FAR 16.203-4—Contract clauses.
Plain-English Summary
FAR 16.203-4 explains when contracting officers must or should include economic price adjustment (EPA) clauses in negotiated fixed-price solicitations and contracts, and which clause to use depending on the type of supply or pricing basis. It covers four EPA approaches: standard supplies priced from established catalog or market prices, semistandard supplies priced by reference to nearly equivalent standard items, labor-and-material cost adjustments based on actual cost changes, and adjustments based on labor or material cost indexes. The section also addresses when an agency-prescribed clause may replace the FAR-prescribed clause, when the contracting officer must document catalog/list prices and trade discounts, when the parties must agree in writing on the items covered, and when higher aggregate increase limits may be approved. In practice, this section is about allocating inflation and market-risk fairly between the Government and contractor in long-duration or price-sensitive fixed-price contracts. It matters because the wrong clause, missing documentation, or an incomplete schedule can make price adjustments unenforceable, create disputes, or shift risk in ways the parties did not intend.
Key Rules
Use EPA clauses in negotiated fixed-price buys
This section applies when a fixed-price contract is contemplated and the contracting officer has made the required determination under FAR 16.203-3. The contracting officer must choose the EPA clause that matches the pricing basis and supply type, or use an agency-prescribed clause only when the FAR clause is inappropriate.
Standard supplies use catalog or market prices
For standard supplies with established catalog or market prices, the contracting officer shall insert FAR 52.216-2, Economic Price Adjustment—Standard Supplies, unless an approved agency clause is used instead. If the negotiated unit price is a net price after a trade discount, the contract file must show both the catalog/list price and the discount.
Semistandard supplies need written item identification
For semistandard supplies whose prices can be reasonably related to nearly equivalent standard supplies, the contracting officer shall use FAR 52.216-3 or an approved agency clause. Before award, the contracting officer and contractor must agree in writing on the identity of the standard supplies and the corresponding line items covered by the clause.
Labor and material adjustments require detailed schedules
For contracts using actual labor or material cost changes, the contracting officer shall use a clause substantially the same as FAR 52.216-4 or an approved agency clause. The contract Schedule must identify the labor and materials subject to adjustment, the adjustable rates and unit prices, and the quantities allocable to each deliverable unit.
Adjustments exclude indirect cost and profit
When negotiating adjustments under the labor-and-material clause, the contracting officer must consider work in process and materials on hand at the time of the change, but may not include indirect cost or profit in the adjustment. Only fringe benefits specifically listed in the Schedule may be considered.
Index-based clauses are for unstable, long-term risk
A clause based on labor or material cost indexes may be appropriate for extended performance periods, substantial amounts subject to adjustment, and unstable economic conditions that make a reasonable risk split impossible without an EPA clause. Any such clause must be prepared and approved under agency procedures.
Aggregate increase limits may be raised
For the standard-supplies, semistandard-supplies, and labor-and-material clauses, the contracting officer may increase the 10 percent aggregate increase limit in the FAR clause only with approval from the chief of the contracting office.
Responsibilities
Contracting Officer
Determine whether an EPA clause is appropriate under FAR 16.203-3, select the correct clause type, and insert it into solicitations and contracts when the stated conditions are met. The contracting officer must document catalog/list prices and trade discounts when applicable, write the Schedule details for labor/material adjustments, obtain written agreement on semistandard item identities, and secure required approvals for agency clauses or increased aggregate limits.
Contractor
Review the EPA clause basis carefully, ensure the contract pricing structure matches the clause, and agree in writing where required on the standard supplies and line items covered. The contractor must also support any requested price adjustments with the contractually required pricing data and comply with the clause’s limits and adjustment methodology.
Agency
Provide agency-prescribed EPA clauses when authorized and establish internal procedures for preparing and approving index-based clauses. Agencies also support approval processes for clause modifications and ensure their prescribed clauses are consistent with FAR requirements.
Chief of the Contracting Office
Approve any increase above the 10 percent aggregate increase limit in the standard-supplies, semistandard-supplies, or labor-and-material EPA clauses when the contracting officer seeks to modify the clause.
Practical Implications
This section is a clause-selection roadmap: if the supply type or pricing basis is wrong, the contract may not support the intended price adjustments.
The biggest drafting risk is an incomplete Schedule—especially for labor/material clauses, where missing labor rates, fringe benefits, materials, or quantities can make later adjustments hard to calculate or defend.
For semistandard supplies, the required written agreement on the standard item and corresponding line item is critical; without it, the parties may later disagree about what is actually adjustable.
Trade discounts must be documented separately from prompt-payment or cash discounts, so contracting officers should not treat all discounts the same in the file.
Index-based clauses are not routine; they are reserved for long, high-dollar, unstable-cost situations and require agency-level preparation and approval, so they should be used deliberately and sparingly.
Official Regulatory Text
(a) Adjustment based on established prices-standard supplies. (1) The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-2 , Economic Price Adjustment-Standard Supplies, or an agency-prescribed clause as authorized in paragraph (a)(2) of this subsection, in solicitations and contracts when all of the following conditions apply: (i) A fixed-price contract is contemplated. (ii) The requirement is for standard supplies that have an established catalog or market price. (iii) The contracting officer has made the determination specified in 16.203-3 . (2) If all the conditions in paragraph (a)(1) of this subsection apply and the contracting officer determines that the use of the clause at 52.216-2 is inappropriate, the contracting officer may use an agency-prescribed clause instead of the clause at 52.216-2 . (3) If the negotiated unit price reflects a net price after applying a trade discount from a catalog or list price, the contracting officer shall document in the contract file both the catalog or list price and the discount. (This does not apply to prompt payment or cash discounts.) (4) The contracting officer may modify the clause by increasing the 10 percent limit on aggregate increases specified in 52.216-2 (c)(1), upon approval by the chief of the contracting office. (b) Adjustment based on established prices-semistandard supplies. (1) The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-3 , Economic Price Adjustment-Semistandard Supplies, or an agency-prescribed clause as authorized in paragraph (b)(2) of this section, in solicitations and contracts when all of the following conditions apply: (i) A fixed-price contract is contemplated. (ii) The requirement is for semistandard supplies for which the prices can be reasonably related to the prices of nearly equivalent standard supplies that have an established catalog or market price. (iii) The contracting officer has made the determination specified in 16.203-3 . (2) If all conditions in paragraph (b)(1) of this subsection apply and the contracting officer determines that the use of the clause at 52.216-3 is inappropriate, the contracting officer may use an agency-prescribed clause instead of the clause at 52.216-3 . (3) If the negotiated unit price reflects a net price after applying a trade discount from a catalog or list price, the contracting officer shall document in the contract file both the catalog or list price and the discount. (This does not apply to prompt payment or cash discounts.) (4) Before entering into the contract, the contracting officer and contractor must agree in writing on the identity of the standard supplies and the corresponding line items to which the clause applies. (5) If the supplies are standard, except for preservation, packaging, and packing requirements, the clause prescribed in 16.203-4 (a) shall be used rather than this clause. (6) The contracting officer may modify the clause by increasing the 10 percent limit on aggregate increases specified in 52.216-3 (c)(1), upon approval by the chief of the contracting office. (c) Adjustments based on actual cost of labor or material. (1) The contracting officer shall, when contracting by negotiation, insert a clause that is substantially the same as the clause at 52.216-4 , Economic Price Adjustment -Labor and Material, or an agency-prescribed clause as authorized in subparagraph (c)(2) of this section, in solicitations and contracts when all of the following conditions apply: (i) A fixed-price contract is contemplated. (ii) There is no major element of design engineering or development work involved. (iii) One or more identifiable labor or material cost factors are subject to change. (iv) The contracting officer has made the determination specified in 16.203-3 . (2) If all conditions in paragraph (c)(1) of this section apply and the contracting officer determines that the use of the clause at 52.216-4 is inappropriate, the contracting officer may use an agency-prescribed clause instead of the clause at 52.216-4 . (3) The contracting officer shall describe in detail in the contract Schedule- (i) The types of labor and materials subject to adjustment under the clause; (ii) The labor rates, including fringe benefits (if any) and unit prices of materials that may be increased or decreased; and (iii) The quantities of the specified labor and materials allocable to each unit to be delivered under the contract. (4) In negotiating adjustments under the clause, the contracting officer shall- (i) Consider work in process and materials on hand at the time of changes in labor rates, including fringe benefits (if any) or material prices; (ii) Not include in adjustments any indirect cost (except fringe benefits as defined in 31.205-6 (m)) or profit; and (iii) Consider only those fringe benefits specified in the contract Schedule. (5) The contracting officer may modify the clause by increasing the 10 percent limit on aggregate increases specified in 52.216-4 (c)(4), upon approval by the chief of the contracting office. (d) Adjustments based on cost indexes of labor or material . The contracting officer should consider using an economic price adjustment clause based on cost indexes of labor or material under the circumstances and subject to approval as described in paragraphs (d)(1) and (d)(2) of this section. (1) A clause providing adjustment based on cost indexes of labor or materials may be appropriate when- (i) The contract involves an extended period of performance with significant costs to be incurred beyond 1 year after performance begins; (ii) The contract amount subject to adjustment is substantial; and (iii) The economic variables for labor and materials are too unstable to permit a reasonable division of risk between the Government and the contractor, without this type of clause. (2) Any clause using this method shall be prepared and approved under agency procedures. Because of the variations in circumstances and clause wording that may arise, no standard clause is prescribed.