Equitable adjustment in government contracting

Direct answer: In federal procurement, an equitable adjustment is a contract price and/or schedule modification to fairly compensate for Government‑ordered or constructive changes, differing site conditions, or similar unforeseen events—usually pursued first via a Request for Equitable Adjustment (REA) under the Changes clauses and, if unresolved, as a Contract Disputes Act claim. The REA must be accurately priced, properly supported, and, for DoD contracts above the simplified acquisition threshold, certified in good faith; many agencies (e.g., GSA) prescribe detailed pricing, markup, and schedule‑analysis requirements. [1][3]

IRAC Analysis

Issue

When is a contractor entitled to an equitable adjustment in U.S. Government contracting, how should it be requested and supported, and what are the key differences between an REA and a Contract Disputes Act claim?

Rule

• Contract entitlement arises under standard clauses such as the Changes clauses (48 C.F.R. § 52.243-4; 48 C.F.R. § 52.243-5) and the Differing Site Conditions clause (48 C.F.R. § 52.236-2). Agency supplements (e.g., 48 C.F.R. § 552.243-71) govern how the equitable adjustment must be proposed and priced, including timing, cost breakdowns, allowable markups, schedule analysis, and the potential for unilateral determinations if negotiations fail. [1]
• DoD REAs exceeding the simplified acquisition threshold must bear a good‑faith certification and include only costs properly allocable to the change; no double‑recovery or inclusion of previously reimbursed costs is allowed (48 C.F.R. § 252.243-7002). The clause implements 10 U.S.C. § 3862(a). Routine payments and final incentive adjustments are excluded. [3]
• Although the FAR/DFARS do not define “REA,” the Federal Circuit has described it as a non‑routine remedy available when unforeseen or unintended circumstances (e.g., Government modification, differing site conditions, defective or late Government‑furnished property, stop‑work) increase performance costs. See Reflectone, Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir. 1995). A contractor may seek a negotiated settlement via REA or submit a claim under the Disputes clause (48 C.F.R. § 52.233-1) for a contracting officer’s final decision and potential litigation; REAs may allow recovery of preparation/negotiation costs, whereas claims may accrue interest and support fees but do not allow recovery of claim preparation costs. Claims need not be labeled as such or be preceded by an REA, and a “dispute” is not a prerequisite. [2]

Application

• Basis for entitlement and notice:

  • Identify the specific clause(s) supporting entitlement (change order, constructive change, or differing site condition). Promptly notify the CO and submit a proposal within the time specified in the applicable clause or as otherwise reasonably required by the CO. 48 C.F.R. § 552.243-71(c). [1][2]

• Content of an REA (pricing and support):

  • Provide a detailed breakdown of direct costs (materials, labor with burdens, equipment, submittals/drawings, delivery, etc.), segregating added/deleted work and impacts on unchanged work. 48 C.F.R. § 552.243-71(d)–(f). [1]
  • Time and time‑related costs: Extensions and time‑dependent costs are allowable only if the change necessarily and exclusively causes performance to extend beyond the contract completion date and the costs are solely dependent on the duration of performance; schedule analyses must comply with contract scheduling provisions. 48 C.F.R. § 552.243-71(g). [1]
  • Markups: Overhead is negotiable and subject to audit; profit is negotiable but generally capped at 10% unless a higher rate is justified. No pyramiding of overhead/profit on a subcontractor’s overhead/profit; apply markups only as permitted and only to the performing tier’s costs. 48 C.F.R. § 552.243-71(h). [1]
  • Allowability: All proposed costs must be reasonable, allocable, and consistent with FAR Part 31 cost principles and the contractor’s accounting practices. 48 C.F.R. pt. 31 (as incorporated by 48 C.F.R. § 552.243-71(l)). [1]
  • Proposal preparation costs: If incurred in‑house, include as direct labor; if by consultants/law firms, treat as other direct costs—subject to reasonableness/allocability and cut off if the CO issues a unilateral determination/denial or the matter becomes a dispute. 48 C.F.R. § 552.243-71(j), (o). [1]

• Certification and disclosure (DoD):

  • For DoD contracts, any REA above the simplified acquisition threshold must be certified in good faith and supported by full disclosure of relevant facts, including certified cost or pricing data if required, or data other than certified cost or pricing data when applicable. 48 C.F.R. § 252.243-7002(b)–(c). [3]
  • The REA may not include costs already reimbursed or costs separately claimed and must include only costs properly allocable to the change. 48 C.F.R. § 252.243-7002(a). [3]

• Negotiation dynamics and unilateral outcomes:

  • The CO may require additional data and, if necessary, order performance pending negotiation via a unilateral mod; if agreement cannot be reached (e.g., within 60 days of the contractor’s proposal), the CO may determine the equitable adjustment unilaterally. 48 C.F.R. § 552.243-71(i), (m)–(n); proposal‑preparation costs after a unilateral determination/denial are generally not allowable. 48 C.F.R. § 552.243-71(o). [1]

• REA versus claim strategy:

  • Contractors commonly begin with an REA to seek a negotiated settlement in equity; if ignored or unresolved, they may submit a claim under the Disputes clause (48 C.F.R. § 52.233-1), requesting a CO final decision and providing a claim certification if over $100,000. Courts/boards have jurisdiction over claims, not REAs (unless converted). REAs may permit recovery of preparation/negotiation costs, while claims may afford interest and certain fees, but not claim‑preparation costs. Reflectone, Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir. 1995); DAU summary. [2]

Conclusion

To obtain an equitable adjustment, anchor entitlement in the appropriate clause, give timely notice, and submit a well‑substantiated REA that complies with agency‑specific requirements on cost breakdowns, markups, schedule analysis, and allowability; certify as required (e.g., DoD REAs above the SAT). If negotiation fails, convert the matter to a certified claim under the Disputes clause to secure a CO final decision and preserve litigation rights. [1][2][3]

Practical Checklist (abbreviated)

• Identify clause basis and give prompt written notice. 48 C.F.R. §§ 52.243-4, 52.243-5, 52.236-2; 48 C.F.R. § 552.243-71(b)–(c). [1]
• Price the REA with required detail; segregate added/deleted work and impacts. 48 C.F.R. § 552.243-71(d)–(f). [1]
• Perform schedule analysis; claim only time impacts “necessarily and exclusively” caused by the change. 48 C.F.R. § 552.243-71(g). [1]
• Apply markups correctly; profit typically ≤10% absent justification; avoid pyramiding. 48 C.F.R. § 552.243-71(h). [1]
• Verify allowability/allocability under FAR Part 31 and accounting consistency. 48 C.F.R. pt. 31; 48 C.F.R. § 552.243-71(l). [1]
• For DoD, include DFARS REA certification if above SAT and disclose required data. 48 C.F.R. § 252.243-7002. [3]
• Consider REA vs claim tradeoffs (prep‑cost recovery vs interest/fees and forum); convert to a claim if negotiations stall. Reflectone, Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir. 1995); 48 C.F.R. § 52.233-1. [2]