FAR 52.216-4—Economic Price Adjustment-Labor and Material.
Plain-English Summary
FAR 52.216-4, Economic Price Adjustment—Labor and Material, is a contract clause used to protect both the Government and the contractor when labor rates (including fringe benefits) or material unit prices change during performance. It covers the contractor’s duty to notify the Contracting Officer of increases or decreases, the timing and content of that notice, negotiation of a contract price adjustment and its effective date, the authority to postpone negotiations until changes accumulate enough to justify an adjustment, and the requirement to keep performing while the parties negotiate or the adjustment is determined. It also sets important limits on what can be adjusted: only the effect of changes in the labor and material prices shown in the Schedule, not unrelated cost changes, quantity changes, or items not tied to the Schedule. The clause further restricts upward adjustments to work due before the effective date, requires a minimum 3 percent net change before an adjustment is made (with a limited exception after final delivery), caps total upward adjustments at 10 percent of the original unit price, and allows unlimited downward adjustments. Finally, it gives the Contracting Officer audit rights over relevant books and records for up to three years after final payment, or a shorter period if FAR Subpart 4.7 requires earlier retention. In practice, this clause is designed to share inflation or deflation risk in a controlled way while preserving contract performance and documentation discipline.
Key Rules
Notify on price changes
The contractor must notify the Contracting Officer whenever labor rates, including fringe benefits, or material unit prices shown in the Schedule increase or decrease during performance. The notice must be submitted within 60 days of the change, unless the Contracting Officer approves a longer period in writing, and in all cases before final payment.
Submit supporting data
The notice must include the contractor’s proposed contract price adjustment and supporting data in the form required by the Contracting Officer. The data must explain the cause, effective date, and amount of the change, as well as the amount of the contractor’s adjustment request.
Negotiate and modify contract
After receiving the notice and data, the Contracting Officer and contractor must promptly negotiate the adjustment and its effective date. The contract must then be modified to reflect the agreed adjustment and to revise the Schedule labor rates or material unit prices accordingly.
Performance continues during dispute
The contractor must keep performing while the parties negotiate or while the adjustment is being determined. This prevents price-adjustment issues from interrupting contract delivery or service performance.
Adjustment is narrowly limited
Any adjustment is limited to the effect of changes in the labor and material prices shown in the Schedule. There is no adjustment for items whose production cost is not affected, for changes in rates or prices not shown in the Schedule, or for changes in the quantities of labor or material used from those shown in the Schedule.
No retroactive upward adjustment
Upward adjustments do not apply to supplies or services that were required to be delivered or performed before the adjustment’s effective date, unless the contractor’s late performance was excusable under the Default clause because it was beyond the contractor’s control and without fault or negligence.
Minimum 3 percent threshold
No adjustment is made unless the change in labor or material rates produces a net change of at least 3 percent of the then-current total contract price. This threshold does not apply after final delivery of all line items if either party requests an adjustment under the negotiation paragraph.
Upward cap, no downward cap
The total of all increases to any contract unit price under this clause may not exceed 10 percent of the original unit price. There is no percentage limit on decreases, so downward adjustments can exceed 10 percent if justified by the underlying price changes.
Government audit rights
The Contracting Officer may examine relevant books, records, and supporting data at reasonable times until three years after final payment, or until the applicable FAR Subpart 4.7 retention period ends, whichever is earlier. This supports verification of the claimed labor and material cost changes.
Responsibilities
Contractor
Monitor labor rates, fringe benefits, and material unit prices shown in the Schedule throughout performance; notify the Contracting Officer within 60 days of any increase or decrease; provide a complete adjustment proposal and supporting data; continue performance while the adjustment is negotiated or determined; and maintain relevant records for audit and verification.
Contracting Officer
Receive and review the contractor’s notice and supporting data; negotiate the price adjustment and effective date promptly; may postpone negotiations until changes accumulate enough to meet the 3 percent threshold; issue a contract modification reflecting the agreed adjustment and revised Schedule prices; and examine relevant books and records within the allowed time period.
Agency
Use the clause when appropriate under the prescription in FAR 16.203-4(c); ensure contract administration procedures support timely review, negotiation, modification, and record retention; and apply the clause consistently with the contract’s pricing structure and the FAR limitations.
Practical Implications
Contractors need a tracking process for labor and material price movements, because missing the 60-day notice window can jeopardize recovery.
The clause is not a general inflation clause; it only covers the specific labor and material prices shown in the Schedule, so contractors should document exactly what changed and why.
The 3 percent threshold and 10 percent upward cap can delay or limit recovery, so small changes may need to accumulate before an adjustment is worthwhile.
Contracting Officers should verify that claimed changes are tied to Schedule items and not to quantity changes, productivity shifts, overhead, or unrelated cost growth.
Both sides should preserve detailed records, because the Government can audit the supporting data for years after final payment and disputes often turn on documentation quality.
Official Regulatory Text
As prescribed in 16.203-4 (c) , insert the following clause: Economic Price Adjustment-Labor and Material (Jan 2017) (a) The Contractor shall notify the Contracting Officer if, at any time during contract performance, the rate of pay for labor (including fringe benefits) or the unit prices for material shown in the Schedule either increase or decrease. The Contractor shall furnish this notice within 60 days after the increase or decrease, or within any additional period that the Contracting Officer may approve in writing, but not later than the date of final payment under this contract. The notice shall include the Contractor’s proposal for an adjustment in the contract unit prices to be negotiated under paragraph (b) of this clause, and shall include, in the form required by the Contracting Officer, supporting data explaining the cause, effective date, and amount of the increase or decrease and the amount of the Contractor’s adjustment proposal. (b) Promptly after the Contracting Officer receives the notice and data under paragraph (a) of this clause, the Contracting Officer and the Contractor shall negotiate a price adjustment in the contract unit prices and its effective date. However, the Contracting Officer may postpone the negotiations until an accumulation of increases and decreases in the labor rates (including fringe benefits) and unit prices of material shown in the Schedule results in an adjustment allowable under paragraph (c)(3) of this clause. The Contracting Officer shall modify this contract (1)to include the price adjustment and its effective date and (2)to revise the labor rates (including fringe benefits) or unit prices of material as shown in the Schedule to reflect the increases or decreases resulting from the adjustment. The Contractor shall continue performance pending agreement on, or determination of, any adjustment and its effective date. (c) Any price adjustment under this clause is subject to the following limitations: (1) Any adjustment shall be limited to the effect on unit prices of the increases or decreases in the rates of pay for labor (including fringe benefits) or unit prices for material shown in the Schedule. There shall be no adjustment for- (i) Supplies or services for which the production cost is not affected by such changes; (ii) Changes in rates or unit prices other than those shown in the Schedule; or (iii) Changes in the quantities of labor or material used from those shown in the Schedule for each item. (2) No upward adjustment shall apply to supplies or services that are required to be delivered or performed before the effective date of the adjustment, unless the Contractor’s failure to deliver or perform according to the delivery schedule results from causes beyond the Contractor’s control and without its fault or negligence, within the meaning of the Default clause. (3) There shall be no adjustment for any change in rates of pay for labor (including fringe benefits) or unit prices for material which would not result in a net change of at least 3 percent of the then-current total contract price. This limitation shall not apply, however, if, after final delivery of all line items, either party requests an adjustment under paragraph (b) of this clause. (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. There is no percentage limitation on the amount of decreases that may be made under this clause. (d) The Contracting Officer may examine the Contractor’s books, records, and other supporting data relevant to the cost of labor (including fringe benefits) and material during all reasonable times until the end of 3 years after the date of final payment under this contract or the time periods specified in subpart 4.7 of the Federal Acquisition Regulation (FAR), whichever is earlier. (End of clause)