Despite inflation at levels not seen in decades, Air Force primes have yet to demand major adjustments to existing contracts, but there are concerns about lower-tier vendors, Air Force service acquisition executive Andrew P. Hunter said.
Speaking with reporters at AFA’s Air, Space & Cyber conference, Hunter said the structure of contracts usually means the company “has to make a request” for inflation adjustments.
“The contractor has to come forward and say, ‘These are the costs that we are seeing—we need some kind of adjustment,’” he said. But “we haven’t had much of that … yet.”
The Air Force is also not planning a large “across-the-board, everyone-gets-an-adjustment” action, because each contract is unique, and inflation is affecting various programs and companies differently.
“Not everyone has been impacted in the same way. … The impacts are pretty broad, but they’re not the same magnitude for everyone,” he said.
“The issue is fixed-price contracts,” Hunter continued. While such agreements usually compel the vendor to absorb inflation losses, there may be ways to mitigate them, depending on the needs of the service and other factors, he said.
The Federal Acquisition Regulations were “developed in the 1960s and ‘70s, when there was a lot of inflation, so mechanisms exist to deal with this,” he said.
Pentagon acquisition and sustainment chief William A. LaPlante will issue guidance for all the military services to “try to understand how” to reply “should those requests come about and what are the natural channels that exist” to deal with them. LaPlante’s guidance will tell contractors, “this is how you ask us.”
Hunter acknowledged that for those “high dollar value” contracts still in negotiation, “we do see that there are higher dollar values than we anticipated.”
In all cases, the Air Force will have to work to ensure that “the costs that are being cited to us are supported by the data.”
Hunter said the Air Force does not have direct visibility into the health of subcontractors, especially at the lowest level of supply, and so is paying close attention to what is being said at industry days, through trade associations “that focus on the supply chain” and through small business advocates.
“We are listening carefully,” he said. “We” and Air Force Materiel Command “have our ear to the ground.”
But primes are also being reminded that they are “responsible for their subs; that’s a big part of what they get paid to do,” Hunter noted.
“We are … instructing the primes that they need to assure that their supply chain is going to be able to deliver,” he said. “If there are companies at risk because of inflation, you need to identify that and look at ways to mitigate that.”
Hunter said the Air Force has noticed that for some products and components, “we … are starting to see substantial lead times to get things; much longer than is typical.” Consequently, “we may have to identify alternatives to meet program schedules.”