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    What is a reasonable escalation rate for a multi-year contract? If the price goes up about 3% each year, does this still constitute a firm-fixed price contract?


    Answer

    Since we do not have all of the facts pertaining to your requirement, solicitation/contract or contractor(s), the following answer is based solely on the background and question provided.  As we do not have access to the contract folder or particulars that apply to this situation, we highly recommend you consult the Contracting Officer andpossibly the Legal Office.
     
    You have provided a two-part question.  First, we will address the first part, “What is a reasonable escalation rate for a multi-year contract? Overall, in accordance with FAR 31.201-3, a cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of a competitive business.  When considering the reasonableness of the proposed escalation/merit increases DCAA considers the following:  Guidebook on Use of Economic Indexes in Contract Audits (https://infoserv.dcaaintra.mil/headquarters/O/OTS/Documents/Guidebook_Use_o f_Econ_Indexes.pdf); Management approved wage increases/plans or budgets or HR raise information including the timing of granting raises (once a year or continually throughout the year); Historical wage increases and union agreements.
     
    Concerning the second part of your question, “If the price goes up about 3% each year, does this still constitute a firm-fixed price contract?” According to FAR 16.202, a FIRM-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract.  Further, the contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.  There are also various fixed-price type contracts including, fixed-price contract with economic price adjustment.  These adjustments can be made based on established prices -- standard supplies or based on established prices -- semistandard supplies.  Adjustments can also be made, based on actual cost of labor or material, or based on cost indexes of labor or material.  In addition to fixed-price EPA contracts, other types of fixed-priced contracts are fixed-price incentive contract, fixed-price contract with prospective price redetermination, fixed-ceiling-price contract with retroactive price redetermination, and finally firm-fixed-price, level-of-effort term contracts.
     

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