adjustment. The base must be set so the same risk is not paid twice.
Obtain adequate base data
For contracts that do not require certified cost or pricing data, the contracting officer must still obtain adequate data to establish the adjustment base. The contracting officer may also require verification of the data submitted to support the base level.
Responsibilities
Contracting Officer
Determine whether the conditions justify use of a fixed-price contract with economic price adjustment, including whether market or labor stability is doubtful and whether contingencies can be separately identified. Set the base level carefully to avoid duplicating contingency allowances, obtain adequate data when certified cost or pricing data are not required, and require verification of submitted data when needed. Also ensure compliance with FAR 14.408-4 when EPA is used in sealed bidding.
Contractor
Provide support for the proposed base level and any data used to establish the adjustment baseline, especially when certified cost or pricing data are not required. Ensure requested adjustments do not include contingency allowances already reflected in the base price and limit adjustment claims to the contract’s EPA terms.
Agency
Use EPA clauses only where the acquisition circumstances justify them and ensure internal pricing and acquisition practices support proper baseline setting and data quality. The agency should also ensure contracting personnel understand the limits on the types of contingencies covered by EPA clauses.
Practical Implications
EPA clauses are a risk-allocation tool, not a default pricing method; they should be used only when volatility is real and measurable.
The biggest pricing pitfall is double counting—if the base price already includes a contingency, the contractor should not recover that same risk again through an adjustment.
Contracting officers need enough data to defend the baseline even when certified cost or pricing data are not required, so informal or unsupported pricing submissions are not enough.
The type of adjustment matters: established-price adjustments are generally for broad industry conditions, while labor/material adjustments should be tied to factors outside the contractor’s control.
In sealed bidding, EPA adds procedural complexity, so officers must check the separate FAR 14.408-4 requirements before using the clause.
Official Regulatory Text
A fixed-price contract with economic price adjustment may be used when (i) there is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance, and (ii) contingencies that would otherwise be included in the contract price can be identified and covered separately in the contract. Price adjustments based on established prices should normally be restricted to industry-wide contingencies. Price adjustments based on labor and material costs should be limited to contingencies beyond the contractor’s control. For use of economic price adjustment in sealed bid contracts, see 14.408-4 . (a) In establishing the base level from which adjustment will be made, the contracting officer shall ensure that contingency allowances are not duplicated by inclusion in both the base price and the adjustment requested by the contractor under economic price adjustment clause. (b) In contracts that do not require submission of certified cost or pricing data, the contracting officer shall obtain adequate data to establish the base level from which adjustment will be made and may require verification of data submitted.