WASHINGTON – The Pentagon admitted this week that a record 40-year inflation rate is beginning to affect contract negotiations, leading to a demand to cancel the deal.

In a May 2 letter to Republicans in Congress criticizing the Pentagon’s 2023 fiscal budget for underestimating inflation, Pentagon Comptroller Mike McCord and Secretaries of the Army, Navy and Air Force wrote that “some major programs may be isolated from transitional marketing pressures due to existing long-term purchase agreements. “

For example, according to the letter, steel prices for Navy-class Columbia submarines were fixed before inflation began to rise sharply. As such, rising steel prices are not expected to have much of an impact on the program, “as long as inflation doesn’t last too long.”

However, officials say inflation is beginning to affect new defense contracts, especially long-term agreements.

“Negotiations for new contracts are directly affected by inflation uncertainty,” the letter said. “The department works with all purchasing teams to ensure there is a common understanding of when [economic price adjustment] the clauses are appropriate to protect both industry and government. “

Officials warn that inflation has prompted defense officials to express concerns about long-term agreements. He also says that one supplier has asked for a clause for economic adjustment of prices for special metals, while another has directly asked to cancel an unspecified long-term contract.

They write that the Pentagon and defense contractors must decide on economic price adjustment clauses that set the price of labor and materials in an agreement at the beginning of the process in order to “inform subcontracting negotiations throughout the supply chain.”

Contracts in the process of negotiation “are likely to show an escalation of the price, which reflects current market conditions”.

The letter was sent in response to inquiries about inflation from top Senior Republicans on Senate and House Armed Services committees, James Inhoff of Oklahoma and Mike Rodgers of Alabama, respectively.

Although officials note that “adjustments may be needed as prices fluctuate,” the letter did not ask Congress to increase the proposed defense budget by $ 773 billion for fiscal 2023 – $ 20 billion, or 4 %, more than allocated by Congress for fiscal 2022

“If Congress raises the ceiling but directs all additional resources to specific programs or program increases not requested by the agency, as was the case with the National Defense Permit Act for fiscal 2022, these increased budgetary resources will not mitigate the impact of higher inflation, “the letter said.

He noted that the Pentagon could deal with inflationary pressures on vital items as fuel through its reprogramming body, but also acknowledged that it had not made any reprogramming requests to deal with inflationary pressures in fiscal year 22.

McCord, along with Joint Chiefs of Staff General Mark Millie and Secretary of Defense Lloyd Austin, admitted last month that the 2.2 percent inflation the Biden administration is using to calculate its budget proposal is too low.

Inhoff and Rodgers told Defense News that the indicator used by the Department of Defense to measure inflation – the price index linked to GDP – was 6.4% in the first half of fiscal year 22. They promised that the annual defense permit bill would include an increase of 3% to 5% amid inflation.

“We are generally concerned that the ministry is not taking a proactive stance to mitigate the harmful effects of inflation,” Inhoff and Rodgers said in a statement. “At the very least, they need to collect the necessary data, establish a governance framework and maintain regular contacts with all stakeholders.”

“In particular, the department does not seem to have a good idea of ​​how inflation harms our servicemen and their families – and how this in turn affects recruitment and retention,” they added. “Similarly, we are concerned that the department does not have an adequate understanding of the challenges facing the industrial base.

Bryant Harris is a congressional reporter for Defense News. It covers the intersection of US foreign policy and national security in Washington since 2014. He has previously written for Foreign Policy, Al-Monitor, Al Jazeera and IPS News.

https://www.defensenews.com/pentagon/2022/05/04/pentagon-says-inflation-has-made-one-company-request-to-cancel-a-long-term-contract/

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