Under a labor and material price schedule, supplier unit prices can rise, but only within two limits. The contract can allow unit prices to move when the cost of labor or material moves. That sounds like good news for a supplier, and it is. It is also a risk for you, because the same clause that lets a price rise also limits how far it can go.
Key takeaways
- The adjustment is about the items in the schedule. It is not a general license to raise every price on an invoice.
- The rules run in both directions. A drop in labor or material cost also has to be reported.
- Check whether the net change across the relevant items reaches the 3 percent threshold before accepting an adjustment.
- Check each adjusted invoice line against the original unit price before paying it.
This post covers these rules in the standard economic price adjustment clause for labor and material, FAR 52.216-4. The clause text quoted here comes from the public FAR page at acquisition.gov, and where a rule has a number or a deadline, it comes from that page.
The post explains the limits in plain words, shows where the staff who post supplier invoices fit in, and lists what to check before a higher invoice is paid. It is not legal advice, and it is not a substitute for your contract. Your contract may use a different clause, a different version, or different terms. Read the clause that is actually in your contract first, then use this post as a checklist.
What the clause covers
The clause deals with two kinds of cost that sit inside a price schedule: the rate of pay for labor, including fringe benefits, and the unit price of material. The schedule lists both. When either one goes up or down, the contractor has to tell the contracting officer, and the contract unit prices can be adjusted to reflect the change.
If one of your suppliers has seen its costs fall, the same notice rules can work in your favor, because the price on your invoices should follow the lower cost.
Limit one: the 10 percent ceiling on each unit price
The first limit caps how far a unit price can climb through this clause in total. The total of all increases made under the clause may not exceed 10 percent of the original unit price.
Three things about this cap are easy to miss.
It is not measured against the most recent price. If a unit price has already gone up once, the next increase does not get a fresh 10 percent. The total of all increases is what counts.
Second, the cap applies to the aggregate. Several small increases add up. Ten small rises of one percent each would reach the same place as one ten percent rise, and the cap applies to the total, not to each step.
Third, the cap applies only to increases made under the clause. If an invoice shows a price above the scheduled price plus the allowed increases, the extra amount is not covered just because the supplier says costs went up. The person who checks the invoice should be able to show the original unit price, every adjustment already made, and the running total.
Here is a simple way to work it out. Start with the original unit price from the schedule. Work out 10 percent of that price and add it on. The result is the highest the unit price can go through this clause, counting every increase made so far. Keep that figure in the contract file next to the price list. Any invoice line above it needs a second look before it is paid.
Illustrative example: one invoice line
Suppose the scheduled unit price is 20 dollars. The total of all increases may not exceed 10 percent of that price, or 2 dollars. Earlier adjustments have already added 1 dollar, so 1 dollar of increase remains. A new invoice line that adds more than 1 dollar takes the total above the ceiling and goes to a second check. A line that adds 1 dollar or less stays within the ceiling, though its notice and dates still need checking.
Limit two: no raise on work due before the effective date
The second limit is about timing. An upward adjustment does not apply to supplies or services that the contract required to be delivered or performed before the effective date of the adjustment.
In practice, a price increase does not reach back to work the supplier was required to finish before the increase took effect. If an increase is effective on a certain date, the delivery schedule decides which invoices it can touch. For an increase, work due before that date keeps its old unit price. Work due after that date can carry the new one. The rule covers increases only, so a decrease is not held back this way.
There is one exception. The rule does not hold if the supplier failed to deliver or perform on schedule because of causes beyond its control and without its fault or negligence. That is judged within the meaning of the Default clause. The exception is narrow. A supplier who is late for an ordinary reason cannot use it to move an earlier delivery into the higher price. If an invoice covers work that was due before the effective date and the supplier wants the new price on it, ask why the work was late. Ask the contracting officer if you are not sure.
This is where invoice staff catch mistakes. Check these two dates on every adjusted invoice:
| Date to check | Where it comes from | Why it matters |
|---|---|---|
| Effective date of the adjustment | The notice or written approval | It sets the point where the new price can start |
| Actual delivery or performance date | Receiving record or supplier delivery note | It shows whether the work was late, and whether the exception needs a reason on file |
If the work was late, write the date and the reason in the file. Do not leave them to memory.
The 3 percent threshold decides whether a change counts
Before the two limits come into play, a threshold decides whether an adjustment is allowed at all. No adjustment is made for a change in labor rates, including fringe benefits, or in material unit prices, unless the change results in a net change of at least 3 percent of the then-current total contract price.
This threshold is measured against the total contract price, not against one unit price. A small change to one item may not move the total far enough to qualify. A group of changes, taken together, might. The test is the net change on the whole contract. "Then-current" means the total as it stands when the change happens, so the base shifts as the contract moves.
For staff, the practical point is that a single supplier price rise is not automatically adjustable. Someone has to work out whether the net change, across the relevant items, reaches the 3 percent level. A supplier who says "our costs went up on this line" has not yet shown that the change meets the threshold. The notice should include the numbers that support the claim.
The notice has to say what changed and why
The first step is the notice. The contractor must give notice within 60 days after the increase or decrease, or within any additional period the contracting officer approves in writing. In every case, the notice must come no later than the date of final payment under the contract.
The notice also has to carry substance. It must include the contractor's proposal for adjusting the contract unit prices, to be negotiated under the clause. It must include supporting data, in the form the contracting officer requires, that explains the cause, the effective date, and the amount of the increase or decrease, along with the amount of the contractor's proposed adjustment.
That gives your team a short list to ask for when a supplier says prices are going up:
- The cause of the change, such as a named labor rate or a named material cost.
- The effective date.
- The amount of the change, and how it affects the scheduled unit prices.
- The proposed new unit prices.
- The supporting data that ties the cause to the amount.
If the supplier cannot give you these items, the price change is not ready to be paid. Do not approve an invoice on the strength of a phone call or a letter that says only "costs are up." Send the request back and ask for the full notice in the required form.
Note the deadline, too. It is not permission to wait. If a notice arrives late, check whether a longer period was approved in writing. If there is no approval, the late notice is a problem to raise with the contracting officer, not something to fold into the next invoice.
What invoice staff should check on every line
The people who post supplier invoices are often the first to see a price that does not match the schedule. They do not make the contract decision, but they can stop a bad invoice from being paid by running a few checks. Those checks work best when staff know which figures matter.
An OpenStax managerial accounting case shows what that means. AlexCo has produced each of the components used in making its wagons, but DAL, Inc. has offered to provide the axle and wheel assembly for $18.75 each. The case gives AlexCo’s own cost figures for that assembly:
"AlexCo’s costs to produce the axle and wheel assembly are $9.00 in direct materials, $6.50 in direct labor, $3.57 in variable overhead, and $2.50 in fixed overhead."
The lesson is to set the offered price against the costs that would actually change, not to judge the offer by its total alone. Costs that stay the same whichever way the decision goes do not belong in the comparison at all. Invoice staff can apply the same discipline. A supplier's new price is one figure. The schedule, the notice, and the approvals are the others, and the new price should be checked against them. For a related set of checks on supplier invoices, see Supplier invoice deductions: 2 thresholds to check.
A simple routine for each adjusted line looks like this.
First, find the scheduled unit price. This is the original price from the contract, not the last invoice. Write it on the job or in the system note.
Second, find every adjustment approved to date and add them up. Compare the running total against the 10 percent ceiling on the original unit price. If the new price takes the total above that ceiling, stop and escalate.
Third, check the effective date against the delivery or performance date for that line. For an increase, work due before the effective date keeps the old unit price unless the late-delivery exception clearly fits. A decrease is not held back this way.
Fourth, confirm that the change is for a labor or material item that appears in the schedule. A rise in a cost that is not in the schedule is outside the clause, and it should not be pushed through as if it were.
Fifth, check that there is a notice on file, that it includes the supporting data, and that it matches the invoice. Numbers on the invoice should trace back to the notice and to the approved adjustment.
Sixth, if any of these checks fail, do not pay the disputed amount as if it were settled. Pay what is clearly due, if your process allows partial payment, and send the question to whoever handles contract changes at your shop. Keep a note of what was paid and what was held.
Keep the records the clause expects
The contracting officer has a right to examine the books, records, and other supporting data behind a price change, covering the cost of labor, including fringe benefits, and material, during all reasonable times. That right lasts until the end of three years after the date of final payment under the contract, or until the time periods in subpart 4.7 of the Federal Acquisition Regulation end, whichever is earlier.
For a shop, this means the records behind an adjusted invoice should be kept and easy to find. The table below lists what to keep.
| Record | Why keep it |
|---|---|
| Original schedule | It is the base price for every later check |
| Every notice | It shows the cause, effective date, and amount of each change |
| Every approval and written extension | It shows whether a late notice was allowed |
| Supporting data for each change | It backs the amount the invoice claims |
| Invoices that used adjusted prices | They show what was paid and the dates behind each line |
Do not assume the file can be cleaned out when the job closes. The examination window runs from the date of final payment, and the end date is set by the rules above. Ask whoever manages your contract records to confirm the retention period that applies to your contract. Then make sure the people who post invoices know where the records are and what to keep. For shop-side figures to gather before a price change, see Shop price rise: 3 figures to check before you start.
Common mistakes to avoid
A few errors come up often enough to name.
The first is treating the most recent invoice as the base price. Once a price has been adjusted, the next check has to go back to the original schedule. Otherwise the running total of increases is lost, and the 10 percent ceiling is never checked.
The second is applying an increase to work done before the effective date. The date of the work and the date of the adjustment must be compared line by line. Batch approvals make this easy to miss.
The third is ignoring decreases. If a material cost falls and the supplier keeps the higher price, the shop is paying more than the contract requires, and the file will not show why.
The fourth is accepting a bare statement that prices went up. The clause asks for supporting data. A short email is not enough, however reasonable it sounds.
The fifth is letting a small change slip through because it looks minor. A single small line may not reach the 3 percent threshold, but a run of small lines might. Someone should track the net change over time, not just check each invoice on its own.
What to do next
If you hold a contract with a labor and material schedule, start with the clause text in your own contract. Find the economic price adjustment clause, read it in full, and mark the terms that match the two limits in this post: the 10 percent ceiling on each unit price, and the rule that an upward adjustment does not apply to work required before the effective date. Check whether your contract includes the 3 percent threshold and the 60-day notice period as written, because the wording and numbers can differ between versions.
Then build a small checklist for the invoice staff. Use the steps above, adjust them to your own system, and review them with the person who manages the contract. Show the staff a real example from your own schedule, with the original price, the running total, and the cutoff date, so the rule becomes concrete.
Finally, talk to your suppliers early. A supplier who knows that the clause requires a notice, supporting data, and an effective date is less likely to send a bare price increase and more likely to send a complete request. That saves time for both sides, and it keeps your shop's invoices within the limits the contract sets.
Frequently asked questions
Can a price increase apply to work due before its effective date?
No, not for an increase, unless the late delivery came from causes beyond the supplier's control and without its fault or negligence.
How much can a unit price rise through this clause?
In total, the increases may not exceed 10 percent of the original unit price, and every earlier increase counts toward that limit.
How long does a supplier have to send the notice?
Within 60 days after the change, or within any longer period the contracting officer approves in writing, and never later than the date of final payment.